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I have recently been asked how much accounting knowledge someone should have when becoming self-employed. I am somewhat biased since I write accounting software, and so I am afraid of overestimating what I would recommend.

My initial thought was to recommend that one learns enough accounting to keep one's own books generally, and also enough to have intelligent conversations with accountants. My thinking was that this provides enough that such an individual could keep his/her own books and thus not worry about a bookkeeper taking advantage of a clueless owner. My initial instinct is to recommend buying a few accounting textbooks (second-hand is fine) as reference material.

Is this recommendation over the top though? Is this just my bias speaking?

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It seems to me that this depends largely on the type of freelance business you are in. In my case, I build custom software. I don't have any "inventory", and I charge on a fixed fee basis (per deliverable). So in my case, accounting is very, very basic.

On the other hand, my son produces a weekly internet program (he reviews bad comic books in an entertaining way). He regularly travels to conferences where he speaks and sells items related to his show. He also sells items online, but his main revenue is advertising revenue from his show. He also occasionally pays subcontractors who do work for him (art, costumes, etc.) In his case, his accounting could potentially be more complicated.

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Though having some accounting know how when starting to freelance, this is not really needed.

In the same way that you don't need to know about business law to start freelancing, but it helps.

Most freelancers manage by hiring professionals in these fields - an accountant and an lawyer, respectively. Yes, there is always a risk that they will take advantage of a clueless owner, but that is true when hiring any professional and means the owner has to go thorough some due diligence when selecting such a professional.

For most freelancers this is part of the cost of doing business and means they spend less time on these issues and more time on their core competencies.

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  • The accountant though isn't doing the bookkeeping, though. My larger concern is in the actual day to day bookkeeping, and that's where you have the real potential for mischief, since the bookkeeper is almost certainly handling your money. Mentioning it because a lot of accounting is typically done by a bookkeeper, so it might be a useful edit or clarification. – Chris Travers May 29 '13 at 9:23
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    @ChrisTravers - In my opinion, a freelancer doesn't need to know much about bookkeeping (do they really need to understand double-entry, for example?). As for cooking the books - my point about due diligence when hiring is really the crux of it - word of mouth, recommendations, talking to existing and previous clients of the bookkeeper are all part of that. – Oded May 29 '13 at 9:26
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Usually you don't need more about accountancy when going to accountant then about medicine when going to the doctor.

You can't be good at everything and you have to choose. I have done accountant things myself, but most of my colleagues had only very basic knowledge about accountancy (that is, they've known the telephone number of their accountant). If you have accountant, you usually don't need to know more than how to print an invoice.

So accounting knowledge is neither necessary nor commonly possessed by the freelancers. If you earn a little, it's good to be able do everything yourself because you save money, but if you earn a lot, it's only your choice. It's like hand-washing instead of buying washing machine. You can do that, but most people won't decide for such option.

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After reading the other answers here and pondering them, I decided to throw my own answer in anyway and flesh it out a little. I am posting this after having accepted another answer.

How much knowledge is (minimally) necessary?

I don't think my initial instincts are that far off from what others are saying, though perhaps the emphasis is from another angle (hence this is worth posting). It still comes back to being able to do the day-to-day bookkeeping oneself. The level of knowledge minimally required to do this with standard accounting packages on the market is pretty low. It amounts to "generally understanding some terminology and being willing to learn how to use software aimed at beginners." It's a very low bar today. Whether or not you hire a bookkeeper you need to know enough to be able to supervise what the bookkeeper does, since the bookkeeper is probably handling your money.

Being able to do the bookkeeping means you can do some very basic things yourself. You can print invoices, find out who owes you money, pay your expenses, write your own checks, and balance your checkbook. It does not mean you have to understand the finer points of day count conventions, determine what needs to be adjusted end of year, or worry about exactly when income is realized.

The second thing one needs to be able to do is formulate questions to ask an accountant. So there you have it. If you can run accounting software (or are willing to learn), ask questions, and understand the answers, that's sufficient.

However, accounting is power for business owners

If you are going to be self-employed with multiple streams of revenue for any period of time, more accounting knowledge is better. What accounting knowledge gives you, fundamentally, is an ability to analyse your revenue stream when you are making business decisions. Now if you are just independent contracting (one customer at a time, each for an extended period), you can probably figure such things out without any accounting knowledge at all, but if you are consulting for multiple customers concurrently, and offering different services, then such knowledge is quite empowering when it comes to actually making business decisions. Being willing to learn a little at a time as you need it is thus a very good thing.

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This really depends on how successful you are. If you don't make any money, you really don't need any bookkeeping skills. Any money you spent trying to get the business started could be written off as a non-reimbursed job expense.

If you are mildy successful it is just a matter of keeping track of how much money you make minus the amount that you spend. The one mistake that I made was starting consulting work before I setup a separate business bank account. It was a complete pain remembering which expenses and income were from the business.

Once things got going a little I setup an S corp. I did this based on the advice that I got from a buddy who ran his own business. When you have a S corp not all the money get passed through and taxed as income unlike an LLC which is just a pass-through entity. I paid myself a reasonable salary and took the rest as a owner's draw which meant it got taxed as a capital gain.

The one thing to know about the US is: the people making their money through income are getting jacked. You end up having to pay a much higher percentage of your income than if you are making that money as an investment.

When you start dealing with S corps you are solidly in CPA territory. I did do my own taxes last year but I wouldn't recommend it for the average reader. I value learning new things above all else and will spend hours and hours learning something new when I could be relaxing or doing something fun. There is also the chance that I didn't do it right but I haven't gotten any notifications from the IRS yet. I had a CPA that I really liked and he wasn't going to be doing personal tax work anymore so I had to find someone new but I kept procrastinating it.

For people who don't need the full double-bookkeeping accounting software (still more comparable to FreshBooks) I have been working on a project called ZipBooks. Would be interested to see what people think. For me the big issue was I was using Google Sheets to create invoices and I didn't have a good system to keep them all in one place, track revenue, etc.

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