We get a lot of questions about personal bookkeeping at Bench. Questions like:
“Does Bench do personal bookkeeping?”
“What’s the difference between business bookkeeping and personal bookkeeping?”
“Which one do I need more? Do I need both?”
The difference is clear cut for corporations, but way messier for sole proprietorships and other flow-through entities.
In this guide, we’ll explain the key differences between business and personal bookkeeping, and why it’s important for small business owners to distinguish between the two.
What’s the difference between business bookkeeping and personal bookkeeping?
Business bookkeeping is tracking all the revenue, expenses, debt, and assets in your business on a regular basis. That information gets turned into financial statements, which lets you make smart financial decisions, secure loans, and file your taxes.
(Further reading: What Is Bookkeeping, and Why Is It Important?)
Personal bookkeeping, on the other hand, is staying on top of your personal finances. It’s essentially expense management and budgeting. It can help you answer questions like:
“Am I spending too much on eating out?”
“Can I really afford to go to Turks and Caicos again this year?”
“What kind of home mortgage do I qualify for?” (Okay, you’ll need a bank to help you with this one. But if you understand your personal expenses, you’ll know how much you can handle in monthly mortgage payments.)
Doing your “personal books” just means tracking your personal spending, and making sure you have a budget that works for your lifestyle. It could also mean keeping tabs on your personal debt and assets if you have a personal loan (like a mortgage), or have investments like property or a collector’s sports car.
Why is small business bookkeeping important?
If you want to know where your business is currently spending money, how much in taxes it will owe this year, and whether it qualifies for a loan, you need some form of bookkeeping.
You need it to produce financial statements
Financial statements tell you and anyone interested in investing in your business how your company is doing, financially. And they’re impossible to assemble without accurate bookkeeping.
You need it to do your taxes
If you’ve never filed a business tax return, it’s important to remember that business and personal tax filing are two different beasts.
To file your personal taxes you need to know your income and your tax-deductible expenses. If you know those two, you’re pretty much set.
Doing your business taxes is another story. Different industries have unique—and often confusing—tax rules. There are countless traps your business could fall into around tax time: changing tax rates, varying excise taxes, expired credits and deductions, state-by-state sales tax rules, etc.
Keeping detailed books for your business means your accountant can spend less time sorting through the mess, and more time saving you money on your taxes.
Further reading: Everything You Need to Know about Filing Small Business Taxes
You need it to get a loan or investment
If you want a bank or investor to give you money, be prepared to show them a set of properly prepared financial statements. The further back your records go, the more confidently these people can give you money, so it’s a good idea to start bookkeeping as early as possible.
Do I need personal bookkeeping?
Generally speaking, no. Unless you earn and spend so much money that you couldn’t possibly keep track of every expense yourself, what you probably need instead is a personal budget.
But what about flow-through entities?
A “flow-through entity” is a businesses incorporated in such a way that its income “passes through” directly to the owner as personal income. These companies might be taxed differently than regular businesses, but at the end of the day they still need business bookkeeping, just like any other business.
So what kind of business bookkeeping do I need?
If you run a small business, you need to start doing some form of bookkeeping, even if it’s just DIY. This involves using basic accounting software or even just a simple spreadsheet to track your income and expenses. (Our guide to starting your own bookkeeping process can help).
Different industries have different tax codes, and different companies have different bookkeeping needs, so make sure to consult with a CPA or professional bookkeeper before you set up your books.
They’ll probably tell you to separate your business and personal accounts, recommend a specific bookkeeping system, and show you how to record transactions in a spreadsheet or accounting software.
If your business is growing and you don’t have time to learn all that, you might want to outsource your bookkeeping to a pro.
If you don’t know who to hire, try Bench (that’s us). We’re North America’s largest bookkeeping service, and we’ll do your books for you, all online. Plus we’ll give you software that makes it easy to stay on top of your business finances.