What is bookkeeping and why does it matter? - More Than Accountants

What is bookkeeping and why does it matter?

Each of us has our own strategy for keeping track of our personal finances. Some of us are extremely organized, employing filing systems and simple free bookkeeping software.

Whether you like it or not, bookkeeping is necessary. All businesses must maintain track of their income and expenses, and if you don’t keep track of your cash flow, things will become difficult sooner or later.

So, what exactly is bookkeeping, and why do you need to do it?

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Simply, bookkeeping is the process of keeping track of your company’s financial activities. Sales, purchases, receipts, and payments are all examples of transactions. They could be manufactured by or for another company or individual, or they could be generated by accounting software.

So, what happened to the tape? After a bookkeeper creates the record, it is handed over to an accountant, who will prepare financial statements and then file the financial reports that HMRC and other government agencies require for tax returns and VAT.

Financial transactions can be recorded in a variety of ways, ranging from simple approaches like single-entry bookkeeping to more complex systems like double-entry bookkeeping services. A bookkeeper or accountant utilizes the information to generate an income and expenditure account to see if the company is profitable and to help manage cash flow, regardless of the method they choose.

What is the definition of bookkeeping?

Bookkeeping is the practice of keeping track of your financial transactions so that you can easily see how much money is coming in and going out.

You must balance the books every month in order for your business to be successful; otherwise, you may have difficulty paying for items like stock, suppliers, and even taxes.

It’s a good habit to form from the start of your own company.

What is the significance of bookkeeping?

You won’t be able to manage your firm for long if you don’t have a good understanding of your money.

Small businesses must pay a variety of taxes throughout the year, and bookkeeping allows you to accurately calculate how much is owed. This allows you to plan for the coming fiscal year and consider your next steps, such as expanding your firm or forming a limited liability company. Every year, anyone who is self-employed or a director of a limited company must file a Self Assessment tax return. This is used to disclose your work and other income to HMRC and determine how much National Insurance and Income Tax you’ll have to pay. Your bookkeeping must be organized in order to do this properly, as well as for things like filing your tax return early (which has numerous advantages).

Even if you hire an accountant, you’ll need to keep up with your bookkeeping, such as sending invoices and keeping track of your costs, because they can’t do their job without knowing your income and expenses.

Some accountants will require you to record everything using online accounting software (or, if they’re old school, Microsoft Excel), while others will handle your bookkeeping for you.

When your bookkeeping is in order, an accountant can assist you in making tax-efficient decisions including how much to pay yourself, what business structure is best for you, and whether or not you should register for VAT. It’s also important remembering that if you want to expand your company, you’ll need to be able to show investors, new partners, and banks that it’s profitable. This is something that good bookkeeping practices can assist you with.

In April 2019, the government launched the first phase of its ‘Making Tax Digital’ initiative. This means that if your company is VAT registered, you must electronically transmit information to HMRC about the VAT you pay and collect using “MTD compatible” software.

As the rollout of Making Tax Digital progresses, you’ll need to organize all of your tax accounting online.

Is it possible for me to handle my own bookkeeping?

Many small firms handle their own bookkeeping. They keep track of their income and expenses in a spreadsheet. This can take a long time, and it’s simple to make mistakes.

Why do I have to keep track of my books?

Small enterprises and sole traders, too, must keep track of their books to ensure that they have a complete record of their financial transactions.

Your business bank accounts must be reconciled accurately so that you can be confident that all of your transactions have been recorded, that none have been missed, that all of your customers have paid you, and that you are paying your suppliers on schedule.

A well-kept set of books allows you to determine whether or not your business is profitable. If your expenses surpass your income, your firm is losing money. If a company continues to lose money, you must assess how long you can sustain it and whether it has a long-term future.

Alternatively, bookkeeping can demonstrate how profitable a firm is; if the business is profitable, you may wish to spend more capital and develop it.

The legal need to pay any taxes due is, of course, the major reason small business owners need to keep proper books. If you don’t keep reliable records, your accounts may not be accurate, which could result in erroneous tax returns and fines or other penalties from HMRC.


7 Reasons Why Bookkeeping Is Crucial to Your Company

1. Assists you in making accurate budgeting decisions

Any firm needs bookkeeping because it makes budgeting so much easier. It’s straightforward to analyze your financial resources and charges once you’ve correctly organized your income and expenses.

Your business’s financial roadmap is created by a budget. You can plan for future spending for your business to help with growth if you have a budget in place. It’s far more difficult to get an accurate budget if you don’t keep accurate and up-to-date books because it’s just guessing.

2. Keeps you tax-prepared

Businesses must file their taxes at the end of the tax year, no matter how inconvenient it is. You’ll have financial information ready for tax season if you have an accounting system in place, and the taxman won’t be breathing down your neck.

So, if HMRC requests a financial statement from your company for tax purposes, regular bookkeeping means you’ll be able to predict the conclusion more precisely if you keep detailed balance sheets over time.

3. Keeps meticulous records

Last-minute stress from trying to locate a critical piece of business can result in missed deadlines and minor blunders. Businesses of all sizes can’t afford to make mistakes, and regular bookkeeping may assist.

You can keep organized records by doing your books frequently, staying on top of them, and not leaving it until the last minute. It will become much easier to find the bits of information you require in a short period of time as time goes on.

4. It’s Easier to See Business Goals

Every company wants to expand, but inadequate financial records might prevent this from happening at the desired rate. It’s difficult to create any growth targets when you don’t have any precise numbers or data to analyze.

It’ll be because you’re guessing everything again, and you’ll be unhappy that you didn’t meet the goals you set for yourself earlier. You may more precisely sketch out your business goals and accomplish growth by staying on top of your finances and keeping regular financial records.

5. Complying with government guidelines

We all know that the government is constantly announcing new initiatives aimed at making life easier for them. The Making Tax Digital (MTD) project, which the government expects businesses to comply with, is the most recent example.

It does exactly what it says on the tin: businesses will be required to begin filing their taxes digitally, using apps and software. In this instance, you’ll need to not only perform your homework but also use an app.

In all honesty, the process is fairly simple if you use an easy-to-use program. You won’t face any penalties as a result, and you won’t have to waste money outsourcing your books.

6. Provides you with additional peace of mind

Unorganized books, troubles with HMRC, and looming tax deadlines may all lead to a lot of stress and anxiety. As a business owner, the last thing you want to worry about is bookkeeping concerns on top of your daily tasks.

Your books won’t keep you awake at night after they’re finished and organized. You may relax knowing that your company’s financial records are ready to be audited without having to worry about HMRC. Your mind will be at ease, and you will be able to concentrate on other aspects of your company.

7. You Gain Knowledge During the Process

It doesn’t matter if you’re a total beginner or a seasoned pro when it comes to bookkeeping. Digital bookkeeping provides numerous opportunities to learn and fill up knowledge gaps. It can be interactive with an app, free HMRC workshops and tools, or even reading content online.

Bookkeeping may educate you a lot more about your company’s finances than you might imagine. Everything you learn will aid you in making more informed business decisions.

Further Reading: Bookkeeping – A Free Guide

Basic bookkeeping for small businesses can be broken down into four parts.

1. Keep your business and personal costs separate. Create a bank account in your company’s name using your tax identification number as the account number. Personal spending should not be included in the corporate account. Keeping your costs separate might shield your personal assets from corporate liabilities or a lawsuit. If your company is a corporation, for example, it should be treated as a different legal entity from you.

You endanger the accuracy of your financial statements and tax returns if you record both commercial and personal transactions in the same bookkeeping system. Assume you have £2,000 in personal spending recorded in your company’s accounting records. The income statement expenses will be incorrect, and your business tax return will be incomplete.

2. Decide whether to use double-entry or single-entry bookkeeping. The double-entry bookkeeping approach should be used by every company. Because every accounting transaction affects at least two accounts, this idea is critical. You can get a better view of your business activity if you use the double-entry method. The double-entry method accounts for debit entries, credit entries, and totals when posting a journal entry to your accounting system.

Each journal entry has a debit entry on the left side. With each debit input, asset and expense accounts often increase. Each journal entry has a credit entry on the right side. With a credit entry, the liability and income accounts are usually increased. Finally, the total pound amount of debits must always be equal to the total pound amount of credits. Each journal entry in accounting and bookkeeping software must report an equal cash amount of debits and credits. The number of debit and credit entries, however, may differ.

3. Decide whether to use the accrual or cash basis of accounting. To ensure that their financial statements are clear and accurate, business owners should employ the accrual foundation of accounting. The accrual approach reconciles income generated with expenses incurred to create revenue, resulting in a clear picture of profit.

Consider the following scenario:

– In February, Riverside Landscaping purchased £1,000 of sod; in March, Riverside Landscaping paid £2,000 in labor expenditures, and on March 20, the Jones family was invoiced £3,500. Riverside’s invoice was paid by the Joneses in April. If Riverside paid £100 in overhead, you can compute their profit from the Joneses’ project by subtracting revenue, material, labor, and overhead costs. The profit for Riverside is £400.

The landscaping job’s material, labor, and overhead expenses, as well as revenue, were reported when Riverside completed the work. Riverside’s £400 profit was recorded when the Joneses were billed on March 20. You’ll know the profitability of each product or service when you can match income with expenses.

The cash method, on the other hand, records revenue and expenses as cash inflows and outflows. Riverside would have £1,000 in sod charges if they paid cash in February, if they used the cash approach. When they get payment from the consumer in April, their £3,500 revenue will be recorded.

In essence, revenue and spending transactions would be recorded in separate months. Riverside couldn’t see the Joneses project’s revenue and expenses on the March income statement. As a result, they were unable to calculate the profit earned on that task.

4. Sort your transactions into categories. You must constantly publish information to the correct accounts in your bookkeeping system when you make transactions. Maintain an up-to-date chart of accounts to ensure that your accounting data is recorded correctly.

Every firm generates a chart of accounts, or a list of all the accounts that are required to run the business, as well as the account numbers that correlate to each account. You can add, remove, or update the accounts you use to post transactions as your company expands. Riverside’s cash account is #1000, while their sod account is #3000 in their journal entry. Accounts on the balance sheet are numbered first, then revenue and spending accounts.

Consider the following scenario:

– In February, Riverside Landscaping purchased £1,000 of sod; in March, Riverside Landscaping paid £2,000 in labor expenditures, and on March 20, the Jones family was invoiced £3,500. Riverside’s invoice was paid by the Joneses in April. If Riverside paid £100 in overhead, you can compute their profit from the Joneses’ project by subtracting revenue, material, labor, and overhead costs. The profit for Riverside is £400.

The landscaping job’s material, labor, and overhead expenses, as well as revenue, were reported when Riverside completed the work. Riverside’s £400 profit was recorded when the Joneses were billed on March 20. You’ll know the profitability of each product or service when you can match income with expenses.

The cash method, on the other hand, records revenue and expenses as cash inflows and outflows. Riverside would have £1,000 in sod charges if they paid cash in February, if they used the cash approach. When they get payment from the consumer in April, their £3,500 revenue will be recorded.

In essence, revenue and spending transactions would be recorded in separate months. Riverside couldn’t see the Joneses project’s revenue and expenses on the March income statement. As a result, they were unable to calculate the profit earned on that task.

4. Sort your transactions into categories. You must constantly publish information to the correct accounts in your bookkeeping system when you make transactions. Maintain an up-to-date chart of accounts to ensure that your accounting data is recorded correctly.

Every firm generates a chart of accounts, or a list of all the accounts that are required to run the business, as well as the account numbers that correlate to each account. You can add, remove, or update the accounts you use to post transactions as your company expands. Riverside’s cash account is #1000, while their sod account is #3000 in their journal entry. Accounts on the balance sheet are numbered first, then revenue and spending accounts.

Three advantages of online bookkeeping

Many simple bookkeeping operations may be automated with the correct accounting solution. As a result, you’ll be able to:

1. Collect money more quickly To speed up the cash collecting process, invoice your clients and take payments automatically.

2. Scan and organize receipts To avoid paper files and keep organized for tax season, scan and attach receipts to a transaction.

3. Keep track of your tax deductions Keep track of your spending to get the most out of tax breaks for things like business mileage.

Bookkeeping in Excel vs. bookkeeping in the cloud

Excel is the accounting software of choice for many small businesses. Managing your finances in a spreadsheet, on the other hand, can be time-consuming and error-prone. Spreadsheet tabs may not be linked or up to date if they are not correctly managed. Furthermore, spreadsheets cannot be linked to bank statements, credit card data, or payroll records. If you need someone to help you manage the books, training them in Excel may be difficult. Your tiny transactions will rise as your company expands. Entering data becomes more challenging if you’re publishing more transactions each month.

What is the difference between bookkeeping and accounting?

Simply said, bookkeeping is the process of precisely recording and organizing all of your company’s financial activities, whereas accounting is the process of regularly reporting your company’s financial situation. We have solutions for both simple, free bookkeeping software and full accounting software at Crunch. Financial reporting is a broad topic that is influenced by the size and complexity of a company. It entails analyzing, categorizing, interpreting, and reporting on financial data over a set period of time for most small firms in the UK.

Bookkeeping is the process of keeping track of the money that comes in and out of your business, which is usually made up of all of your sales or invoices, as well as everything your company spends money on (your expenses). Accounting is the process of organizing data in order to assist you in making business decisions that will help your company expand or become more efficient.

It also entails ensuring that your board of directors fulfills their legal obligations to disclose your financial performance to shareholders, Companies House (if you manage a limited business), and HMRC. You may consider bookkeeping to be the first and most important step in ensuring that your company satisfies its accounting obligations.

What is the difference between proper bookkeeping methods and bank reconciliation?

Begin your bookkeeping as soon as possible. Good bookkeeping practice might be as simple as a few minutes per day or a weekly time block. If you don’t take care of it right away, you risk paying more tax than you need to, or worse, being penalized for submitting a late or erroneous return.

Keep your professional and personal accounts separate. Open and maintain a company bank account to avoid the hassle of sifting through your receipts to figure out which transactions were made “wholly and solely” for business purposes. Sign up for open banking and connect your business banking to your accounting software if possible.

With digital bookkeeping software, you can update your records from anywhere. Even if you aren’t using a full accounting software and service bundle. You might also use a free cloud service such as Google Sheets, which allows you to access your spreadsheets from any location. Built-in data processing can assist you in avoiding difficult math difficulties.

We have a handful of useful spreadsheets that can help you track your spending and business mileage – making life easier. We also have free invoice templates to make sending invoices and recording your expenses as simple and professional as possible. Of course, spreadsheets can become lost, corrupted, or difficult if you aren’t familiar with them, which is where an online system comes in helpful.

Keep all of your receipts. Make sure you keep track of all your spending in case HMRC wants to look into your company.

There are regulations about how long you must retain records – usually at least six years.

HMRC may request receipts, and if you don’t have anything to show, you’ll be in big trouble, so make sure you keep track of all your business spending.

Printed receipts are often misplaced or worn out, so scanning and backing them up is a good idea. HMRC accepts digital copies, so take a picture of the document and save it to your computer or internet drive, carefully labeling the date. When you need to discover the proverbial needle in the haystack, this will dramatically boost production and speed. Scanning and converting receipts and documents to PDFs is a breeze with the Google Drive and Dropbox smartphone apps.

Whenever an invoice is paid, make sure to update your accounts. When filing your invoices, divide them into four date-ordered sections: Sales Paid, Sales Unpaid, Purchase Paid, and Purchase Unpaid. This will save you from having to frantically shuffle through an unorganized pile afterwards.

Doing business in another country?

If you need to record an invoice or expense in a foreign currency, bear in mind that foreign exchange rates fluctuate all the time, so make sure you record the amount that actually appears in your bank account, and if you’ve been overseas, save all of your receipts.

Don’t put it off until the last minute. It’s all too tempting to put off fundamental administrative tasks until they’re absolutely necessary. “Proper preparation prevents bad performance,” remember the 5 P’s.

Bookkeeping, like any other work, takes significantly less time and is far less perplexing if done on a regular basis. While it’s tempting to prioritize more hands-on and, let’s face it, more exciting duties, owning your own business might be a short-lived endeavor if your finances are in disarray.

Of course, according to HMRC, this guidance doesn’t deter hundreds of thousands of self-employed people from filing their Self Assessment tax returns on deadline day every year. Consider the frustration and lost business these people have endured, all while cursing themselves for not getting started sooner.

It’s entirely up to you how much time you think is necessary to get all of your documentation in order. It’s a good idea to set aside a few minutes each day or a specific period each week for practice. If you don’t take care of it right away, you risk paying more tax than you need to, or worse, being penalized for missing a deadline. Make sure you’ve set aside enough money. Completing a last-minute tax return only to discover you don’t have enough money to pay your payment is a common blunder that can be easily prevented by always having the appropriate amount of cash in a savings account. Simply put, when your clients pay, redirect a percentage of each invoice into a savings account, and you’ll be ready to go on tax payment day. While you manage your business as a limited company, it can get a little more complicated. We’ve published an article on how much to put aside when you’re a single trader. Despite the fact that it is normally more tax-efficient, you will have to pay a variety of taxes, including Corporation Tax and making sure you pay your personal tax liability.

Engage the services of an accountant or a bookkeeper. It makes sense to hire an accountant as soon as you realize that slaving over your paperwork is costing you money or taking up too much of your time. By entrusting your business to an expert, you’ll be able to focus on running your company the way you intended it without having to worry about difficult numbers.

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