Who this is for
- US sole proprietors, partnerships and corporations whose books live in a spreadsheet
- Owners deciding whether to move to accounting software
- Owners whose lender, co-owner, accountant or the IRS has asked for the books
Not covered here
- Which accounting software to buy
- Rental property books and cash-or-accrual choice
- Rebuilding months of missing books, and penalty amounts
- How long to keep each kind of record
Can I do my bookkeeping in a spreadsheet?
Yes. The IRS lets you choose any recordkeeping system that clearly shows your income and expenses, and the law requires no special kind of records except in a few cases (IRS: Recordkeeping). The regulation asks for permanent books or records sufficient to establish gross income, deductions and credits (26 CFR 1.6001-1). A spreadsheet can meet that standard when it ties to the return, traces back to source papers and is reconciled to the bank each month (each entry matched to the bank statement, line by line), as the IRS advises. Publication 583 adds tests for computerized records, and a plain spreadsheet may not meet them without extra work. Neither it nor Revenue Procedure 98-25 names spreadsheets, but the revenue procedure covers any system that processes records by other than manual methods, a stand-alone microcomputer system included. Treat those tests as the standard for a sheet that holds your only books.
A spreadsheet gets harder to rely on when:
- no one reconciles it to the bank statements each month;
- anyone with the file can change closed months without a trace;
- you have employees, pay contractors, or resell stock;
- a lender, investor, co-owner or the IRS has to rely on it;
- months of bank activity were never recorded.
If several apply, or months were never recorded, the sheet often has to be rebuilt into reconciled books rather than patched; the last section says where each case goes.
Gather first: statements for every bank and card account for the year; the spreadsheet and every older copy of it; invoices and receipts; the last filed return; payroll and contractor records, if any.
What must my spreadsheet records show, and what papers go with them?
The books must show gross income, deductions and credits, and each entry needs a source paper behind it. Publication 583 says the books summarize your transactions, and that sales slips, paid bills, invoices, receipts, deposit slips and canceled checks hold the information that goes into them. For purchases and expenses, the IRS says the papers should identify the payee, the amount, proof of payment, the date and what was bought (IRS: what kind of records).
| Record | Source papers | What each spreadsheet row should let you find |
|---|---|---|
| Income | Invoices, deposit slips, receipt books, card slips, Forms 1099-NEC and 1099-MISC | The paper, and the deposit it landed in |
| Stock bought for resale | Invoices, proof of payment | The supplier invoice and what was bought |
| Expenses | Invoices, receipts, account statements, petty cash slips | The payee, the date, the business purpose and how it was paid |
| Business assets | Purchase invoices, closing statements | Date acquired, cost, improvements and depreciation taken |
Keep a business bank account separate from your personal one, and note the source of each deposit as business income, personal funds or a loan (Publication 583). A computer-prepared record counts as written for travel, car and gift expenses, but you should record them at or near the time they happen (Publication 463). If you keep scans or photos instead of paper, the electronic storage system must index, store and reproduce them legibly, and the paper may be destroyed only after the system has been tested to meet IRS requirements (Publication 583, Electronic records).
Single-entry or double-entry: what can a spreadsheet do well?
A spreadsheet does single-entry well, because that system records only the flow of income and expenses. Publication 583 calls it the simplest to maintain, and says it may not suit everyone. Double-entry records each transaction twice, as a debit in one account and a credit in another, and the IRS says it has built-in checks and balances.
| Single-entry | Double-entry | |
|---|---|---|
| Records | Income and expenses | Income, expenses, assets, liabilities and net worth |
| Produces | An income statement | An income statement and a balance sheet |
| Built-in error check | None; you reconcile to the bank | Total debits must equal total credits |
| In a spreadsheet | One row per transaction | Possible, but you must build the debit and credit columns and the balance check yourself |
What does a spreadsheet lack that an examiner or lender looks for?
A plain spreadsheet often lacks the controls, the written description and the audit trail that the IRS lists for computerized records. Publication 583 says computerized records must reconcile with your books and return and identify the source documents, and your documentation must show controls that prevent unauthorized addition, alteration or deletion. Revenue Procedure 98-25 sets out the detail.
| What the IRS looks for | Where it says so | What a loose spreadsheet often lacks |
|---|---|---|
| Totals by account that reconcile to the books and to the return | Rev. Proc. 98-25 section 5; Publication 583 | A monthly tie-out to each bank statement, and year-end totals mapped to return lines |
| Transaction detail that identifies the source documents | Rev. Proc. 98-25 section 5; Publication 583 | One row per transaction with a document reference, not lump entries |
| Controls against unauthorized addition, alteration or deletion | Rev. Proc. 98-25 section 6; Publication 583 | Any cell can be overwritten, a row deleted or a column re-sorted, with no record |
| A written description: data flow, controls, chart of accounts (the list of categories you sort entries into), and dated changes | Rev. Proc. 98-25 section 6 | A note saying what each column and code means, and when a formula changed |
| Internal controls an examiner can evaluate | IRS FAQ, answer 11 | Closed months locked or kept as dated copies |
The revenue procedure covers records kept by other than manual methods. For a smaller business it applies when, for example, some of the required information exists only in electronic records. Neither text names spreadsheets, so whether a given sheet is covered is a CPA's call, and a sheet that holds your only books is the case most likely to be.
If a taxpayer does not comply with the revenue procedure, the IRS can issue a Notice of Inadequate Records under 26 CFR 1.6001-1(d), and the revenue procedure (section 12) lists the accuracy-related penalty among the consequences. See penalties for not keeping business records. Importing bank lines into a sheet does not reconcile it; see bank feeds are not reconciliation.
How do I set up a spreadsheet that meets the standard?
Use one row per transaction, tie out each month and keep dated copies of closed months. Each row needs the date, the payee or customer and the amount; a category that maps to a return line; the account it was paid from or deposited to; a document reference such as an invoice number or file name; the business purpose, for expenses; and a mark showing which statement month it was reconciled to.
Each month, match every account to its statement balance, save a read-only dated copy and note any formula or column change on a notes tab. Some spreadsheet programs keep a version history or let you lock cells. Neither IRS document says whether that meets the control test, so treat it as a help and keep the dated copies too.
Is software worth it if I already have an accountant?
Software can supply some checks a plain spreadsheet lacks, but an accountant does not change the standard: the IRS says taxpayers are responsible for keeping the books and records that support their returns (IRS FAQ, answer 8). Those checks are accounts that must balance, statements, and a backup file that is an exact copy of the books of original entry (the records as first entered). The Publication 583 tests for computerized records still apply to it, and it does not reconcile the bank for you. The IRS says it can test the integrity of that file, and cannot adequately test records already converted from software into spreadsheets (IRS FAQ, answer 11).
An accountant can prepare a return from a spreadsheet that reconciles to the bank. One that does not usually has to be rebuilt first; see rebuilding books from bank statements. For what an app must do, see a bookkeeping app for Schedule C.
When do inventory, payroll or contractor forms force the move to software?
No rule names software for any of them. Each adds records that must tie to a return, and a sales-and-expense list has no place for that.
| Trigger | What the rules require | What the spreadsheet must add |
|---|---|---|
| Stock you resell | Where merchandise is an income-producing factor, an inventory is generally necessary and purchases and sales use an accrual method. A small business taxpayer, with average annual gross receipts for the three prior tax years of $32,000,000 or less and not a tax shelter, may choose not to keep an inventory but must still use a method that clearly reflects income: treat stock as non-incidental materials and supplies, or follow the treatment in your financial statements or, without any, your books and records (26 U.S.C. 471(c)). If you keep one, you value it each year to find cost of goods sold, and changing an existing inventory method means filing Form 3115 (Publication 538; Schedule C instructions) | Opening stock, purchases, a year-end count and a cost of goods sold calculation |
| Employees | Keep employment tax records for at least four years, and longer for some credits (Publication 583). They include names, addresses, Social Security numbers, wage dates and amounts, Forms W-4, deposit dates and amounts, and the returns filed (IRS: employment tax recordkeeping). Forms W-2 and W-3 (the annual wage statements) should agree with Forms 941 (the quarterly payroll tax returns), or Form 944 for annual filers; if they do not, the IRS or the Social Security Administration may contact you (Publication 15) | Withholding, deposit and reconciliation checks that you build and test yourself |
| Contractors | Form 1099-NEC (the yearly report of payments to contractors) is due January 31 after the year for service payments of $2,000 or more to one payee for the tax year, with exceptions such as most payments to corporations and payments by card, which the card processor reports on Form 1099-K (Instructions for Forms 1099-MISC and 1099-NEC; IRS: Am I required to file a Form 1099) | A yearly total for each payee, with the payee's name, address and taxpayer ID (from Form W-9), kept apart from other expenses |
Sales tax records follow each state's rules; see filing sales tax returns. For setup, see setting up payroll, which contractors get a tax form and inventory or supplies for small sellers.
When does a lender, investor, co-owner or accountant make a spreadsheet stop working?
It stops working when it cannot produce what the other reader needs; outside reliance raises the bar but does not by itself require software. Publication 583 says books should produce financial statements that help in dealing with a bank or creditors: an income statement, which shows income and expenses for a period, and a balance sheet, which shows assets, liabilities and your equity on a date.
| Reader | What they ask for | Why a plain spreadsheet falls short |
|---|---|---|
| Lender | Often a profit and loss statement and a balance sheet that tie to bank statements and filed returns | A sheet of income and expenses is only the first statement; the balance sheet needs assets, liabilities and equity. See proving income to a lender |
| Investor or buyer | The same statements for past periods | Closed periods should stay fixed, with the changes dated. See cleaning up your books before fundraising |
| Co-owner | Each owner's share of income and what each put in or took out | A partnership gives each partner a Schedule K-1 and must keep records supporting each partner's share of profits, losses and capital (Form 1065 instructions). Several people editing one file make the controls above more important |
| The tax return | A balance sheet (Schedule L) with a partnership or corporation return, unless the return's small-size tests are met | Schedule L must agree with the books (Form 1065, Form 1120-S and Form 1120 and their instructions); a sheet of income and expenses alone cannot fill it |
| The IRS | The books, on request | The records must be available on request and capable of being processed (Rev. Proc. 98-25, section 5) |
How do I move from a spreadsheet to software without losing history or counting income twice?
Pick one cut-over date, reconcile the spreadsheet to it, bring over opening balances or old transactions but not both, and keep the original file. For a switch between two programs partway through a year, see switching accounting software mid-year.
- Choose the date. The spreadsheet ends the day before the software begins, so there is no gap and no overlap. The first day of a tax year is cleanest.
- Reconcile first. Tie the spreadsheet to every bank and card statement through the cut-over date, and fix differences before moving anything (Publication 583 says to reconcile the checking account each month).
- Load balances or history, not both. Opening balances already contain the effect of earlier income and expenses, so loading old transactions on top counts them twice. If you cut over mid-year with balances only, the software's profit and loss starts at that date, so keep the spreadsheet's year-to-date totals: the return needs both. If you load the year's earlier income and expenses, the software already holds them; do not add them again. For opening balances, see opening balances when books start late.
- Enter unpaid invoices and bills once. On the cash method, income counts when you receive it; on an accrual method it counts when earned (Publication 538). On accrual books, enter each unpaid invoice or bill as an open item against the opening balances, so it adds no new sale or expense, and record its payment against it. On cash books, keep a list of unpaid items and record each when paid. Either way, an item the spreadsheet already counted must not be counted again; see switching accounting software mid-year for the opening entries.
- Compare totals. Match the software's opening balances to the spreadsheet's closing figures at the cut-over date. At year end, combine only periods that do not overlap, the spreadsheet to the cut-over date plus the software after it (unless the software already holds the earlier months), and tie the result to the return.
- Keep the original untouched. In an examination, the IRS has said a file rebuilt by re-entering transactions is not the books of original entry (IRS FAQ, answer 10). So save the spreadsheet read-only, in a format you can still open and process, even after the software holds the same history.
What does the IRS ask for when books are electronic, and how long do I keep every version?
The IRS asks for the electronic books themselves, not only printouts, and you keep them at least until the time the IRS has to assess more tax on each return runs out. The IRS FAQ is written for accounting software. It says examiners request the electronic files early in an examination, by a written request, and can review transactions created or changed during the year under examination. Revenue Procedure 98-25 requires electronic records to be kept that long, made available on request and capable of being processed. Its system documentation must include changes and their dates, and it recommends backup copies kept securely. No source sets a number of versions to save. Dated month-end and year-end copies are a simple way to show what changed and when.
For how long to keep each kind of record, see how long to keep business records and Topic no. 305.
What do I give my accountant if my books are in a spreadsheet?
Give the working file, not a printout, with everything under "Gather first", plus:
- the dated copies for closed months, and a note of any month not yet reconciled;
- loan statements and invoices for assets bought;
- owner contributions and withdrawals, kept apart from income and expenses;
- a one-page note of what each column and code means (Revenue Procedure 98-25 asks for a chart of accounts and account descriptions).
For a simple routine, see record keeping for the self-employed.
Example
These examples are illustrative and use US dollars.
A consultant with a steady, simple year
A consultant bills $90,000 a year with about 40 transactions a month. She keeps one row per transaction with a document reference, reconciles to the bank each month and saves a dated copy at month-end. That spreadsheet can meet the IRS standard. The day a lender asks for a profit and loss statement and a balance sheet, she has only the first, and must add assets, liabilities and her own contributions and withdrawals.
A landscaping LLC with two employees
A landscaping LLC with $180,000 of revenue pays two employees and a crew subcontractor $6,000 by check. It must keep wage, withholding and deposit records for at least 4 years. Its Forms 941 should agree with the Forms W-2 and W-3, and if the subcontractor is not a corporation (an LLC taxed as one counts), it totals that subcontractor's payments for a Form 1099-NEC. One sheet of sales and expenses holds none of that. The owner either builds and tests the checks, or moves payroll and contractor records into software.
An online craft seller
A seller has $40,000 of sales across 600 orders and buys stock. If she keeps an inventory, she counts stock at year-end and computes cost of goods sold: $3,000 opening stock plus $14,000 of purchases less $4,000 closing stock gives $13,000. She may qualify as a small business taxpayer and choose not to keep an inventory, but must still follow one of two accepted treatments: stock as non-incidental supplies, or her books and records. A sheet with sales and expenses and no purchase or count records supports neither choice.
Different for you?
- A lender, buyer or investor wants a profit and loss statement and a balance sheet, and your spreadsheet cannot produce them: see proving income to a lender and cleaning up your books before fundraising. Whether the sheet can be rebuilt into reconciled books is a question for bookkeeping help.
- You received an IRS letter asking for records: the electronic file, its reconciliations and its change history come into play. See penalties for not keeping business records. A reply on the return itself is a matter for a tax professional; whether the books behind it reconcile is a question for bookkeeping help.
- Months of bank activity were never recorded: see catching up on overdue books and rebuilding books from bank statements, then bookkeeping help to move to software without a gap at the year boundary.
- Co-owners split income, or one account mixes personal and business money: see fixing commingled business and personal funds and guaranteed payments vs. partner draws; a shared file also needs bookkeeping help to set up owner accounts.
- You have employees or contractors, or resell stock, and it all sits in one sheet: see setting up payroll and inventory or supplies for small sellers. Unpaid withheld payroll tax can reach owners and officers personally: see trust fund recovery penalty. Getting payroll, contractor and stock records into books that tie to Forms 941, W-2, 1099-NEC and cost of goods sold is a job for bookkeeping help.
- You run a corporation, or it is owned from abroad: see S corporation bookkeeping setup and bookkeeping for a foreign-owned US company; owner accounts and the balance sheet are a question for bookkeeping help.
- You own rental property: see rental property bookkeeping, spreadsheet or software.
- You are a solo owner with a simple year: see record keeping for the self-employed and doing your own books or hiring a bookkeeper.
- Your choice of method affects the numbers: see cash or accrual for a small business.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| Small-business inventory gross-receipts test Average annual gross receipts for the three prior tax years under section 448(c); other conditions apply to the inventory-method exception. | $32,000,000 Tax year 2026 | IRS: Internal Revenue Bulletin 2025-45 Checked |
| US employment tax record retention Minimum, counted from the date the tax becomes due or is paid, whichever is later | Four years | IRS: Publication 583, Starting a Business and Keeping Records Checked |
| Form 1099-NEC reporting threshold for payments made in 2026 Generally, reportable service payments to one payee during 2026; backup withholding can require filing at any amount | $2,000 Tax year 2026 | IRS: Am I required to file a Form 1099 or other information return? Checked |
Primary sources
- IRS: Publication 583, Starting a Business and Keeping Records
- IRS: Recordkeeping
- IRS: What kind of records should I keep
- IRS: Topic no. 305, Recordkeeping
- 26 CFR 1.6001-1, Records
- IRS: Revenue Procedure 98-25
- IRS: Use of electronic accounting software records, frequently asked questions
- IRS: Publication 538, Accounting Periods and Methods
- IRS: Instructions for Schedule C (Form 1040)
- IRS: Publication 463, Travel, Gift, and Car Expenses
- IRS: Employment tax recordkeeping
- IRS: Instructions for Forms 1099-MISC and 1099-NEC
- IRS: Publication 15, Employer's Tax Guide
- IRS: Am I required to file a Form 1099 or other information return?
- IRS: Instructions for Form 1065
- IRS: Internal Revenue Bulletin 2025-45 (Revenue Procedure 2025-32)
- 26 U.S.C. 471, General rule for inventories
- IRS: Form 1065, U.S. Return of Partnership Income
- IRS: Form 1120-S, U.S. Income Tax Return for an S Corporation
- IRS: Form 1120, U.S. Corporation Income Tax Return
About this guide
Published by Cloud Accounting under standing professional approval. This version has no separately recorded personal review. It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.