Bookkeeping for sole traders and partnerships doesn’t have to be difficult, but there are things to be aware of before you start your business life.
If you get the numbers wrong it can be embarrassing to say the least, but mistakes have even more significance than that. If you submit incorrect accounts to HMRC, don’t register for VAT when you should, or operate payroll incorrectly, then you could end up with big fines and interest to pay on any unpaid tax. (Say that in a mirror three times to summon an accountant).
You could even lose your business if you don’t have a handle on cash flow and profitability. In this article we’ll look at:
- What is bookkeeping?
- Why size matters for business bookkeeping
- Typical bookkeeping tasks
- What does bookkeeping have to do with VAT?
- Systems to help lighten the load
- End of year bookkeeping jobs
- Should I outsource my bookkeeping?
- Is bookkeeping a necessary evil?
What is bookkeeping?
Bookkeeping is the process of recording the daily transactions of the business. The word bookkeeping originates from hundreds of years ago when transactions were recorded using a quill pen and parchment books.
The technology might have changed, but the process is essentially the same:
- Record the money coming in, such as from sales you make to customers or from loans
- Record the expenses you incur from running the business, such as electricity, postage, and so on.
All businesses need some form of bookkeeping, from a taxi driver who needs to add up fares and deduct fuel costs, to a multi-million-pound company operating globally.
The only differences are the volume of transactions, the numbers involved, and the way that they record them. In this post we’ll focus on the smaller end of the market, on bookkeeping for sole traders and partnerships, and especially for new businesses.
Size matters for business bookkeeping
Bookkeeping and accounting practices can change depending on the size and type of business you have. A very small business that only carries out a few transactions can keep things relatively simple.
For example, a contractor who invoices one or two clients once a month, runs payroll for themselves, and pays for a few business expenses doesn’t need much in terms of bookkeeping firepower.
But a busy online merchant who sells thousands of items every month and receives tens, if not hundreds, of invoices from suppliers, needs good systems. Ideally these will be systems which cut down on manual data entry and intervention.
For example, a bank feed automatically imports bank transactions and turns them into bookkeeping records. It saves a lot of typing!
The key here isn’t the value of the transactions, as much as the volume. A highly paid consultant may only send out two invoices a month, but have the same turnover as an eBay seller who sends out hundreds of low-value parcels.
The consultant has little to do in terms of bookkeeping, whereas the eBay seller will probably need some help!
Typical bookkeeping tasks
So, what does bookkeeping involve? Well, there are a variety of tasks, such as producing and sending out invoices, receiving customer payments (or chasing up overdue payments) and matching these to sales invoices.
You’ll also need to record purchases from suppliers for stock, mark them as paid or pending, and potentially run some form of stock management system.
Bookkeeping also involves recording transactions from your bank account, and making sure that these match your accounts. For instance, if your bank account shows a payment to a supplier for £30, this transaction is recorded in your bookkeeping, which should also show a corresponding supplier invoice.
If you have employees, then you’ll also need to include this information in your bookkeeping. The same goes for making payments to contractors, or paying yourself dividends from the company’s profits.
What does bookkeeping have to do with VAT?
Not all businesses need to register for VAT, but that doesn’t mean you can just forget about it entirely. Once taxable turnover reaches the £85,000 registration threshold, it’s time to sign up.
There are all manner of fines and interest to pay if you don’t register when you should, so keeping an eye on your bookkeeping figures helps you prepare as the threshold approaches.
And of course, once you do register for VAT, you’ll need to make VAT submissions according to which VAT scheme you’re on. Accurate bookkeeping figures will help you pay the correct amount of VAT to HMRC, or to reclaim what they owe you!
Systems to help lighten the load
In ye olden times, business owners could choose whether or not to use software to manage their books. These days the steady introduction of Making Tax Digital and Real Time Information reporting eradicates that.
For instance, if you run a payroll, then you’ll need software so you can report payment information in real time using HMRC’s Real Time Information scheme. If you’re VAT registered, then you’ll need to keep digital bookkeeping records and make VAT submissions using Making Tax Digital software.
MTD rules for Income Tax Self Assessment aren’t far behind either, becoming compulsory for some businesses from April 2024.
To keep things as simple as possible, it’s worth doing some research to find software which does what you need it to, without increasing your workload. Nobody wants to spend hours typing if there’s an automated option!
Should I outsource my bookkeeping?
It’s a good question, but the answer really depends on you. Do you have enough time? Do you feel that you can manage your bookkeeping accurately?
On one hand, there’s a good case for handing your bookkeeping over to someone with the knowledge and experience to do it in a fraction of the time it would take you. You’ll get some of your free time back (or spend it on the business).
But bookkeepers cost money and if you are a new start-up, it may be cash you don’t have. Good bookkeeping software should take care of the more time-consuming bookkeeping tasks anyway, and the really good ones will have lots of tools built in to make things simple, whilst reducing the risk of any errors.
It’s easy to think of bookkeeping as a necessary evil that you have to do, rather than something that can help you keep a check on your business. The reality is that keeping your books up to date can affect every aspect of your business, from helping you to get paid more quickly, to making better business decisions.