As the owner of a limited company—or any business for that matter—annual accounts and tax returns are unavoidable (sorry). Before you get to that point though, or rather, to even get to that point, you’ll need to master the art of great bookkeeping.
If it all sounds a bit daunting, don’t worry. We answer some of the most frequently asked bookkeeping questions to help you get clued up on keeping financial records for your limited company.
- What is bookkeeping?
- Is bookkeeping the same thing as accounting?
- What bookkeeping records does a limited company need to keep?
- Why is bookkeeping important?
- What are the best bookkeeping systems for limited companies?
So, whether you’re starting out as a limited company or making the switch from being a sole trader, let’s get stuck in!
What is bookkeeping?
In a nutshell, bookkeeping is the process of recording the transactions which happen in your business every day. These might include bank transfers, payments, invoices, credit notes, loan repayments… and so on.
Is bookkeeping the same thing as accounting?
No, bookkeeping and accounting are not the same thing, despite the words sometimes being used interchangeably. Bookkeeping is the first step in the process, collating and recording financial data correctly.
Accounting is the next step, and uses the bookkeeping data to analyse and forecast a business’s performance, manage spending, compile tax returns, and so on.
Why is bookkeeping so important?
Maintaining thorough and accurate bookkeeping records is one of the most vital things you can do for your business—but why? Well, for a few good reasons.
You can’t complete your annual returns without it
Falling behind with your bookkeeping, or neglecting it entirely throughout the year, will land you in some serious hot water when it’s time to sort out your tax return. Not only will you run the risk of making mistakes or missing deadlines (leading to HMRC penalties), but you’ll also be in danger of overlooking expenses that you can claim tax relief on!
When you haven’t got everything you need for a Company Tax Return, you could potentially end up paying too much or too little tax – neither of which is good news.
Reduce the risk of bookkeeping errors
We’re all human and we all make mistakes, but your financial records are one place where it’s better to make as few errors as possible. Even just one decimal point out of place could be the difference between a seamless tax return or a hefty penalty from HMRC so it’s important to stay vigilant.
With good bookkeeping habits in place (and the support of great software), you’ll make far fewer mistakes. For example, Pandle’s transaction locking tool helps to reduce the risk of VAT errors!
It helps you monitor your business’s performance way more efficiently and effectively
Getting your bookkeeping in order provides a much clearer picture of how your business is performing. Really performing, not just the sales figures. It’s an important point to make, because concentrating solely on the sales data is a dangerous habit.
Good bookkeeping gives you an overview of all areas of the business, such as how much you spend to make each sale. Looking at the two side by side is much more revealing, and can help you make decisions about spending, sales prices, and so on.
If you spot a downward trend for a particular product or service over time, for example, you can assess whether it’s worth continuing to offer it.
As well as allowing you to monitor the business’s performance more effectively, knowing the state of your cash flow and understanding your finances allows you to make more informed, strategic decisions. If your forecasts are looking promising, for instance, you might decide it’s a safe time to expand your offering.
What bookkeeping records does a limited company need to keep?
As a limited company, you are required to keep what’s called ‘double-entry bookkeeping’ records.
What is double-entry bookkeeping and how does it work?
Double-entry bookkeeping is where every transaction that is recorded also comes with a corresponding, opposite entry. For example, a transaction at the bank might have a corresponding entry in your stock account. In other words: every transaction is recorded in two accounts (hence the name), one showing the credit, and the other showing the debit.
Good accounting software (like Pandle!) will create double entries for you, making the job less labour intensive.
Oh, and don’t forget about Making Tax Digital!
HMRC is in the process of rolling out a new tax system known as Making Tax Digital—or MTD for short. MTD for VAT is already in place, which means that VAT registered businesses must keep their bookkeeping records digitally, and submit returns to HMRC using software. MTD for Income Tax Self Assessment is expected to arrive in April 2024. Our advice is to get a head start now!
What are the best bookkeeping systems for limited companies?
Sure, we might be biased but we’d always recommend a cloud-based bookkeeping software for your limited company accounting.
- Cloud-based bookkeeping software means you can access your accounting records from anywhere in the world with an internet connection.
- Good software providers will include time-saving tools (such as automated invoicing and bank feeds) that will allow you to redirect your focus from bookkeeping and back on growing your empire.
- It makes double-entry bookkeeping much less complicated and confusing.
- Again, good software will include tools and features designed to recognise potential errors and protect your records from mistakes.
- It will help make the transition into the new Making Tax Digital system more seamless and stress-free.
Create your free Pandle account to learn more about how we can support your limited company.