So you’ve taken the plunge and started a business!
But now you’re busy setting up your business and worried about what’s involved when it comes to looking after your accounts, paying for costs and keeping receipts.
That’s where bookkeeping comes in.
Bookkeeping and accounting get some bad press with small business owners in my opinion. It’s often branded as boring or time-consuming.
I think the truth is this reputation comes from small business owners who just don’t really understand what they are doing when it comes to their business finances and aren’t being efficient.
Bookkeeping doesn’t have to be boring! In fact, it is a fundamental part of running a small business and sound decision-making.
I put this guide together for anyone who is setting up a business or has been going for a while and wants to formalise things.
I’ll show you what’s involved in setting up a bookkeeping system, that’s quick and easy to use as well as sharing my recommended daily, weekly and monthly bookkeeping tasks to help you stay on top of things.
What Is Bookkeeping?
Put simply, bookkeeping is a way of tracking all your business income and expenses during a set period of time.
Being self-employed or a sole trader means that you are legally required by HMRC to submit a tax return which summarises all your income and expenses, as well as calculating your own taxes.
Your bookkeeping system will provide you with the numbers you’ll need to complete your tax return, saving you from tax hell.
A good bookkeeping system will add up your income and expenses.
But a great bookkeeping system will:
- help you to analyse your costs to stop you from wasting money;
- store all your receipts;
- tell you where you are making the most money so you can make more of it;
- automate some of the boring bookkeeping tasks you can’t get away from;
- give you the numbers you’ll need to complete your tax return.
So how do you set up a great one?
How to Set Up a Simple Bookkeeping System
There are two tricks to make your bookkeeping easy:
- Opening a separate business bank account
- Setting up a bookkeeping system
1. Open a Business Bank Account
Keeping all the financial transactions of your business separate from your personal payments is a sure-fire way to make your bookkeeping easy.
Imagine if you had to sift through all your personal costs to find your business ones? It could take forever and you might miss out on some of those precious expenses that will reduce your tax bill.
It’s also recommended by HMRC for the self-employed and sole traders. If you have a Limited Company then you are legally required to open a separate bank account.
The easiest way to open a bank account is to go online. Revolut offers a free business bank account for small businesses and freelancers.
Once you have a business bank account set up, the one piece of advice I’d give you is to never dip into it. Instead, set yourself a regular salary.
The most successful business owners I have come across have always treated themselves just like an employee of their business.
2. Get a Bookkeeping System
No matter what stage your business is at, getting some kind of financial system is a must.
Even if you are just starting out and only have a few transactions somewhere, in the not too distant future, you’ll look back and be so grateful you did this next step.
You can choose to use a spreadsheet or invest in using an automated online system, like Quickbooks.
My bookkeeping spreadsheet lets you to easily keep an eye of everything an accountant would. You can estimate tax, manage cash flow, budget accurately, and more – all from one pre-automated spreadsheet.
Tax Records When You’re Self-Employed
A big part of your bookkeeping includes keeping tax and accounting records and holding onto them for certain periods of time.
What are Tax Records?
Your tax records are all the different pieces of documentation that you need to complete a tax return for HMRC.
That includes information you’ll need on your business, that’s why it makes sense to put them away as you do your bookkeeping.
Example Tax Records
Here are some of the typical tax and accounting records that self-employed and sole traders need to keep:
- Bank statements
- Sales invoices
- Purchases invoices and receipts
- Cash receipts
- VAT records (if you’re VAT registered)
- P60s or P45s if employed
- Mileage claim forms
- Records about any other income such as dividends or capital gains
- Copies of tax returns and tax calculations you have submitted
How Long to Keep Your HMRC Tax Records
Every time you send in a tax return HMRC reserves the right to ask questions about the numbers and request that you show evidence of how you reached that number and check you’ve paid the right amount of tax.
You are legally required to keep your tax and accounting records for HMRC for at least 5 years after the 31 January you submit your tax return.
You must keep all your tax records for your 2018/2019 tax return, which is due by 31 January 2020 until the 31 January 2025 at least.
How to Keep Your Tax Records
There is no set way that you have to follow when it comes to keeping your tax records.
Fortunately, you no longer need to keep paper copies of your HMRC tax records. That means keeping your records digitally is probably the easiest way to hold onto them for the right number of years.
Of course, you can still choose to keep paper copies, just make sure you print and file all the correct information.
If You’re Using a Bookkeeping Spreadsheet
You’ll need many of your tax records to complete your bookkeeping. That’s things like your bank statements and sales invoices.
Once you are done updating your spreadsheet put copies away. It’s much easier to do on a regular basis so don’t let it pile up.
I’ve written a detailed guide on organising business receipts to help get you set up with a system that you can use year after year.
If You’re Using an Online Bookkeeping System
Most of the online bookkeeping systems let you store copies of your sales invoices and purchase invoices, along with other information. It’s really easy to save all these pieces of information as you go along.
You still might need to store other tax records like bank statements separately.
What Happens if You Lose Tax Records
If you have misplaced tax and accounting records then try to get copies. For example by calling your supplier or banks and checking through old emails.
It is a legal requirement to have your tax records so it’s really important.
You may have to pay penalties or interest if you cannot support figures on your tax return and it turns out you have not paid enough tax.
If you are completing your tax return and are missing information you can still submit it but you must let HMRC know if you are using provisional or estimated numbers.
Provisional means you’ll be getting the lost records replaced and will confirm the correct figures later
Estimated means you have lost the relevant tax records, are making a best guess and will not be changing the figures.
How Often Should You Do Your Bookkeeping?
The key to making your bookkeeping easy is staying on top of it.
But it can’t take up too much of your precious time. After all, being an entrepreneur is much more than just bank statements, receipts and number crunching!
I’ve split all the likely bookkeeping tasks you’ll need to do into a daily, weekly, monthly and annual checklist to help you stay organised. It may help you to put them into your diary.
Daily Bookkeeping Tasks
- Check your bank account and review money in and money out, marking off any payments on the Client Invoicing tab;
- Invoice your clients for any work completed;
- Update the bank statement input tab for the week’s bank transactions;
- Record your business mileage and cash expenses;
- Check which invoiced clients have exceeded the credit terms offered and chase for payments where necessary;
- File receipts and invoices safely, either as a scan or paper copy in a folder
Monthly Bookkeeping Tasks
- Review your results on the Business Results tab;
- Transfer money into a deposit account for your tax bill due 31 January and 31 July each year;
- Scan in your business paperwork and file securely online
Annually Bookkeeping Tasks
- Close off your bookkeeping spreadsheet for the UK tax year;
- Complete your self-assessment tax return by 31 January each year and pay any tax due by 31 January and 31 July each year;
- Start with a new copy of the bookkeeping spreadsheet and being populating it with transactions for your new financial year.
Whilst getting a new bookkeeping system may feel overwhelming, once you create a routine for yourself and become familiar with the basics you will find staying on top of your finances will become very quick and easy (and maybe even enjoyable).
This guide is number 5 in my 6 Core Elements of Self-Employment Taxes series.
New Here? These are my most popular resources:
- The Ultimate Bookkeeping Spreadsheet – Organise your money, track the numbers that matter and stay on top of your cash;
- FREE Guide: 11 Common Small Business Setup and Tax Mistakes – Are you worried your business isn’t set up correctly? Use this guide to identify whether you’re making the 11 most common financial pitfalls I’ve seen when it comes to setting up a business and taxes, as well as finding out how you can put them right;
- Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
- FREE Business Expenses Cheatsheet – Check what you can and can’t claim as an expense against your taxes.
- 6 Core Elements of Self-Employment Taxes – Confused by taxes? Worried you’re missing something when it comes to tax allowances and reliefs? These easy to follow 6 mini-guides will have you on top of the tax side of things in no time at all.