What Your Bookkeeper Wants You to Know About Recordkeeping (Interview)
Posted May 11, 2010 in Accounting/Bookkeeping, Interviews
Freelancers have survived yet another Tax Day, which means now is the perfect time to… prepare for the next one!
Most freelancers are in denial about their finances, putting off even thinking about them until taxes are due again–with grave consequences (as you’ll see later on).
However, recording and monitoring your “books” or records of financial transactions is an essential part of running a business.
If you’re just starting out, you probably do your own bookkeeping and tax preparation. As your business grows, you’ll be better off getting professionals to do it for you. Either way, you need to understand the basic processes involved in bookkeeping and accounting.
To help us get a better grip of bookkeeping, I have interviewed Monica Ross, President of Virtual Bookeeping. Read on to find out what tips a professional bookkeeper has for freelancers, especially those of us who want to do everything ourselves.
First Things First
Let’s make sure we understand the terms we’re using here. Bookkeeping refers to how you record a business transaction. Whether you use a notebook, a spreadsheet, or full-blown software to record your expenses and income, that’s bookkeeping.
On the other hand, accounting is a much broader term. There are many aspects of accounting–including bookkeeping activities, preparing and auditing financial reports, and understanding and advising on tax matters.
Therefore, bookkeeping is part of accounting. However, accounting goes farther. It includes analyzing and reporting financial information. For example, when you analyze how profitable your freelancing has been, you’re performing an accounting activity. When you prepare your own tax returns, you’re doing accounting.
Now that we’ve got the semantics cleared up, let’s move on to…
A Bookkeeper’s Tips for DIY Freelancers
Here’s my interview with Monica, a professional bookkeeper:
1. What are the most common bookkeeping mistakes freelancers (and other self-employed people) make?
Monica: The most common mistake I’ve seen is not keeping their books current. Most people wait until something is due (taxes, financial statements for loans, etc) and then try to put everything together hastily.
Another common mistake is not properly separating their personal transactions from their business transactions. They use the same checking accounts and credit cards for both personal and business transactions.
I’ve also noticed many self-employed individuals don’t keep all their receipts. You should obtain receipts for all of your business transactions including meals, gas etc. and not just large purchases.
2. What are the consequences of these mistakes?
Monica: Leaving bookkeeping to the last minute is very stressful. You also end up with a lot of inaccuracies when you do update you books. It’s a lot easier to remember what you did yesterday and today rather than last year.
It is better to keep personal and business accounts separate for two reasons. One, you don’t have to try and remember if a purchase common to both is for business or personal use. Two, it is better to have reconciled accounts in your books, and if the accounts are shared then you have to deal with twice as many transactions.
If you do not have a receipt for a disbursement that you’re claiming, and you are audited, the expense will be disallowed.
3. What is the most important tip to remember if I do my own books?
Monica: If you don’t already have an accounting background, you should take some kind of course that will give you a general idea of the accounting cycle and principles before starting your books. This will help to ensure your books are being done properly.
4. When should freelancers seriously consider hiring a bookkeeper and accountant?
Monica: If they do not have the necessary knowledge, then freelancers should definitely work with a bookkeeper and accountant. Also, when you become so busy that you no longer have the time to keep the books current, then it’s time to hire somebody else to do it for you.
I’ve noticed that most self-employed individuals give their books the lowest priority, thinking “I will do those when I have time.” I hear this all the time and then we end up with a shoe box of receipts and people panicking.
Freelancers should always consult an accountant for filing income taxes, and also if you are making a major change in the way you are doing business.
Bookkeeping Benefits
Having an accurate record of your financial transactions is good for your freelancing business. With good bookkeeping, you can:
- Monitor the financial health of your business
- Create and stick to a monthly budget, so that you avoid cash flow problems
- Identify ways to cut down on costs and keep more of what you earn
- Prepare your taxes more easily, if you do them yourself
- Make your accountant’s job easier and possibly reduce the amount you pay for tax preparation
- Be ready for a tax audit, confident that you have all the documents to back up your tax forms
How Are Your Books?
As a part-time freelancer, I do my own bookkeeping and tax preparation. I used LessAccounting for about one year. It helped streamline the process of invoicing my clients, receiving payments and recording them. However, because I did not know anything about accounting, I soon found that I was doing many things wrong.
Finally, early this year, I switched to an accounting software that resides in my hard drive and decided to get serious with my finances. I worked with a bookkeeper to teach me how to record my transactions, customize the accounting software I’m using, reconcile my bank accounts, and deal with the fact that my transactions are in two currencies (US and Canadian dollar).
Since I will soon be freelancing full time, I expect that I’ll be hiring an accountant to do my taxes next year.
Another good option for freelancers is IAC-EZ. (Freelance Folder is fortunate to be sponsored by one of the best bookkeeping
platforms on the web, IAC-EZ.)
How About You
How have you been tackling bookkeeping and taxes? Are you a do-it-yourselfer like me? If so, what resources do you use to make sure you’re doing it accurately? And, how do you take the pain out of bookkeeping?
If you work with a bookkeeper and accountant, how has that experience been for you? How did you find the right professionals to work with?
Do share. You just might help another freelancer out.
PS: The Unlimited Freelancer has a list of many different financial software packages that are affordable and easy for freelancers to use. Check it out!
Image by TerryJohnston
Related posts:
- Introducing FreelanceFolder’s New Premium Sponsor, IAC-EZ
- When To Hire an Accountant
- Interview With Designer Extraordinaire — Liam McKay of Function
- Interview With Adelle Charles From Fuel Your Creativity – Design, Blogging And Business
- Accounting Basics for Designers
About the author: Lexi Rodrigo is the creator of The Savvy Freelancer, a blog that's all about achieving creative and financial freedom through freelancing. Check out Lexi's free guide, 31 Days to Start Your Freelancing Business (or Make Yours A Better One).
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23 Comments
Carlos Perez
May 11th, 2010 at 8:58 amI couldn’t agree more with your points and those made by Monica Ross. One of the best pieces of advice I got when I was working for myself full-time was to get an accountant to help me with bookkeeping, tax returns, etc. I was told to consider your bookkeeping as a time-consuming project you don’t get paid for and can easily screw up if you aren’t trained to do it properly. And since incorporating my business last year, I knew there was no way I would be able to prepare financial statements for a Corporation properly by myself.
I keep all my business expenses separate (get separate bank accounts!!) and keep all my receipts for all expenses. On a monthly basis I give all my receipts to my accountant. During the month, I will BCC: him on all my invoice emails so he can keep track of those.
I think what is extremely valuable with having a professional help you out is that they know what can be claimed as an expense, and what can’t be. I find most people starting out don’t necessarily know that there are a lot of expenses that can be written off as a business expense!
Thanks for the article!
Jordan Walker
May 11th, 2010 at 9:21 amExcellent points, being articulate and organized are key to great book and time keeping.
Najam Siddiqi
May 11th, 2010 at 9:51 amyou really doing excellent work and give us some thing new on daily basis thanks for sharing
Lexi Rodrigo
May 11th, 2010 at 9:55 amThanks for all your comments! Glad to keep giving you helpful information.
@CarlosPerez – I couldn’t agree with you more. My bookkeeper tells me that I will definitely need an accountant if/when I incorporate. Besides, isn’t it a big load off our shoulders when we have a professional doing our books for us? The key thing, though, is finding the right bookkeeper and accountant for us. That’s probably a topic for another blog post :-)
Kelly Justin
May 11th, 2010 at 10:08 amvery nice topic and an important one too…..very well written
Matt Pritchett
May 11th, 2010 at 10:13 amI was good about doing my own accounting (taxes, bookkeeping) for a while, then I started to fall off of it. I then hired my own tax preparer, but have still been doing my own bookkeeping (by hand, not a software). Perhaps soon I’ll be able to purchase bookkeeping software.
Lucian
May 11th, 2010 at 10:17 amI manage the bookkeeping myself but I hire a professional to do my taxes. Believe it or not, I save money that way.
Mike Roberts
May 11th, 2010 at 10:47 amAs a growing web design company, we handle our own bookkeeping… for now. Like the article states, we are not accountants by any means, but it’s not hard to do the following:
A) Keep the business finances separate and clearly documented
B) Meet every week to keep the financials organized and stick to a budget
We are absolutely looking to bring on an accountant soon, but we are comfortable to document our transactions neatly so when we do come across an accountant that we feel is a fit for our company, we are not handing them a shoe box full of receipts!
~Mike
Debbie Foley
May 11th, 2010 at 12:06 pmI keep meticulous records of all my bookkeeping and enter any expenses or receipts within a day or two using QuickBooks. That said, I don’t keep my personal and business accounts separate – this is a good reminder to open a checking account for my business(es).
Lexi Rodrigo
May 11th, 2010 at 12:17 pm@Matt Pritchett – Uhoh! It might be time for you to get a bookkeeper as well. The thing with getting accounting software is, you’ll still have to input your data. Unfortunately, they haven’t found an app to do that for us ;-)
@Lucian – Yes, that’s what everybody says: you’ll actually save money by hiring an accountant to do your taxes.
@Mike Roberts – I’m in the same boat as you: doing my own books but expecting to work with an accountant soon. I’m sure accountants will charge us less if we hand them our data in an organized way and, as Monica pointed out, if they can directly import our data into their software.
@Debbie Foley – I admire your diligence! I only work on my bookkeeping once a month and it takes me 1-2 hours. I cannot imagine having to look into it every couple of days.
Jennifer Escalona
May 11th, 2010 at 2:46 pm@Lexi Rodrigo – Actually, there IS an app that inputs your bookkeeping information for you. Outright.com imports your income and expenses from your credit card, PayPal, oDesk, and invoicing programs like Freshbooks, effectively putting much of your bookkeeping on autopilot. Now that I’m set up, I haven’t entered any income in a year, and I rarely have to enter expenses.
Outright is designed for self-employed professionals and prides itself on simplicity. It also files your 1099′s for your contractors, and fills out your Schedule C for you at the end of the year. I used that feature for the first time this year and it was amazing! You can also find bookkeepers and other financial types who specialize in self-employed folks hanging around at Outright’s community. I found my accountant, Wray Rives, there.
Full disclosure: I’m Outright.com’s social media manager, though I was a user long, long before I contracted to them, and actually got hired to work with them after I complimented them on Twitter! (Which is a whole other can of worms…)
Eugene
May 11th, 2010 at 4:29 pmBookkeeping shouldn’t be a particularly difficult task for most freelancers out there as long as you are disciplined about it (which is the theme I’m getting from the article).
I’m still in my infancy as a freelancer and plan to tackle the bookkeeping myself as part of the learning experience. I studied a bit of accounting so I should be able to handle it. Tax returns on the other hand are a chore I’d rather just let someone else deal with.
Lexi Rodrigo
May 11th, 2010 at 4:34 pm@Eugene – Problems arise when (1) we don’t know what we’re doing; and/or (2) we’re not disciplined enough to keep our documents organized. That’s why Monica Ross advises that, if we want to do our own books, then we should at least educate ourselves in the basic accounting and bookkeeping principles.
Lexi Rodrigo
May 11th, 2010 at 6:11 pm@Jennifer Escalona – Thanks for sharing! In fact, you can import bank statements into Quickbooks as well. What I meant was, we need an app to input our cash transactions. I think there is a service out there that does that after you send them your shoebox of receipts :-D
Jennifer Escalona
May 11th, 2010 at 6:23 pmThat’s Shoeboxed.com. They’re an Outright.com partner and just a really cool company all around!
Matt - Microbrew Media
May 11th, 2010 at 9:07 pmGotta have Quickbooks. But before starting consult your accountant about the types of services you provide as well as tax incentives that they be able to inform you about. The two “MUSTS” are have a separate credit card for your business as well as reconcile your bank account (and credit card if you feel like it) each month as your statement becomes available.
Ramona
May 11th, 2010 at 10:52 pmI have an accountant that keeps my firm’s bookkeeping. It’s the law in my country, so I have to pay someone to do this. The good thing is the pay is small and she does do a great job.
If it comes to my personal finances I found that acemoney is a great tool.
Leslie A. Joy
May 12th, 2010 at 2:03 amExcellent interview loaded with great advice. I do all my own recordkeeping, then see an accountant for my taxes, however until last month I used the last minute form of record keeping. Doing it as I go has definitely helped decrease my anxiety and keep better track of my money,
Najam Siddiqi
May 12th, 2010 at 8:35 amvery nice posts thanks for sharing . nice post.
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