Accounting for Small Business, especially for any entrepreneur I know may be your biggest stressor. Crunching numbers can get overwhelming. But without the proper preparation and tracking not having the right cash flow can be the difference between you being a thriving business and closing your doors.

Working with lots of different entrepreneurs I see and hear a lot of misconceptions about bookkeeping. Many business owners just don’t have the education or background to understand small business accounting. When you are looking at your small business bookkeeping it is important to understand the system and where the numbers come from that create your financial reports. Here are a few common misconceptions about small business bookkeeping.

Bank Deposits = Income

Just because there is a deposit in your bank account doesn’t mean it is income. When you transfer money from one account to another this is not income, this is simply an account transfer. Recording that transfer as income would be a mistake and it would overstate income. If you make an owner contribution to your business for startup funds or to cover a cash shortage this is an equity move not income.

Just Pay Them As A Contractor

When a business owner needs help and finally hires someone I often hear them say, “I will just pay them as a contractor.” Unfortunately if independent contractors are not handled correctly there can be some huge consequences for the business. Staying in compliance with independent contractors is a major concern, but very few businesses properly handle their 1099 independent contractors. Most small businesses will try and go the contractor route when hiring because they think it is cheaper and less risky. The problems come when you are not handling all segments of this correctly, it can prove to be a pretty costly route. It is attractive to pay people as contractors because you save on payroll taxes and workers comp insurance. However, having a true independent contractor is quite rare. Here are a few things you definitely want to be sure your independent contractors have:

Ideally they would be set up as a corporation or LLC
You want a W-9 form filled out with their current information
A copy of their business license
Proof that they have other clients (you are not their only means of being in business) and that they are pursuing other clients
A contractor agreement

Personal vs. Business Expenses 

It can be difficult between personal and business expenses, especially for the self-employed. Just because you are self-employed doesn’t mean that everything can be a business expense. If your business is a corporation, you must keep business finances separate because the business is considered a separate legal entity. If you have structured your business as a sole proprietorship, it’s considered an unincorporated business with no legal distinction between it and you, its only owner. Through the sole proprietorship, all profits, losses and liabilities are tied to you personally. Because of this, it’s even more imperative for a sole proprietor to keep business and personal finances separate in case of an IRS audit.