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Most small business owners rely primarily on their business checkbook as a recordkeeping device. It's extremely important that you keep a business bank account that is separate from your personal funds. When you make a deposit, you should note the source of the funds which may be as simple as noting whether the deposit represented business receipts from a certain day or week, an infusion of personal funds, or a loan.
Once you've established your business checking account, you should pay all business expenses (and only business expenses) with a check from that account, or with a credit card. If you must pay an expense with cash, be sure that you save the receipt.
The exception to the "don't write checks payable to 'cash'" rule is that when you withdraw earnings from the business for your personal use, you may write a check payable to cash, to yourself, or to your personal bank account.
As your business grows, you may become ready to step up to a small business accounting software package. There are many good ones on the market, and we suggest that you poll your friends and associates about the packages they've tried and liked. If you work with an accountant, choose a software package that works with his or her system so that data can easily flow back and forth between you.
The IRS does not require you to keep any specific forms of records, so long as your records clearly show your income and expenses for the period. If you use a computerized system, you must be able to obtain printouts of your records that are easily read.