Creating A Business Bank Account
Once you have registered your tax preparation business, you will first need to create a business bank account. This keeps your business and personal finances separate and will make it quite easier to manage your books. Moreover, if you have listed your business as a Limited Liability Company (LLC), you need a business bank account.
Cash Vs. Accrual-Basis Method For Accounting
In the next part of the guide to accounting for business tax, you will need to determine whether you will use the cash or accrual-based method of accounting to manage your books. The cash-based system recognizes expenses and revenue when they hit your bank accounts. At the same time, the accrual method recognizes expenses and revenue as soon as the product or service has been delivered, even if the payment hasn’t hit the bank account yet.
For instance, you prepare taxes for a client in February but don’t get payment until May. With proper cash accounting, you won’t recognize that revenue until May; however, you will recognize it in February with accrual-basis accounting.
The cash system is considered somewhat simple since the accrual-basis method needs double entries for every transaction. Most big firms must use the accrual method, but the choice is up to you as a small company owner. Moreover, the accrual-basis method is quite common as it provides a more accurate picture of your finances.
Also, using the cash method can save companies valuable time as you won’t need numerous entries for each transaction. If your expenses are simple and you typically receive payment quickly after performing services for clients, you may opt for the time-saving cash method.
Bookkeeping And Payroll Software
There is no doubt that the right professional tax software makes all the difference when dealing with your clients’ taxes. The same is true for accounting and bookkeeping software as well. The best part about bookkeeping software is that it can sync with the business account to get rid of manual entries and automatically generate financial statements and reports.
Moreover, it should allow you to upload scanner receipts to your expense entries and choose between accrual-basis and cash methods. If you have workers or seasonal contractors during tax season, you will also want to invest in perfect payroll software.
Related: Top 7 Questions To Ask When Choosing A Tax Planner
Entering And Categorizing Transactions
You can categorize transactions imported from your bank account when proper accounting and bookkeeping software are in place. With accrual-basis accounting, you will be able to enter transactions manually when they occur and then reconcile them with the payments that come to your bank account. Furthermore, it is always a great idea to review your transactions and attach any relevant scanned invoices or receipts at least once a week. This way, maintaining your books will never be a tedious task, and you won’t lose copies of your receipts.
Tracking Profit, Loss, And Cash Flow
At least every quarter, one needs to review major financial statements like your loss, profit, and cash flow sheets. As long as you have been keeping your books, your bookkeeping software can probably generate these reports for you automatically.
The profit and loss sheet includes your revenue and expenses in any given time frame, usually every month. This information will allow you to analyze profits in the off-season compared to the busy season for the tax preparation business plan. Moreover, it will make it easy to set income goals every quarter.
Furthermore, a cash flow sheet helps you keep a pulse on the money going in and out of bank accounts. Moreover, if you use the cash-basis method of accounting to maintain your books, you will already have a strong sense of your cash flow. However, if you use the accrual-basis method, you will want to review your cash flow sheets daily. Also, your books and entries could show higher amounts than the actual cash in your accounts if you have remaining invoices for clients.
The other common financial sheet is the balance sheet that compares liabilities and assets, i.e., what your company owns and debts, respectively. They tend to be less relevant for the tax preparation business than they might be for other small businesses. Many tax preparers never take on major debt for their company, and assets are generally limited to computers and different office technology. Still, if you have significant assets like office space or are considering taking on debt to grow your tax practice, a balance sheet can help give you a perfect idea of what your company is worth.
Should You Hire An Accountant Or Bookkeeper?
This question generally haunts numerous business owners, but it depends on the size of your tax preparation business, your budget, and the time you want to devote to bookkeeping. If you are working as a sole proprietor, your revenues and expenses are probably relatively simple, and you can likely keep your books easily. The more huge your practice, the more sense it makes to outsource accounting or bookkeeping help, as you won’t have enough time to keep your books on your own.
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