Difficulty rating: Easy

Step one:
Create the files that you need, you can create the files on the computer and use a scanner to help put information into the files or you can create a file system by hand to keep in a file cabinet. If you are going to be dealing with a lot of paper then it is best to create manual files that you will store in a file cabinet. Although this sounds really simple and it actually is many people do not do it because they overlook it or they put everything into one huge file. This is great if you only have a few items, such as pay stubs, but when you are organizing your tax records for a business you need to have multiple files to store all of your paperwork. If you itemize your deductions you should have a separate file for each deduction. You should also have a separate file for your business expenses, such as utilities, payroll, etc. Keep it all in one spot that is easy to access, such as in a filing cabinet or in accordion files.

Step two:
Now that you have created all the files that you are going to need you are going to want to put the file system to use. One thing you want to avoid is to put everything off until the end of the business year. One thing that is important when doing your accounting is to make sure that everything balances every month if possible. If you can't do it every month then you should at least do it every other month. And by having the file system in place you can easily access your bank statements, expense receipts, income receipts, etc.

Step three:
To help keep track of miles you will need to get a notebook and a pen to keep in the car at all times. If you get in the car to drive for business purposes you will need to write this down in your notebook. Be sure to record the date, the mileage when you left and the mileage when you returned, as well as the total miles driven. Also be sure to include what the purpose of the trip was. At the end of each month you can then input this information into your computer on a spreadsheet or similar software, but do not get rid of the papers from the original notebooks. When the notebook is full or if it is the end of the tax year you should file the notebook with your tax papers.

Step four:
If you want to use your computer or any other electronics you have as a business expense you will need to keep a log of all activity. You are going to want to make sure that you update this log daily so that you can get accurate information for your accounting purposes. The IRS requires stricter reporting when it comes to using computers, video cameras, etc for business expenses because so many of them are also used for pleasure. To do this you should keep a notebook of some sort right next to your computer to record the day and time spent using the computer for business purposes, you should do this everyday. Then make sure that you file the records with your tax papers at the end of each work week or as the paper fills up.

Step five:
If you are going to be using a home office you are going to want to write down a few things and keep them with your accounting records. The first thing that you are going to want to write down is how many hours you are going to work each day and what days you plan on working, this will serve as a type of official record for the IRS for tax deduction purposes, as well as accounting purposes each month. You will also need to write down the square footage of your home office to keep with the records.

Step six:
The next thing that you are going to need to do is to choose accounting software or you can create your own spreadsheets with Excel or a similar program if you have some kind of accounting background.

Step seven:
Once you have chosen the accounting software or you have created the accounting spreadsheets you are going to want to input the expenses and income that you have incurred each month in the proper categories. You are also going to want to make sure that your bank statement reconciles, and you are going to want to make sure that everything balances. One of the best things about using accounting software is that once you input the information everything else is done for you. You can input all invoices that you have obtained, and then mark them as paid once you pay them, etc.