Chapter 8 Lesson 1 Sole Proprietorship Bookkeeping

In a sole proprietorship, the business and the owner are legally considered the same entity. This means the owner receives all the profits from the business but is also personally responsible for any business debts. There’s no separate tax return for the business; instead, all income and expenses are reported on the owner’s personal tax return. Because of this close connection, bookkeeping for a sole proprietorship focuses heavily on keeping clean, organized records while maintaining a clear boundary between personal and business finances.

Common bookkeeping activities for a sole proprietorship include several important tasks that help keep the business organized and compliant. First, it’s essential to track all income and expenses, including every sale, payment, bill, and purchase. It’s equally important to separate personal and business finances by using a dedicated business bank account, even if you’re the only person in the business. When the owner takes money out for personal use, it’s called an owner’s draw, not a salary, and should be recorded properly as such. Additionally, sole proprietors must calculate self-employment tax, since they are responsible for both the employer and employee portions. Finally, all business income and expenses must be prepared for tax reporting on Schedule C, which is filed along with the owner’s personal tax return.

Let’s say you're a freelance designer running a sole proprietorship. You complete a client project and earn $2,000, then purchase a design tool for $100. Later, you transfer $500 from your business account to your personal account. In your bookkeeping records, you would record the $2,000 as business income, the $100 as a business expense under software or tools, and the $500 as an Owner’s Draw—not a salary or expense. Properly recording these transactions helps keep your finances organized, makes tax preparation easier, and ensures your business continues to run smoothly.