Bookkeeping is vital in any successful business. It makes budgeting easier, and allows you to track and record your business’s income and expenses.
But what is bookkeeping? And where do you even start? If you’re a beginner then don’t worry, we’ve got you. We’ll go through exactly what bookkeeping is, along with some tips for becoming a bookkeeping pro.
What is bookkeeping?
Bookkeeping is essentially the process of recording everything that happens in your business, such as purchases, sales, loans, debts, and beyond.
Keeping accurate, up-to-date records means you’ll have the information you need to generate reports, prepare your tax return, and see what’s really working in your business.
But how does bookkeeping help with tax?
To put it simply, you’ll know precisely how much you’ve made in order for HMRC to calculate exactly what you owe. Your tax bill is worked out on the basis of how much profit your business makes, which is why it’s so important to have accurate data about all the income coming in, and spending going out.
Lots of businesses miss out on the opportunity to reduce their tax bill because they don’t claim tax relief on the expenses that they’re allowed to. Good record keeping will go a long way towards minimising this.
Some bookkeeping software providers include tools for snapping and uploading your expenses on the go, so you don’t need to rummage through your purse or wallet to find old receipts in time to file your tax return.
Do I have to keep bookkeeping records for my business?
Yes, and this applies to all business structures. You could be a sole trader, freelancer, a limited company, or in a partnership (the list goes on). Anyone who needs to submit a tax return for their business must maintain accurate bookkeeping records. They form the basis of your tax returns, so starting off with a solid foundation means your much more likely to avoid any run-ins or fines from HMRC.
It’s not all about your tax bill though, and good bookkeeping habits will help you build a more useful picture of everything that’s happening (and needs to happen) in your business. Such as the money you owe and when, the money clients owe you, and where you could save money.
What bookkeeping records do I need to keep?
Pretty much everything that happens in your business! In very broad terms this means recording everything which comes in and goes out, from day-to-day banking transactions and supplier invoices to customer sales invoices and beyond.
What information needs to be included in my bookkeeping records?
With each bookkeeping entry, you need to include:
- The date of the transaction
- The amount
- What the transaction was for
- Who the customers or suppliers are
- A breakdown of any VAT charged
If your business has lots of transactions, or there are lots of processes happening at once, it can also be useful to categorise your bookkeeping entries. Categories can make it easier to see what’s happening in a particular area. For instance, if the costs in one category shoot up one month you might be able to spot any issues before they develop.
Should I hire a bookkeeper or do it myself?
If you’re ready for the challenge, you can opt to do it solo! Some people feel they gain a better understanding of their business in doing so, although financial reporting can also be useful in this respect, either of which could lead to better business plans in the long run.
Good bookkeeping software can help automate some of the more tedious processes, such as Bank Feeds which pull transactions into your bookkeeping straight from the bank, reducing the time you spend entering information manually.
Bookkeeping tip: If saving time on your bookkeeping is what you’re looking for, bookkeeping software can also help by sending automated payment reminders to your clients and customers – so you don’t have to do the chasing!
However, we completely understand bookkeeping is tricky, and outsourcing may save you heaps of stress if you’re not comfortable completing it yourself.
Bookkeepers are there to assist you with your bookkeeping, so don’t feel stupid asking 101 questions. It’s what they’re there for!
It’s worth noting that your bookkeeping needs to be highly accurate, so getting help to start off with will save you time and keep you out of trouble with HMRC.
How do I choose the right bookkeeping software for me?
There are a couple of things to keep in mind when browsing for the right software:
- Compare the market! Are you getting your money’s worth?
- Can they give you everything you need? And do they have the right add-on features if not?
- Can your accountant or bookkeeper (if you have one) work with this software?
No one is stopping you from using a simple spreadsheet or writing your transactions down in a trusty notebook. But while it can be cool to go old school, choosing software can help you prepare for the ongoing roll-out of MTD (Making Tax Digital).
All of this information can be overwhelming, and viewing websites with lots of bookkeeping jargon may leave you a little confused. Always chat with your accountant or bookkeeper for more advice on what’s best for your business.
Bookkeeping for sole traders and limited companies
The structure you use to register your business matters, because there isn’t a one-size-fits-all when it comes to bookkeeping. Check these handy videos and guides that explain all things bookkeeping for sole traders and partnerships. Or if you’re a limited company, have a look at this bookkeeping video guide.
5 top bookkeeping tips
Keep track of important dates
The last thing you need is interest added on things you owe for missing the payment date, and worse yet, fines from HMRC. Anything from loan repayments to your tax returns should be jotted down to keep you on top of everything.
Store all your receipts and invoices
Keeping note of your receipts and invoices is crucial when it comes to bookkeeping and is in fact an HMRC requirement! The easiest way to keep them safe is by uploading them to bookkeeping software.
Separate your business and personal finances
This isn’t a legal requirement if you’re a sole trader, but will make your life much easier. Doing this helps you watch your cash flow and keeps things like expenses separate. This saves the faff of trying to figure out if something was a business expense, or an afternoon out with the family!
Review your bookkeeping regularly
Regularly reviewing your bookkeeping is key. Every business transaction needs to be recorded, and by checking it regularly you won’t let anything slip through the net.
Always ensure your information is up to date, and view your financial reports regularly to make the right business decisions.
Seek professional advice
Always ask your accountant or bookkeeper for advice. Remember, no one expects you to become an expert overnight, and the professionals you chat with have spent years training to be where they are now. Even if you decide to do your own bookkeeping, having a chat to guide you in the right direction is worthwhile.
Find more support and guidance for London-based businesses in our online information centre.