Small Business Bookkeeping from Bank Statements: IRS Basics

IRS Publication 583, Starting a Business and Keeping Records, says everyone in business must keep records. It says good records help you track your business's progress, prepare financial statements, identify the sources of your receipts, and support items on your tax return.

It also says the law generally does not require a specific kind of records. You can choose any system that clearly shows your income and expenses, and the system should suit your type of business.

Publication 583 says one of the first things to do when you start a business is open a business checking account and keep it separate from your personal checking account. It suggests depositing all daily receipts there, noting the source of each deposit, and reconciling the account monthly.

The publication walks through a reconciliation example. It starts from the bank statement balance, adds deposits shown in the checkbook but not yet on the statement, and subtracts outstanding checks, then compares the result with the checkbook balance after adjusting for items such as a bank service charge. Differences between the two sides usually have an explanation like these.

The publication describes books as a summary of transactions, usually in journals and ledgers, backed by supporting documents like invoices, receipts, deposit slips and canceled checks. A bank statement fits into that as a record of money in and out.

If you convert each statement PDF to a spreadsheet, you can add a Category column and an Invoice reference column to every row. A synthetic example:

A bank statement shows that money moved, not always why. Publication 583 says proof of payment by itself does not establish that you are entitled to a deduction, so keep invoices and receipts with the sheet. Cash transactions, sales made by card processors that pay out in batches, and payments that combine several items will need extra records.

On retention, Publication 583 says to keep records as long as they may be needed under the Internal Revenue Code, generally until the period of limitations for the return expires. It says the standard period is 3 years but longer in some cases, for example 6 years for underreported income, and that employment tax records must be kept at least 4 years after the tax is due or paid, whichever is later.

The spreadsheet is a working copy; keep the original statements. We are not claiming it meets any IRS requirement. PDFtoRow can convert statement PDFs into Excel or CSV for this kind of sheet.