How bookkeeping works for a sole trader
Do you know what accounting documents your small business has to keep? Learn more about your self-employed bookkeeping duties and what information your accountant needs.
For any self-employed individual, bookkeeping is a top administrative priority. Maintaining accurate records of your income and business costs is crucial because it allows you to better understand your finances and track progress toward any goals or cash requirements you may have.
Bookkeeping also aids you in providing your sole trader accountant with the data needed to complete and submit your annual self-assessment tax return.
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It’s crucial to keep track of all your invoices and receipts when it comes to calculating your annual income and expenses as a lone operator. This allows your accountant to reconcile your financial records and complete your self-assessment in order to compute any tax bills or refunds more quickly. It also aids you in dealing with any tax-related questions HMRC may have.
As a sole trader, what records must I keep?
The sole trader have less stringent bookkeeping and reporting obligations than limited companies. This does not, however, diminish the need of personal financial management. Do you often wonder, “What records do I really need to keep?”
As a starting point, here’s a quick summary:
Income in any form
Keep track of all invoices or other supporting documents for all types of income from your business or self-employed activity, as well as any additional personal income (e.g. lettings income from a buy-to-let property).
Business expenses of all kinds
Keep track of all company and self-employed expenses and receipts, as these may be deducted from your income when calculating profits on your yearly self-assessment tax return. You don’t have to include these receipts in your tax return, but having digital spending records to back up all transactions is helpful if your accountants, HMRC, or others require additional information about your finances.
Accounts of VAT (for those VAT-registered)
VAT-registered enterprises must also keep track of all VAT invoices sent to customers as well as any expenses for which VAT has been applied. The completion of VAT returns and submissions will be aided by this.
Records from a bank
You should keep track of any bank transactions related to your business or self-employment. You should have a separate bank account for each of these so that they can be identified more readily. Your accountant can assist you with this by providing online bookkeeping software that connects to most bank accounts, making record keeping much easier.
Any records of Self-Employed Income Support Scheme grants (SEISS)
It’s crucial to remember that all HMRC grants must be recorded and declared as taxable income as part of your self-assessment during the SEISS’s lifetime.
RELATED: What is a sole trader?
When it comes to tax documents, how long do you need to retain them?
Businesses should keep their tax records for at least five years beyond the 31st January deadline for the tax year in question, according to the UK government. For example, you must keep these data until January 31, 2027, for the 2020/21 self-assessment tax return, which has a final submission deadline of January 31, 2022. If you lose them, make notes now so that you can supply approximated or provisional figures if they are needed in the future. Please keep in mind that limited companies are subject to extra record-keeping requirements that are not addressed here.
Is it necessary for a sole trader to keep records?
The publication of official accounts is not required by law for self-employed sole traders. Formal accounts, on the other hand, can often benefit business owners by allowing them to better understand how their company is operating and supporting banking relationships and loan/finance requests.
Is it possible for me to maintain track of my finances on my own?
It is possible to handle your own bookkeeping if you wish to keep your overhead low and avoid paying accounting costs. There are hazards, though, because you will need to document your income and expenses with 100 percent accuracy. Making errors in your own bookkeeping might have devastating repercussions, especially if an unexpected HMRC investigation occurs.
Professional bookkeeping can save you time by relieving you of the burden of keeping your own records, enabling you to concentrate on growing your business and striking the perfect work/life balance. It will also assist you in better understanding your company’s finances, keeping track of cash balances, planning for future tax liabilities, and identifying trends to aid in making critical business decisions.
Sole Traders: Basic Bookkeeping
Sole traders have it more easier than any other sort of organisation when it comes to accounting records. As a lone trader, all you have to do is keep track of your earnings and costs.
You can just sum these up and put the values in the proper places on the form when completing your tax return.
This entails keeping copies of all invoices and receipts, as well as employing a simple profit and loss account (so you can show the tax man should you ever get asked to prove your tax returns are accurate).
Set up a filing system and number your invoices and receipts so you can keep track of them and record them conveniently. A simple spreadsheet with income and expenses can serve as your profit and loss account.
Breaking down income and expenditure into categories like advertising costs, banking fees, and so on is also a good idea. As a result, you’ll be able to better manage your company’s cash flow.
Because sole traders are not required to file accounts, this is all you actually need to know about basic bookkeeping, and much of it is merely to make your life simpler in the long run.