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Many say that the top two problems for small business owners are lack of funds and lack of time. Our research has observed that business owners often use personal funds to facilitate day-to-day business activities, creating problems when analyzing profit and loss. This could disincentivize revenue, and it can affect taxable income. Keeping track of your finance is important for understanding expenses and can help you minimize unwanted expenses.
Tracking expenses can help allocate funds wisely. To report and file accurate taxes, it is advisable to keep separate business and personal expense records. This is essential to maintain proper accounts and books. Here are some tips for separating business and personal expenses for growing entrepreneurs to save every earned dollar.
Open a new business account to complete business transactions and keep track of the company’s expenses. This makes it easier for you to follow the allocated budget for the financial year. Most importantly, separate bank accounts help in keeping personal expenses under control.
It is advisable to record all the transactions to proper accounts and books to analyze expenses and keep track of the utilized funds. This is also beneficial for filing and reporting accurate taxes to the IRS. However, if you file personal taxes with combined entries of business transactions, the IRS may add penalties, which can jeopardize your business.
To separate expenses and analyze financial reports quickly, you can implement the latest accounting technology. It helps you automate accounting and bookkeeping tasks. Moreover, you can automate tasks like payroll management, transaction recording, and bank reconciliation.
Whenever you make a transaction for your business from a personal account, it is advisable to keep a note and mention the same transaction in your accounts and books. Thus, you can consider it when reporting taxes and analyzing expenses. Additionally, you can withdraw personal expenses from the business account to adjust the entries.
It is important to pay yourself a salary and manage the other pay-outs from your business account. You can also set up auto-payment to reduce workload. This is crucial for analyzing profit and loss.
Benefits of separate business and personal expenses
The easiest way to manage your accounts is to maintain proper books, record each transaction in specific accounts, and store receipts. Having separate accounts helps you reduce taxable income, and most importantly, at the time of IRS review, you can protect your liabilities. Clean records increase the chances of getting business credits as well. In simple words, it helps you save every earned dollar and manage finance effectively.
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