How do I do bookkeeping for my small business?

Small-business bookkeeping means recording every financial transaction, reconciling accounts against bank statements monthly, and producing a profit-and-loss statement and balance sheet at least quarterly. Most owners use bookkeeping software or hire a part-time bookkeeper; the IRS requires you to keep supporting records for at least 3 years.

Bookkeeping is the daily habit that makes everything else in your business measurable — taxes, financing applications, payroll, and strategic decisions all depend on clean books. The IRS requires businesses to maintain accurate records supporting income, deductions, and credits for at least 3 years from the filing date of the return they relate to. See IRS Publication 583 (Starting a Business and Keeping Records) for the full retention schedule.

Step 1: Separate business and personal finances

Open a dedicated business bank account and use it exclusively for business income and expenses. Commingling personal and business transactions is the most common reason small-business books become unworkable and creates audit risk. If you operate as an LLC or corporation, keeping accounts separate also helps protect your personal liability shield.

Step 2: Choose a method — cash or accrual

Cash basis: record income when you receive payment and expenses when you pay them. Simpler; used by most small businesses. The IRS permits cash-basis accounting for most businesses below the gross receipts threshold (see IRS Publication 538).
Accrual basis: record income when it's earned and expenses when they're incurred, regardless of when cash moves. More accurate for businesses with significant receivables or inventory; required for C-corps and some larger businesses.
When in doubt, ask a CPA which method fits your business type and size.

Step 3: Set up a chart of accounts

A chart of accounts is a categorized list of every account you track: revenue, cost of goods sold, operating expenses (rent, utilities, insurance, payroll, marketing), assets (equipment, accounts receivable, cash), liabilities (loans, accounts payable), and equity. Most bookkeeping software comes with a default chart of accounts you can customize. Consistent categorization is what lets you read a profit and loss statement without guesswork.

Step 4: Record transactions and reconcile monthly

Record every income and expense transaction as it happens — or in a weekly batch if you prefer. At the end of each month, reconcile: compare every transaction in your books against your bank and credit card statements and confirm they match. Monthly reconciliation catches errors, fraud, and missing entries before they compound. The SBA's guide to small-business accounting walks through the reconciliation process.

Step 5: Run reports and prepare for taxes

At minimum, produce a profit and loss statement and a balance sheet quarterly. At year-end your books feed directly into your tax return (Schedule C for sole proprietors, Form 1120-S for S-corps, Form 1065 for partnerships). Clean, reconciled books also substantially shorten the time a CPA needs to prepare your return — and are required if you ever apply for financing. If applying for a business loan, most lenders ask for 2 years of financial statements; see business loan requirements.

IRS record-keeping requirements

The IRS generally requires businesses to keep records that support income and deduction items on a tax return for at least 3 years from the date the return was filed (or 2 years from when the tax was paid, whichever is later). — IRS — Publication 583
The IRS permits most small businesses to use the cash method of accounting if their average annual gross receipts for the three prior tax years do not exceed the applicable threshold. — IRS — Publication 538
The SBA advises small-business owners to keep financial records organized and to use accounting software or work with a professional to maintain accurate books throughout the year. — SBA — Manage your finances

Key takeaways

Open a separate business bank account before you record a single transaction — commingling is the most common bookkeeping mistake.
Choose cash or accrual accounting and apply it consistently; most small businesses use cash basis.
Reconcile bank and credit card statements every month to catch errors before they compound.
Produce a P&L and balance sheet at least quarterly — lenders and the IRS both expect them.
Keep supporting records (receipts, invoices, bank statements) for at least 3 years from the filing date.