Bookkeeping – A Free Guide

What is the definition of bookkeeping?

Bookkeeping is the process of precisely recording everyday transactions in a business in order to show income and expenditures.

Your accounting records should reflect how much money your company has received and spent in the past, as well as what it expects to happen in the future.

When you receive an invoice from a supplier that you haven’t paid yet, for example. It’s crucial to include it in your bookkeeping because you know you’ll have to pay it at some point. You may then plan what you need money for and when you need it.

So, what exactly is double-entry accounting?

Any business transaction, according to double-entry accounting, represents some type of trade. Because the transaction is recorded twice (thus the name “double-entry”), your bookkeeping can show both sides of the transaction.

A supplier invoice, for example, indicates that money has left the company, but that this is offset by something coming in, such as goods or services.

How does double-entry bookkeeping services for small business assist me in running my company?

Double-entry bookkeeping is useful for tracking business transactions since it reveals where money is coming from and going to.

Knowing where and when your resources are moving might help you manage your business more efficiently.

Making a sale, for example, means you no longer have that product or that period of time in your firm. Even if you haven’t yet provided those goods or services, you won’t be able to reuse them because they’ve already been committed to someone else.

Your invoice shows that something has left the company, but this is offset by a resource returning to the company. This is usually the amount of money your consumer pays you for the sale. Similarly, if you purchase goods or hire employees. The money that leaves the company is counterbalanced by the resource that they supply.

In double-entry bookkeeping, how do I show transactions?

It’s a double entry to send a customer an invoice, and then it’s a double entry to receive paid for the invoice.

When you send a customer an invoice, the sum goes into sales, while the debit goes into debtor control as an amount owed to the company. This is a two-part entry.

When the bill is paid, another double entry is required. Because your bank balance has increased, a debit is made to your banking ledger. In debtor control, a credit is issued to reduce the amount owing by the customer now that they have sent the payment.

In this case, the company is billing a customer for £10, which is represented in their accounting by two double entries.

Debit Credit

When you send the customer invoice, you’ll get a £10 credit on your sales ledger. £10 is deducted from the debtor’s control account.

When a customer pays their invoice, a £10 credit is applied to debtor control, lowering the total amount owing. A £10 debit has been made to your bank account.

When dealing with the bank, it’s easy to get confused between credits and debits. When you deposit money in your bank account, the bank owes you that amount, which is referred to as a credit. However, an increase in your bank balance is a debit in your accounting system.

In double-entry bookkeeping, how can I know if my transactions match?

A debit and a credit are recorded for each of your financial transactions. The debit is on one side of the transaction, and the credit is on the other, so they cancel each other out and bring the total to zero. A trial balance report ensures that these entries are correct.

Is it necessary for me to keep bookkeeping records for my company?

HMRC expects you to keep good bookkeeping records that demonstrate what’s going on in your firm if you run a business. This is true whether you’re a sole trader, a limited company, a partnership, a freelancer, a VAT registered business, or any combination of the above!

Because your bookkeeping records serve as the foundation for every tax return you must file, accuracy is critical. Good bookkeeping not only helps you avoid awkward meetings with HMRC auditors (and potential fines), but it also helps you for other reasons.

Maintaining accurate financial records allows you to keep track of whatever money you owe (or are due, which aids credit control) and identify areas where you may save. It will be considerably easier for you to control your financial flow. If you keep track of everything you spend on your business, you’ll be able to claim tax relief by deducting any permissible expenses.

Every year, a large percentage of business owners fail to claim tax relief on their business expenses — don’t be one of them!

What records do I need to retain in my bookkeeping?

Every transaction that occurs in the firm will be recorded in your records. This includes every invoice you send and receive, as well as your financial activities, expenses, and any associated information.

The amount of information you record in your bookkeeping will be determined by the size of your company and the number of transactions. Because your records will need to include the date of the transaction, the amount, what it was for, and who the customers and suppliers are, it can be a lot of information. Your company may deal with international transactions, which means you’ll have to think about the tax consequences as well as numerous currencies!

With all much data flowing around, it’s easy to see why bookkeeping is such a time-consuming task, albeit employing bookkeeping software can help substantially.

Your bookkeeping records must include both the transactions and the supporting paperwork that correspond with them. You’ll need the real invoices as well as a list of invoices, for example.

Accounting for sole traders and limited companies

It’s also important thinking about how your company’s structure influences the records you keep. Because there is no legal distinction between you and your business as a sole trader, the earnings earned by your firm are yours to retain, which has tax ramifications.

Is there a difference between bookkeeping and accounting?

Although the phrases bookkeeping and accounting are frequently used interchangeably, the two occupations serve distinct purposes.

Bookkeeping is concerned with a company’s day-to-day financial operations, including recording transactions and managing cash flow.

Accounting analyzes and reports on the state of the business, assisting decision-makers in taking the appropriate action at the appropriate time.

Both are critical to a company’s long-term development, as they make it easier to evaluate what’s working and which areas require more attention.

Further Reading: Service Description for Bookkeeping

Is it a good idea to outsource my bookkeeping?

You can outsource your bookkeeping or employ someone to perform it in-house if you don’t want to do it yourself. It’s up to you who you hire, but hiring a bookkeeper or accountant who is properly qualified will save you a lot of time and work.

Is it possible for me to handle my own bookkeeping?

If you’re a sole trader or run a small business, your bookkeeping will most likely be simple. There are no laws requiring you to outsource your bookkeeping, so doing it yourself (or using software that helps) can save you money.

If you don’t know what you’re doing or just don’t have the time, hiring a bookkeeper or accountant is a good option. Be realistic about your capacity to keep correct, up-to-date bookkeeping records, in addition to balancing the time versus the expense (preferably without getting overwhelmed by stress).

Choosing between hiring a bookkeeper and doing it yourself

That is all up to you. When your bookkeeping needs are modest and you don’t have the funds to hire an accountant, you may decide to take on the chore yourself.

This can be a wise idea because you can learn a great deal about the firm while ‘doing the books.’ It will also assist you in saving every penny so that you may expand your firm.

Doing your own bookkeeping has certain disadvantages as well; what would take a skilled accountant half an hour could take you the better part of an afternoon.

The decision to outsource this task will eventually come down to a simple time and cost comparison between the time it takes you to do the task and the expense of hiring a specialist. After all, your time is valuable, and spending three or four hours a week away from your business is a high price to pay.

Another downside of keeping your own financial records is the possibility of not meeting all of your legal duties simply because you are uninformed of what is required. Then there’s the risk of missing out on tax deductions you weren’t aware were available.

Is it necessary for me to complete my bookkeeping on a regular basis?

Everyone starts off with the best of intentions, but bookkeeping is one of those tasks that should be completed on a regular basis. Don’t put off getting your finances in order until your tax return is due!

Making sure your bookkeeping is up to date can help you avoid any confusion or mistakes later on. If you don’t want to outsource your bookkeeping (or hire someone in-house), look for bookkeeping software that will help you stay on top of things.

Tips for staying on top of your bookkeeping

Your bookkeeping informs the data you supply on your tax return (Self Assessment, Company Tax Return, VAT Return, and so on.) Rather than risking penalties and frustration, our bookkeeping team can help you stay on track with some simple approaches.

Checklist for each day

Examine your financial situation: Do you have enough cash in the bank to handle your business’s expenses?

Checklist for the week

Prepare and mail invoices: This is a time-consuming procedure, but it is necessary to maintain a consistent flow of income into the company.

Keep track of your transactions by: Whether you use an Excel spreadsheet or specialised software, keep track of each transaction. This should include money received from customers as well as payments made to staff, suppliers, HMRC, and other third parties.

Keep a hard copy of any invoices you’ve sent this week, as well as receipts for all cash payments you’ve made.

Pay suppliers: Check the ‘payment due’ dates on any outstanding suppliers’ invoices and pay them on time to avoid late payment penalties. If available, you can also take advantage of early payment savings.

Examine your cash flow: Make sure you have adequate cash in the bank for the coming weeks and months by checking your cash-flow situation.

Checklist for the month

Run your payroll and submit the relevant HMRC payments. HMRC will require you to disclose your employees’ payments and deductions, and you will be required to pay HMRC depending on your reports.

Examine incoming payments to see if there are any late payments that need to be collected.

Take a look at your bank statements: Examine where money is being spent and look for signs of fraud, banking errors, and so forth.

Examine monthly turnover/profit: Compare results to previous months to assess if the company is expanding.

Check your outgoing payments: Make sure you’ve made all of the payments that were due that month.

If you pay your VAT bill on a monthly basis, make advance payments on it.

Decide how you’ll keep track of things.

You’ll need a strategy for keeping track of your costs and cash flow. This can be done by handwriting it in a book, using a spreadsheet, or utilizing software. Making Tax Digital (MTD) is a new obligation for preserving digital tax records that HMRC is implementing.

Some businesses have already been impacted, though you may opt to voluntarily enroll in MTD. You’ll get a head start if you use digital bookkeeping.

Move your accounting to the cloud.

Cloud-based accounting is becoming increasingly popular, and for good reason. Information stored in the ‘cloud’ is stored on a server that you can access from anywhere. You’ll be able to keep things up to date even if you’re not at your typical workspace.

Is it safe to use cloud-based bookkeeping software?

Yes, is the quick answer. The way organizations handle their accounts is changing as technology improvements continue. Bookkeeping software has evolved to reflect this as software has become more sophisticated and technology has become more mobile.

These trends have also been influenced by financial legislation. The UK’s equivalent of European legislation known as PSD2 is known as Open Banking (Payment Services Directive).

Customers can grant their bank permission to share personal data under the Act, and the bank is obligated to do so in a common ‘language’ that licensed platforms can understand.

These platforms are heavily regulated, and once licensed, they can offer services such as cloud-based accounting software. To work with banks, the software must meet stringent security requirements to protect your personal information.

Maintain a calendar of significant dates.

Make a list of all the important dates you’ll need throughout the year and set reminders for them. These should include submission and payment deadlines, as well as other important dates such as payroll or loan obligations, to assist you avoid fines and interest charges.

Keep your personal and business finances separate.

Though you are not needed to have a business bank account unless you are a limited company, you may find it more convenient to do so.

It would be easier to keep track of your cash flow and claim costs if you keep your personal and business finances separate. You won’t have to go over every transaction and recall whether or not it was for work.

Keep all of your receipts and invoices in a safe place.

Keep all of the documentation associated with your accounting records. It makes life easier in the future if there are any questions, and it’s an HMRC requirement! Make sure you have a place to store them, whether it’s a physical location, a folder on your computer, or directly into your accounting program. This method will also assist you in claiming your authorised expenses — the graphic below is eye-opening!

Regularly complete and review your bookkeeping.

If you put off dealing with your bookkeeping until you have more time, you’ll almost certainly never get around to it. There are obligations coming out of your ears as a small business owner, but bookkeeping is just as crucial as the rest.

Keep your data current, and make sure you analyze your financial reports (also known as management accounts) on a regular basis. Financial reports will be generated automatically by good bookkeeping software, allowing you to take more effective business action.

Further Reading: What is bookkeeping and why does it matter?

Seek expert assistance.

If you aren’t a certified bookkeeper, seek advice from your accountant. If you’re doing it yourself, they’ll be able to assist you in setting up a system that you’ll be able to use and understand.

Put money aside for your tax bill.

Make sure you can pay your tax payment on time, whether you’re a sole trader or a limited company! Set aside money from each transaction to put toward your tax payment as you go. Also, don’t overlook National Insurance. If you’re a director, you’ll need to consider the implications of taxation for both yourself and your firm. Company directors must file a Self Assessment tax return for their personal income and a Company Tax Return to pay any Corporation Tax owed by the company. You’ll be better prepared for both if you keep track of your finances.