IRS Publication 583: Starting a Business and Keeping Records

Adding the deposit amounts in your checkbook. Compare that total with the monthly total in your cash receipt book, if you have one. If the totals do not agree, check the individual amounts to find any errors. If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. Many banks print a reconciliation worksheet on the back of the statement. To reconcile your account, follow these steps. Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Note all differences in the dollar amounts. Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Note all differences in the dollar amounts. Mark the check number in the checkbook as having cleared the bank. After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. Prepare a bank reconciliation. One is illustrated later under Recordkeeping System Example . Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. If you still have differences, check the previous steps to find the errors. Table 3. Period of Limitations IF you... THEN the period is... 1. Owe additional tax and situations (2), (3), and (4), below, do not apply to you 3 years 2. Do not report income that you should report and it is more than 25% of the gross income shown on the return 6 years 3. File a fraudulent return Not limited 4. Do not file a return Not limited 5. File a claim for credit or refund after you filed your return Later of: 3 years or 2 years after tax was paid 6. File a claim for a loss from worthless securities or a bad debt deduction 7 years Bookkeeping System You must decide whether to use a single-entry or a double-entry bookkeeping system. The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. Single-entry. A single-entry system is based on the income statement (profit or loss statement). It can be a simple and practical system if you are starting a small business. The system records the flow of income and expenses through the use of: A daily summary of cash receipts, and Monthly summaries of cash receipts and disbursements. Double-entry. A double-entry bookkeeping system uses journals and ledgers. Transactions are first entered in a journal and then posted to ledger accounts. These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). You close income and expense accounts at the end of each tax year. You keep asset, liability, and net worth accounts open on a permanent basis.