What app, tracker or template should a small business use to record and keep track of its business income — on its own or together with its expenses?

What must an income record hold before you pick a tool?

The standard comes from the IRS's Publication 583, Starting a Business and Keeping Records. Except in a few cases, it says, the law does not require any specific kind of records: you can choose any system suited to your business that clearly shows your income and expenses. If you are in more than one business, Publication 583 says you should keep a complete and separate set of records for each business. It adds that your books must show your gross income, as well as your deductions and credits, and that you should keep supporting documents showing the amounts and sources of your gross receipts, such as cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC and 1099-NEC. You need the sources, Publication 583 says, to separate business from nonbusiness receipts and taxable from nontaxable income, and it suggests noting the source on each deposit slip, keeping copies of all slips and identifying deposits as business income, personal funds or loans.

These tests turn that standard into a checklist for any candidate:

State rules add to this. New York's Tax Bulletin ST-770, for example, says a sales tax vendor must keep records of every sale, the amount of the sale, and the sales tax on the sale, so check your own state's rules if you collect sales tax.

Can an app, a spreadsheet or a paper template each be acceptable?

Each can be, on the conditions below.

Paper. Publication 583 says a single-entry system can be a simple and practical system if you are starting a small business, recording income and expenses through a daily summary of cash receipts and monthly summaries of cash receipts and disbursements. A printed template can carry exactly that.

An app or a spreadsheet. Publication 583 says that if you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. Under the publication, those machine-sensible records must reconcile with your books and return and give enough detail to identify the underlying source documents, and you must keep all of them together with a complete description of the computerized part of your system, detailed enough to show the functions performed as data flows through it, the controls ensuring accurate and reliable processing, the controls preventing unauthorized addition, alteration or deletion of retained records, and your charts of accounts with detailed account descriptions. Publication 583 does not say how this applies to a spreadsheet you built yourself. If you treat yours as a computerized system, describe all four items: how an entry flows to the totals, the controls that keep processing accurate, the controls that stop unauthorized addition, change or deletion of past entries, and every category and code with a description. The publication points to Revenue Procedure 98-25 for more information.

Electronic storage. Publication 583 also sets conditions for an electronic storage system, which it defines as any system for preparing or keeping records by electronic imaging or by transfer to electronic storage media. The publication says every requirement for hard copy records applies to such a system, which must index, store, preserve, retrieve and reproduce the records in legible format, give a complete and accurate record accessible to the IRS, and follow the same controls as the originals. Whether and when to discard scanned originals, and how long to keep records, are separate questions.

How do the three kinds differ in effort and durability?

A printable template is cheapest to start and asks most of you afterwards: every total, check and copy is made by hand, and there is one original unless you copy or scan it.

A spreadsheet tracker adds arithmetic, sorting and a file you can send, but its structure and checks are only what you build, and its history depends on where it is stored. For a spreadsheet kept in Google Sheets, Google's help page on finding what changed in a file (undated) says you need permission to edit a file to browse its earlier versions, that revisions may occasionally be merged, and that some changes might not show up in a cell's edit history, so treat that history as a way to recover, not a full record of who changed what. For another program or storage place, check whether and how it keeps earlier versions.

An accounting application can build income handling in. Intuit's QuickBooks Online help page on bank deposits, for example, says to combine multiple transactions into one record to match your account statement, gathering them first in an Undeposited Funds account, and, where a bank adds service charges or processing fees, to enter the fee as its own line in the deposit instead of editing the original transactions.

Which of your circumstances decide between them?

These pairings apply the tests above; they are judgments, not IRS rules:

How do you record income paid after a processor or marketplace takes its share?

Record for each payout what customers paid, split into your own sales and any tax or tips collected for others; each deduction; and the net that reached the bank, linked to the sales it covers. The IRS page What to do with Form 1099-K shows why: the form's gross payment amount shows the total value of payments you received through payment card and third party network transactions, and it isn't adjusted for fees, credits, refunds, shipping, cash equivalents or discounts. That IRS page counts reports from payment apps or online marketplaces, payment card receipts and merchant statements among your records and tells you to use them to confirm the gross payment amount is accurate, which a record of deposits alone cannot do.

Stripe's documentation of its payout reconciliation report (undated) says the report helps you match the payouts you receive in your bank account with the batches of payments and other transactions they relate to, and that its itemized CSV lists every payment, refund, dispute, fee and other balance transaction in a payout. The report is available only with automatic payouts; on manual payouts Stripe points you to its Balance report instead, and because you control the timing and amount of instant payouts, matching those is left to you. Square's help page on sales summary reports (undated) shows fees collected at payment processing as their own figure and describes a Reconciliation Report that explains how the amount paid to your bank account is calculated.

In a spreadsheet or template, give each sale its own row carrying the payout reference, and check that each payout's gross, fees and net equal the sums of its rows. Where some customers pay you directly and others through processors, keep both in one record: direct payments as single entries, processor sales grouped under their payouts. How fees and marketplace deductions are then treated is a separate question; the tool only has to keep them apart.

How do you keep sales tax, tips and client money apart from income?

Give each amount collected for someone else its own field when you enter it; separating it afterwards means revisiting every entry. Square's sales summary help (undated) reports tax amounts applied at the time of sale, and tips, defined as the total of voluntary gratuity added to the transaction by your customers, as separate figures, but its tip figure excludes cash tips, so those must be entered by hand. Square also reports automatic gratuities as service charges within product sales, not as tips; if any of that is passed to staff, give it its own field. Money you hold for a client needs its own field too. How each of these amounts is treated is a separate question.

What changes when expenses share the same record?

A combined record must still clearly show your income and expenses, in Publication 583's words, and the publication's checkbook advice is to indicate the source of deposits and the type of expense. So a combined tool also needs a type on every line (income, expense, transfer or owner money) and a category, and both halves must be checked against the same bank statement, because a deposit or payment recorded in neither half goes unnoticed. If income lives here and expenses elsewhere, tick each bank statement line in one record or the other; without that common basis, neither record can be verified against the bank.

How does each entry stay tied to its document?

Publication 583 says computerized records must give enough detail to identify the underlying source documents, and that supporting documents should be kept in an orderly fashion and in a safe place, for instance organized by year and type of income or expense. The durable link is a reference printed on the document and copied onto the entry: the invoice number, receipt number or processor payout ID. Attach or link the file where the tool allows, but keep the reference too: a link can break when a file moves, and before relying on attachments, check whether the tool's export includes them. On paper, write the reference on the line and file the document under it.

How do you check the record against bank and processor statements?

Publication 583 says you should deposit all daily receipts in your business checking account and reconcile that account each month, and that when the bank statement arrives you should make sure the statement, your checkbook and your books agree. For income the check has two layers: each payout's gross, fees and net against the processor's report, then each bank deposit against a payout or a direct payment in your record. The tool therefore needs, on every entry, a deposit reference and the date the deposit reached the bank, monthly totals of net deposits by that date, and a place to mark each line matched. Publication 583 notes that a bank statement may not agree with your books if it omits deposits made after the statement date. Likewise, a sale paid out after month-end is a payout in transit, not an error: list it as a reconciling item and match it next month.

What if customers owe you as well as pay you?

Publication 583 says that under the cash method you report income in the tax year you receive it, and under an accrual method you generally report income in the tax year you earn it, even though you may receive payment in a later year. The publication also says you choose your method when you file your first income tax return and must keep your books on the same method you use to figure taxable income, so the record follows the method on your return. On the cash method, a record of money received carries the income; a list of unpaid invoices helps you collect but is not income until paid. On an accrual method, the record must also show what was invoiced and is still owed. In a tracker or template, keep an invoice register with the number, date issued, amount, date paid and payment reference. On an accrual method, invoiced sales enter your income total from that register when earned; record each payment against its invoice so it clears the amount owed rather than counting as income again.

Who else will use the records, and what has to survive?

Plan for device loss and handover: keep a copy away from the device, make earlier versions recoverable, and give anyone else who keeps or reviews the records their own access rather than your login. Check that you can open and update the one record from every device you record on, such as a phone at the point of sale and a computer, without keeping two copies that drift apart. A bookkeeper or accountant needs one row per event, consistent column names, a written key to columns and codes, documents findable by reference, and a file that opens outside the tool. Intuit's QuickBooks Online help page on exporting reports says you can export them to Excel to use outside QuickBooks and can also export all your QuickBooks transaction data, and Stripe's payout reconciliation documentation says CSV export is available to all accounts.

What must a template already contain?

A template supplies structure but no logic, so the structure must be complete before the first entry. Look for these already in place:

• Columns for every entry field in the checklist, with gross, deductions, amounts collected for others and net kept apart
• A document-reference column, a deposit-reference column and a deposit-date column
• Totals for each amount column, with a check that gross plus amounts collected for others, minus deductions, equals net
• A monthly summary carrying totals forward, the pattern of Publication 583's single-entry system
• An invoice register if customers pay later, which on an accrual method supplies invoiced income, with each payment clearing its invoice
• A monthly box comparing total net received with the deposits on the bank statement, with a line for payouts in transit

Everything else you maintain by hand: the sums, the carried totals, the monthly check and the copies. Finding templates and setting up a spreadsheet ledger are separate questions.

When has a tracker or template been outgrown?

Publication 583 says the single-entry system is the simplest to maintain but may not be suitable for everyone, and that a double-entry system has built-in checks and balances to assure accuracy and control. These signs suggest you need that control:

• The monthly bank check often fails to agree even after payouts in transit are listed, or takes longer than the recording.
• Several processors or marketplaces each need payouts split into gross, fees and net.
• Unpaid invoices, part payments and refunds must be tracked alongside receipts.
• More than one person enters data, and you cannot tell who changed what.
• Your bookkeeper or accountant retypes your records instead of importing them.

Before you move, export the full history, keep documents filed by reference, and list invoices unpaid at the switch date. On the cash method those invoices are not yet income, so the new system must count each one when its payment arrives and not before. On an accrual method they were income when earned and should already be in your income totals from the invoice register; confirm they are before the switch, and the new system should then carry them only as amounts owed, with the payment clearing them rather than counting as income again. If expenses share the record, list unpaid bills too.

How does one sale travel from its document to the bank?

A shop takes two card payments through its processor on March 3 and receives one payout on March 5; sales tax applies to the goods, and all figures are invented.

Following invoice 1047 through the record takes four steps:

1. Document. The invoice shows the customer, the date, goods of 800.00 and sales tax of 64.00, so the entry needs the invoice number and two separate amounts.
2. Entry. The line records 800.00 of sales, 64.00 of tax collected, the card channel and the invoice number, then the processor's 25.36 fee and 838.64 net, and later its March 5 deposit date.
3. Processor record. The itemized payout report lists both payments with gross, fee and net; the payout ID goes on both lines, whose nets total 1,048.08.
4. Bank. One deposit of 1,048.08 arrives on March 5, matching the payout total, and both lines are marked matched.

A tool holding only the deposit would show 1,048.08 and nothing else: the 1,000.00 of sales, 80.00 of tax and 31.92 of fees would appear nowhere, and the processor's gross figures could not be checked against it.