Small business accounting: a profit and loss you can read every month

The profit and loss, and why it is the only statement you need monthly

A profit and loss statement is income minus expenses for a period. For a small business it answers the only question that matters month to month: did the work pay? Read it monthly, and a bad month is a correction; read it annually, and a bad year is a surprise.

Three refinements make a P&L useful for a service business:

• Income by source. Paid invoices, plus any direct payments that never went through an invoice. Not deposits: deposits include transfers and refunds.
• Expenses by category, in the tax form's own categories, with the percentage each represents. Fuel at 18% of expenses is a fact you can act on; "expenses $12,540" is not.
• Net profit per business, if there is more than one. A trade and a rental file on different forms with different tax; a P&L that merges them describes a business that does not exist.

The balance sheet, which lists assets and liabilities, matters when you borrow, sell or incorporate. For a sole proprietor with a truck and some tools, it can wait for the accountant.

The four records behind the numbers

Invoices

Every job invoiced, every payment recorded against the invoice. Paid invoices are the income figure; unpaid ones are the receivables. This is the record that makes income exact rather than inferred from deposits.

Expenses with receipts

Every purchase categorised on the day, with the receipt image attached. This is the record that makes the expense lines defensible.

Bank and card statements

Imported monthly and reconciled against the first two. This is the record that makes the books complete: it catches the unphotographed subscription and the uninvoiced deposit.

Mileage

A log kept as you drive. For a business that visits customers, often the second-largest deduction.

Small business accounting is the discipline of keeping these four current and checking them against each other once a month. Everything else, the P&L, the tax figures, the answer to "can I afford a second truck?", is a report over them.

Sales tax: collected, not earned

If your state requires you to charge sales tax on your services or the parts you supply, the tax on a paid invoice is money you hold for the state. It is not income, and it does not belong in the P&L. An accounting app should show it on the invoice as its own line, keep it out of income automatically, and report it by state and by rate, because a sales-tax return is filed per state and lists each rate separately. An app that folds tax into the price overstates your income at the federal level and leaves you rebuilding the state return by hand.

Cash basis, receivables and the money you have not received yet

Small businesses account on the cash basis: income when received, expenses when paid, which is what the tax form uses and what the bank statement shows. The P&L therefore counts only paid invoices. But the business also needs to know what it is owed. That is the receivables view: sent and overdue invoices, by customer, with the total outstanding. The two views disagree on purpose, and an accounting app should show both: what you earned, and what you are still waiting for.

The monthly close, in an hour

1. Import the month's bank, card and payment-app statements; mark each line income, expense or non-taxable, with a category.
2. Match deposits to paid invoices; investigate any deposit with no invoice.
3. Match receipts to statement lines; drop the duplicates, keep the receipts.
4. Split loan and mortgage payments into interest and principal.
5. Read the P&L: income, expenses by category, net. Set aside tax on the net.
6. Read the receivables: send reminders on what is overdue.

Done monthly, this is an hour with coffee. Skipped for a year, it is the reason people hire a bookkeeper in March.

Year end: the accounting pays off or it does not

The test of small business accounting is April. If the four records were kept, the year end is a report: gross receipts per business, expenses by Schedule C line with receipts attached, the mileage total, sales tax collected by state, and net profit. Hand it to a preparer, or import it into tax software, and the return is written. If the records were not kept, the same information has to be rebuilt from statements, and the receipts are in a shoebox.

That is the economic case for an accounting app for a small business: not the reports, which any spreadsheet can imitate, but the daily capture that makes the reports true.

Choosing an accounting app for a small business

• Does it start from invoices? For a service business the invoice is the income record; an app that treats invoicing as an add-on has it backwards.
• Does it categorise in tax terms? Schedule C categories, not a generic chart of accounts you have to map later.
• Can it keep two businesses apart? A trade and a rental, on their own schedules.
• Does it keep sales tax separate and report it by state and rate?
• Does it produce the year end as something a preparer or tax software can use directly?
• Where is your data, and what does it cost over five years? A subscription that holds your records hostage is a different proposition from software you own.