Accounting for Self-Employed Business Owners

Accounting for self-employed business owners can feel like a daunting task! Especially if self-employment is new to you and you aren’t a numbers person. I know it can be confusing knowing where to start with your paperwork, what system to use and what all the terms mean!

In this guide, I’ll take you through everything you need to do when it comes to accounting for your small business. I’ll show you the most popular options for systems and clarify your legal requirements.

What is Accounting?

Accounting is a record of all the money that comes in and out of your business with all the right numbers grouped and categorised together. It’s presented to you in a format that gives you the numbers you need to fill in your tax return and to help you gauge what is happening inside your business. The numbers you need to do your accounting come from your business records because they hold all the information you need to find out where your money has come from and gone to.

In business there are 3 formats commonly used to present the numbers of a business:

  1. Balance sheet
  2. Income and Expenditure Account (also known as a profit and loss account)
  3. Cash flow statement

Each one of these focuses on a different area of business finance. Plus, for some, it is a legal requirement that they are sent to HMRC depending on the business structure. But regardless of legal requirements, some business owners choose to produce all 3 of these reports anyway because of the different insights into their business each one offers. This helps to analyse how a business is performing and where there is room for improvement. Which of these 3 reports you’ll need really depends on:

  • Business structure;
  • The complexity of your business;
  • What numbers you feel are important to you;
  • Your future plans.

From a legal perspective if you are self-employed, you don’t actually send your accounts to HMRC. You’ll just use the numbers from your income and expenditure statement to fill out your tax return to declare your profit for tax reasons.

Accounting requirements are very different if you have formed a Limited Company.

How to Do Your Accounts

If you’ve read my self-employed tax guide, you’ll know that you pay tax on your business profits (all your income less your allowable business expenses). So, for that reason, at the very least, you need to prepare an income and expenditure statement (or profit and loss account). This should summarise everything that came in and went out of your business to help you fill in your tax return.

How to Prepare an Income and Expenditure Statement

However, in reality, when you run a small business, there is more information you need to make financial decisions and help running your business admin like:

  • Invoicing
  • Knowing who owes you money
  • Keeping an eye on your bank balance
  • Understanding how much profit you are making in real-time instead of once a year at tax-time
  • Cost control

If you are looking for this level of detail, then you’ll need more than an annual income statement, and that’s where accounting software comes in. Accounting software offers various functions like connecting to your bank, invoicing and automated reporting that can take the hassle out of manually working out your business numbers. The trouble is with so many out there that it’s hard to know which one to choose!

Choosing an Accounting System for Self-Employed Business Owners

There are two options when it comes to accounting systems – a software or a bookkeeping spreadsheet. The one that is right for you will come down to your personal preference and which one you think you will feel most comfortable with. Many choose to start out using a spreadsheet because their accounts are simple and then progress to an accounting software once they get familiar with accounts and their business grows.

Quickbooks v Xero

There are two major players when it comes to accounting softwares, Quickbooks and Xero. Both essentially do the same thing, but have different dashboards. I use both on a daily basis and do feel that Quickbooks is better for the micro businesses and the self-employed whereas Xero is great once you need functionality like foreign exchange and have an understanding of double-entry bookkeeping.

That said, both offer the basics of accounting for self-employed business owners, meaning you can:

  • Raise invoices and email them straight to your clients;
  • Connect to your bank account to pull in your payments and receipts, saving you the hassle of typing in each transaction;
  • Generate your income and expenditure statements automatically, broken down monthly;
  • Use the app to review your numbers, or in the case of Quickbooks, allocate transactions and photograph your receipts making claiming cash expenses easy.

Price wise, Xero can work out more expensive because although their starter package is £10 + VAT per month, you can only record 5 bills onto the system. Therefore, unless your business is really simple, you’ll find yourself having to upgrade and pay £24 + VAT per month.

Quickbooks, however, offer different versions of their software. There is a Self-Employed version, but I did try this a year or so ago, and the functionality was so minimal, I couldn’t even send out invoices. So, the next version is Simple Start, which is £12 + VAT per month, and offers probably all of the functions anyone who is self-employed will need, excluding foreign currency. It’s also £6 + VAT per month for the first six months. I also love the app because I can do so my accounting through it, run reports and send invoices.

Quick Start Guide to Quickbooks Simple Start UK

Do You Need a Separate Bank Account?

Yes, you do. It isn’t a legal requirement to have a business bank account if you are self-employed but I promise it makes managing your small business finances and paying yourself easier. It’s also more professional so if you haven’t opened on yet, then consider doing so. Take a look at Starling, it’s a hugely popular option in the self-employed community and it connects with Quickbooks, so you’ll have your business finances covered between them.


About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.