Once you start to make some real money with your small business, keeping track of expenses can become quite a challenge. That's why it's important to include a budgeting plan in your small business setup. This budget needs to include some amount that you pay yourself as salary and track separately from your business expenses.

It is too easy to mix business and personal expenses when you are running a small business. If it started out as a hobby or just some way to make extra money, this can be even more true, because you likely just put everything into the same bank account. Once your business starts to grow and become profitable, though, it becomes important to track these things separately.

Once you begin to make more than $600 in a year through your small business, the government will classify you as "self-employed". As a result you will have to pay taxes on your business profit. If you don't separate your business transactions from your personal expenses by using different accounts, it will become quite confusing to sort all of this out when tax time comes around again.

Personal expenses are items that you purchase for you and your family's use. The money you use for these things should be considered salary, the same as if you had earned a paycheck from an employer. Typical personal expense items include paying bills, buying groceries, and leisure activities.

Business expenses, on the other hand, are items or services purchased that are directly related to the operation of the business. These expenses can be deducted on your taxes at the end of the year, and that's why it's important that they be tracked closely. Personal expenses cannot be deducted, so if you are tracking both types of expenses through a single account, you might find it difficult to figure out which is which when tax time comes.

The best way to keep these expenses separate and easy to track is through the use of multiple bank accounts, one for your business and one for your personal expenses. Here's how to do it correctly.

First, create a budget for your business that includes a salary for yourself.

Divide the salary into monthly payments and transfer that amount to your personal expense account, just as you would do if you were receiving a paycheck from an employer. Use that account to cover your bills and other personal expenses.

The transfers you make to your personal account will now be recorded as salary in your business account. The balance of your business account should be used for business expenses only. Now, when it comes time to figure out what your business expenses were for the year, you only need to get the statements for your business account rather than doing a line-by-line audit of your personal account.

The more organized you are in tracking your business expenses versus your personal expenses, the easier it will be for you to do your taxes at the end of the year. The easiest and best way to do this is to track everything through separate business and personal accounts. As the saying goes, an ounce of prevention is worth a pound of cure!