Americans owed over $120 billion in back taxes, interest, and penalties in 2022. You don't want to be one of the Americans that owe this money. You could get hit with jail time, penalties, asset seizures, and more.

If you own a small business when the IRS comes knocking, that small business will likely fail. Your small business can also fail if you're mishandling your finances in other ways. How can you prevent this from occurring?

The best practices for bookkeeping for small businesses should help you win. Read on to learn about five of these practices.

1. Choose Your Accounting Method

Before you start anything finance-wise, you need to pick an accounting method. Be sure to choose wisely. It can be difficult to switch to another method later.

Cash Basis Accounting

The two main account methods are cash basis accounting and accrual accounting. The former involves recording transactions at the exact time they occur. It's best for businesses that only use cash payments, but your business doesn't have to be this way to use cash basis accounting.

Accrual Accounting

Then there's accrual accounting. With this method, you record your business's earnings and expenses per month, quarter, etc. This method can get complex, but it's great for businesses that use invoicing.

Modified Cash Basis

This method is a mix between the cash and accrual methods. You will use the cash basis method but you have accounts payable and receivable sections. The former is for your bills and the latter is for your invoices.

2. Choose Manual or Digital

Do you want to write your accounting records by hand (manually) or type them into a computer (digitally)? Neither of these methods is right or wrong. However, each of them has pros and cons that you need to look out for.

Manual Bookkeeping

If you and/or none of your employees are computer whizzes, you may want to choose this method. The problem is that it can take a lot of man-hours to get your accounting done this way. You also have to have an iron-clad trust in the mathematical capabilities of your employees.

Plus, you can easily lose physical records permanently. If you use this method, make sure you organize your accounting records well.

Digital Bookkeeping

This method is faster and you won't lose your records easily. However, accounting software can get pricey depending on which service you use. And hackers can steal your information if this software isn't secure enough.

In addition, your employees can take a long time to learn how to deal with this software. But if you have the money and can find secure accounting software, it can help you in the long run.

3. Separate Business and Personal Accounts

Failing to separate business and personal accounts is a common small business bookkeeping mistake. You must keep these accounts separate or your financial data can become inaccurate. This inaccuracy can cause lenders and investors to refuse to work with you.

Plus, you and your employees may end up buying personal items with business funds. This can cause cash flow issues. Consider doing the following right before starting a business:

Open Separate Bank Accounts

Once your startup is ready, open a business bank account. Get a separate business credit card that you'll only use for business transactions as well. This will help keep both financial streams separate and help your business get a credit score.

4. Keep Your Records Straight

Once you have all of your tools in place, you need to start using them. There are certain important areas of your business's finances that you need to pay extra close attention to:

Taxes

You don't want to be unable to pay your taxes on tax day. You can avoid this problem by keeping careful track of the taxes you owe throughout the year. Every month, make sure your business is setting aside enough money for taxes so you can avoid penalties.

Plus, if you keep track of your taxes this closely, you can quickly identify deductions. This can help your business save money on taxes.

Bank and Credit Card Statements

Look at your bank and credit card statements monthly. Compare them with your bookkeeping records. Make sure they match up.

If they don't, look into any inconsistencies. And don't panic! Banks and credit card companies can sometimes make errors.

Income Statements

Income financial statements are records of what a business makes, what it lost, and its overall profits. It's a good idea to create these for certain periods (months, quarters, or years). You can see the financial health of your business and make any necessary adjustments.

Balance Sheets

Balance sheets are also good business records to have on hand. They display your company's total assets and liabilities day-to-day. This can help lenders and investors decide if your business has what it takes to survive.

Cash Flow Statements

Cash flow statements are another record that lenders and investors love. This document shows how much cash is flowing in and out of your business at a certain time. If you have a good cash flow, lenders and investors will gladly put their money on the line for you.

5. Hire a Bookkeeper

Don't worry if this all seems too complicated for you to handle on your own. Starting a new business is a lot of work. Things can quickly become way too much for you to handle on your own.

If you need a break, there are plenty of bookkeeping services that can take the extra weight off your back. Reach out to them and get back to where you're needed most.

Learn More About Bookkeeping for Small Businesses

Now that you know a bit more about bookkeeping for small businesses, use this knowledge well. This should help keep your business standing tall.

But if you want to know more about bookkeeping for small businesses, read some of our finance articles. We've also got pieces on technology and entertainment. Check them out and have fun.