Large companies can often take business bookkeeping for granted. They have an accounting or finance department and ensure to keep it well staffed. All the responsibility for managing the books lies with those staff. Many Managing Directors will know nothing more of the process than that.
However, for sole traders and small business owners they cannot afford such a luxury. Keeping up-to-date and accurate financial records are one of their many responsibilities. How to keep your own books can seem like a real challenge when starting a business. Like anything, however, once you break it down and get more familiar with it, it’s actually much simpler than it seems.
To help you along, we’ve put together this handy guide on how to keep your books. We’ll cover what business bookkeeping is and offer some tips as to how to best manage the process. Alongside that, we’ll talk about what HMRC require of you and why good bookkeeping is key to any small business. If you want to know more, Business Wales regularly run Bookkeeping workshops across Wales for Welsh business.
What is Business Bookkeeping?
Bookkeeping and accounting aren’t the same thing. That’s a common misconception. Bookkeeping is just one element of accounting. A fundamental and crucial one, but still just one of the many aspects of accounting as a whole.
The part of accounting which bookkeeping refers to is the process of keeping and organising records. It is the recording of transactions, sales and all other financial activities of a business. Accounting is a broader process. It involves interpreting, analysing and classifying the financial data gathered through bookkeeping.
Business bookkeeping is crucial to the accounting process as a whole. That’s not the only reason why it’s important for sole traders and small businesses to understand how to keep their own books. Let’s drill down into why business bookkeeping matters.
Why It’s Crucial to Keep Your Books in Order
By the end of 2021 there were over 207,000 small to medium sized businesses in Wales. They cover all kinds of industries and sectors. They also encompass sole traders, partnerships and limited companies. What’s common to all of them is the importance of business bookkeeping.
Business owners and sole traders must have a good understanding of the financial health of their company. That’s the only way they can maintain a healthy cash flow. It also means that any problems or troubling trends can be identified and acted upon more quickly. The only way to maintain that understanding is by keeping accurate, up-to-date financial records.
For Angel Invest Wales’ business year ending March 2021, 29 companies received investment, which is up from 20 in the year ending 2019. Additionally, the number of angels investing grew from 49 in year end 2019, to 58 by March 2021. According to Beauhurst – The Deal 2021 Report, across the UK there were 2,679 deals made by angel investors, which has increased by 17% since 2020. Funds raised, however, increased by a massive 100% in that same time scale, reaching £22.7 billion.
There’s also another, more practical and pragmatic reason why you should ensure your books are in good shape. Put simply, that’s because HMRC require it of you. They demand that sole traders and limited companies alike keep certain financial records. Sole traders need them to file accurate self-assessment tax returns. Limited companies must file both annual accounts and company tax returns. An important first step in learning how to keep your own books is finding out just what HMRC demand of you.
HMRC & Business Bookkeeping
If you run a business or work for yourself, HMRC will require you to keep records. The precise records they require of you will differ from one business and one individual to the next. It will depend on the size and complexity of your business, the type of tax you have to pay and if you need to register for VAT.
In general, it’s always recommended that you keep track of all income and outgoings associated with your business. That means HMRC normally expect you to keep a record of a number of different types of transaction. They will also demand that you keep certain documents as supporting evidence.
Typical Records & Documents to Keep
- Records of Sales Income – You must record all sales and business receipts as they come in. It’s best to keep these records in a cash book or a computer spreadsheet dedicated to the purpose. You must also remember to include any goods or services you exchange for something other than money (like other goods etc.). These are called barter transactions. Keeping supporting evidence of sales is also vital. That will include invoices, bank statements detailing money received and paying-in slips.
- Records of Purchases & Expenses –You have to keep accurate records of all the funds going out of your business. All purchases or expenditures should be recorded and supporting invoices or receipts kept.
- Personal Drawings – You must keep track of money you take money from your business for your own personal use or use by your family. This includes drawing from petty cash as well as withdrawals from business bank accounts.
- Bank & Building Society Statements – You should keep or have access to statements of any account into which money has been paid or credited to your business. You also need to keep statements for accounts from which money has been drawn for business expenses. If you don’t have separate business bank accounts, you need to note which transactions are personal and which are business.
- Records of Funding From Private Sources – You must record any private money brought into your business. That includes money from family, inheritance or finance from a personal loan.
- Stock & Work in Progress – At the end of your accounting year (more on this below), you should undertake an accurate stocktake. You can then record the value of the stock your business holds, as well as of any work in progress.
- Payroll Information or Sub-Contractor Payments – Companies employing staff need to keep payroll records. These support the deductions from your accounts related to paying wages or benefits to employees. Payments to freelancers and subcontractors should be recorded. It’s best to keep all invoices and bank statements that relate to such payments as well as information on all workplace pensions.
Self-Employed or Limited Companies
As we mentioned earlier, exactly what HMRC requires of you depends on your individual circumstances. Self-employed individuals running their own business have certain responsibilities. Different demands are placed on owners of limited companies. Let’s run through a few key areas related to HMRC and business bookkeeping. As we do so, we’ll discuss what's different for self-employed individuals and limited company owners.
What You Must Submit & File
Let’s start with the basics of what HMRC will ask you to physically provide them. If you’re self-employed, you’ll need to file a self-assessment tax return. You’ll need to enter accurate profit and loss details. You may also need to include other financial data about your business.
Without good business bookkeeping, you won’t be able to do that. In general, you won’t have to submit your accounts or records to HMRC. If they choose to check your return, however, they will ask for them.
Things are a little more complicated for limited companies. Rather than a self-assessment tax return, they have to submit a company tax return. That will need accurate, up-to-date financial records to complete. It’s also a statutory requirement for limited companies to submit annual accounts. That is evidence that they're keeping their books according to HMRC’s requirements.
When You Have to File
Self employed individuals must file a self-assessment tax return for each tax year. The tax year runs from the 6th April until the 5th April. Most people will file these returns online. If you do this you will have until 31st January the following year to submit a return. The same deadline applies to paying any tax the return reveals you owe. Comprehensive records or company accounts will only be requested if HMRC want to check the validity of a return.
Owners of limited companies can choose for their accounting year to end whenever they wish. Taxable income for sole traders and partnerships is still calculated on a 6th April to 5th April basis. That means it makes sense for them to stick to the traditional accounting year. All limited companies must make certain submissions to HMRC for each accounting year.
Initial company accounts must be filed within 21 months of a company being registered with Companies House. Annual accounts for each accounting period must then be filed within nine months of the end of each accounting year. Companies must also file a company tax return on an annual basis. If you don’t keep accurate records or don’t present them when required, HMRC will penalise you. A fine of £3,000 can be levied or you might even be disqualified as a company director.
How Long to Keep Records
HMRC require that you keep financial records for an extended period of time. For self-employed individuals or members of a partnership, they ask you to keep your records for a minimum of five years. That means at least five years from 31 January following the tax year that the tax return relates to.
Limited companies’ records for any accounting year must be kept for six years from the end of that period. If a company sends a tax return late or is subject to a compliance check, the time limit for keeping records can be extended.
Tips on How To Keep Your Own Books
There’s no doubt that business bookkeeping is important. It helps business owners to keep a firm grip on their company’s financial health. That way, they can react to and even anticipate any problems or changes in the marketplace. It might help them recognise a time to seek funding or point out a way to cut expenses. Good bookkeeping is also essential to meeting the requirements set down by HMRC.
You should by now have a good sense of the kinds of records you need to keep. You should also know what HMRC require you to do with them and when. What we’re going to offer now, are some practical hints for keeping your own books. These are just a handful of basic nuggets of advice that can make business bookkeeping a cinch for even the smallest, youngest businesses.
Start as You Mean to Go On
Business bookkeeping should not be an afterthought. That’s a recipe for inaccurate financial records that will cause all kinds of problems down the road. From the first day you set up shop, you should begin keeping track of your financial transactions.
The costs of getting the company up and running count as part and parcel of your bookkeeping. They are by every definition business expenses. That makes them important to your future tax return. Don’t think that because you haven’t yet achieved any sales, you don’t need to start keeping records.
Make Tracking Expenses Second Nature
Learning to keep track of your expenses accurately is key for every business. You need to get in the habit of making a record of every business-related expenditure. Any such expense, which is wholly for business purposes, can be claimed for when filing your tax return.
That means you should keep receipts for small purchases as well as invoices for large expenses. Purchase of things like books of stamps or stationary shouldn’t be forgotten about. It is a good rule of thumb that you should ask for a receipt for every single purchase you make.
Keeping track of other expenses is also important. Fuel or accommodation costs for business trips must be considered. If you work from home, too, you can consider a proportion of your utility bills to be business expenses. These are all figures and amounts you need to keep a record of.
Establish a System
Business bookkeeping is no mystery but it’s also not straightforward. To do it properly, you need to approach the process in a professional manner. Decide at the outset the system you’re going to use to keep your books.
That might mean using a specific piece of bookkeeping software. It could equally mean creating one or a collection of Excel spreadsheets. If you’re so inclined, you could even get an old-fashioned cash book and box file. Whatever your favoured system, make sure you have one and stick to it.
In the same way, it’s also important to develop a routine for your business bookkeeping. Too many business owners leave it as a task for evenings or weekends. That’s not smart. You should budget time to the process when you can give it your full attention. It’s also a good idea to organise, collate and check your financial records on a regular basis. Doing that at the end of each week or month will make your life much easier at year end.