When you start a business, whether it’s on your own as a freelancer, with someone else in a partnership, or as a limited company, you’ll need decent bookkeeping processes in place to keep the cogs turning.
But where do you start if you aren’t entirely sure what bookkeeping is, or how it works?
We’ll guide you through what businesses need to do to comply with their bookkeeping responsibilities, why it’s important, and ways to complete your bookkeeping successfully.
Is it mandatory to keep bookkeeping records?
What type of bookkeeping records do I need to keep?
Do I need bookkeeping software?
Do I need an accountant or bookkeeper?
What is bookkeeping?
Bookkeeping is the process of recording every single transaction that happens in your business, such as the money that comes in and goes out of your bank account. It’s more than that though, because bookkeeping also allows you to record other financial events, such as the depreciation of an asset.
In that respect, bookkeeping basically means gathering information about your business, and laying it out in a consistent format.
Why is bookkeeping important?
Apart from the fact that keeping financial records is a requirement, managing your bookkeeping essentially allows you to take control of your business’s finances:
- It helps you set (and stick to) budgets
- Your records will be in order when the time comes for submitting your tax returns (so there’s less chance of making mistakes)
- Tracking your transactions reduces the risk of missing out any claims for allowable expenses on your tax return
- You can use your bookkeeping data to produce financial statements which show how your business is performing
For example, if you sometimes use your car for business, you can include records in your bookkeeping which show how many miles you’ve driven for business purposes – ready to claim tax relief on your mileage!
You’ll be able to monitor payments you need to make further down the line, such as salary payments to employees or supplier invoices that you haven’t paid yet. Keeping good records also allows you to stay on top of amounts that have been received and spent, as well as unpaid invoices your business is owed.
This level of information helps you run your business more efficiently, such as being able to manage your cash flow.
For example
Let’s say you need to buy a new piece of equipment which costs £15,000.
You’ve just been paid £20,000 by one of your customers, so the money is sitting in the business’s bank account ready. When you check your bookkeeping records, you spot an invoice from one of your suppliers which shows you need to pay them £10,000 by the end of the month.
Knowing that you need to make that payment reduces the risk of the business spending money that it’s already committed to pay elsewhere. Crisis averted!
Is it mandatory to keep bookkeeping records?
Yes! HMRC require you to keep bookkeeping records, no matter your business structure. This is because they form the basis of every tax return you send, and your tax returns must be accurate!
HMRC can ask to look at your business records at any time, so you need proof everything you’ve put in your tax return is correct. You basically need to be ready to back yourself up.
What type of bookkeeping records do I need to keep?
Each and every transaction that takes place within your business must be recorded in your bookkeeping.
These transaction records could include purchases your customers make, invoices you receive and send out, overseas transactions, money you move from one bank account to another, the wages you pay your staff… It really depends on your business!
Do I need bookkeeping software?
You don’t need to use bookkeeping software, although VAT registered businesses do need to keep digital records to comply with Making Tax Digital rules. This doesn’t necessarily mean using bookkeeping software though, so you might use another digital method, such as spreadsheets.
That said, VAT-registered businesses do need to use compatible software when they submit their VAT returns, so choosing bookkeeping software that also allows you to make MTD-compatible VAT submissions straight to HMRC can make life easier, rather than using separate bridging software to submit your return.
Do I need an accountant or bookkeeper?
This is down to the needs of your business. You may find you need one, both or none. Check out our guide ‘Do I Need an Accountant or a Bookkeeper?’ for more advice.
Top bookkeeping tips
Getting to grips with bookkeeping can be tricky at first, so we’ve put together our top tips.
Decide how you’d like to do your bookkeeping
The first step is to choose how you’d like to record all your transactions, expenses, etc.
If you run a small business with a few transactions each month, you may find writing everything down in a book works for you. Or, if you enjoy spreadsheets, that would also be perfectly fine too.
Software is becoming the most popular way of doing your bookkeeping, largely because you can automate lots of the tedious tasks and be MTD compliant at the same time. For example, bookkeeping software (like Pandle) allows you to automate your Bank Feeds so you don’t need to manually enter every single transaction that happens in your bank account.
There are lots of bookkeeping software providers on the market, allowing you to shop around and choose what works best for you.
Think about double-entry bookkeeping
Double-entry bookkeeping is the process of recording every transaction twice to show that some sort of exchange takes place. It sounds more complicated, but it can help you spot accounting errors quickly, keeping your books accurate.
This is good practice for any business – but worth noting that it’s mandatory for limited companies.
Ensure you keep all your receipts and invoices
It’s a requirement that you have all your receipts and invoices to hand if HMRC ever need to cross-check anything. You can put them in a physical place, store them on your laptop, or upload them to your bookkeeping software.
If you use software, you can simply snap a photo of your receipt and upload it, so it’s stored ready for when you need it. Meaning there’s no need to rummage through receipts in your wallet! It also means you don’t need to worry about storage space – everything will be hosted on your software provider’s server.
Separate your business and personal finances
If you’re not a limited company then keeping your own finances separate to those of the business isn’t a legal requirement, but it does make things easier.
For example, keeping them separate makes it simpler to account for your business expenses correctly, without the risk of overclaiming (or underclaiming – neither are good!).
Review your bookkeeping regularly
It’s worth checking your bookkeeping whether that be weekly, monthly or every quarter, to ensure everything is up to date. It’s also good to check your financial reports so you know what’s what.
If you use bookkeeping software, then check to see if it includes any financial reporting tools which will do the hard work of producing reports for you – saving you even more time.
Put money aside for your tax bill
It’s always best to put money aside as you go so you can pay your tax bill on time. Good bookkeeping will allow you to track how much tax you’re expected to pay so there’s no surprises when your bill is due.
You’ll need to think about the current tax rates and thresholds, as well as National Insurance.
If you own a limited company, you’ll need to think about tax on your own income, when you submit your Self Assessment Tax Return, as well as your Company Tax Return and paying Corporation Tax.
It seems a lot but don’t worry – it’s nothing good bookkeeping can’t assist you with!
Need help with your bookkeeping? Take Pandle for a spin and create your free account today.
