Anyone who’s launched their own business will say they’ll never forget the first sale they made. Although that might be true, you’ll have to keep in mind more than your initial sale when you’re managing your accounts.
That’s where bookkeeping comes in. A vital aspect of managing a business, bookkeeping is vital to ensure you have tax-related records that are up to date and up-to-date. If you have a well-organised bookkeeping system implemented, you’ll be able to make it much easier to claim the tax benefits you’re eligible for, all the while staying out of trouble dealing with HM Revenue and Customs (HMRC).
In this post, we’ll explore the basics of bookkeeping for sole traders, what you need to know to begin and what documents you’ll require to keep.
What is bookkeeping for sole traders?
Bookkeeping is the practice of keeping track of, storing and recording financial data and business transactions daily.
Bookkeeping for sole traders refers specifically to the practice of bookkeeping small business proprietors for their sole-trader company. This involves keeping a log of all invoices and receipts that are generated throughout the tax year which you can use to file the annual Self Assessment tax return to get tax reliefs and lower the final income Tax tax bill.
If you’re the director of an unincorporated company and would like to know information about accounting, refer to our bookkeeping guide to business leaders.
What is the difference between accounting and bookkeeping?
Bookkeeping is the process by which an organisation manages their business financially along with financial information. However accounting is about studying the data obtained to ensure that any business decisions made are correct ones.
We’ve laid out the key distinctions between accounting and bookkeeping as shown in this table. to get a deeper understanding of the roles and responsibilities that go into bookkeeping and accounting check out our article titled ‘What’s the distinction between accounting and bookkeeping What is the difference between bookkeeping and accounting?
|Overview of the role
|Keep track of all financial transactions for the business.
|Utilising financial data to create reports which could be utilised to take business decisions
|Maintain accurate information on transactions and up-to-date
|Check the financial health of the company and keep track of the business owner’s obligations
|The beginning of the financial cycle
|The end in the cycle that is the finance
Single-entry bookkeeping vs. Double-entry bookkeeping
In essence, the distinction between double-entry bookkeeping and single-entry is the amount of times an entry is made.
Single-entry bookkeeping is the practice of the recording of all credits and debits in a single book of cash at once. This is usually practised by smaller companies with less transactions to keep tabs on.
Double-entry bookkeeping requires you to record every transaction twice, one as a credit entry, and the other as an entry for debit. Every transaction needs to be saved in a ledger account which includes five primary account categories to keep track of your transactions:
Asset account: Anything with financial value that the company has, for example, company equipment, and property.Revenue account: The money that comes into the company, mostly by the sale of products, however it can also be earned from other income streams including the payment of interest, and royalties.Expense account: Money that is going out of the company typically for operating costs including things like the office rent.Liabilities account: All debts that the company is liable for like loans from banks. loans.Equity accounts: All investment made by an owner to the business.
Both methods of bookkeeping keep track of each financial transaction; double-entry bookkeeping takes into account not just what the company has earned in terms of revenue, but also what it also has loss in stock.
For instance, if you’re operating an online store and you’re selling a book worth £15 and you use single-entry bookkeeping, you’d need to create a single report to track the amount of revenue that’s been deposited to the business.
If you’re using double-entry bookkeeping you’ll have to note +PS15 on the left as a revenue and on the other side you’d record -PS15 to account for the decline in the assets total that the company has.
Check to see whether your records are correct. Find the totals of each column. If the sums of both columns are equal that means you’ve accurately recorded every transaction twice. If there’s a variance but you’ll need to look through the data to discover what’s missing.
How do you manage your bookkeeping when you are sole trader
As we mentioned earlier Bookkeeping is the process of keeping accurate documents of all transactions in the business — but what records are you required to keep?
The choice of the accounting method
Before you begin storing your records, you’ll have to decide on an accounting system. The method of accounting you select will determine the time you keep track of a transaction and the information that you’ll need to maintain.
Traditional accounting is usually adopted by larger companies and involves recording the business’s earnings and expenses at the day you were invoiced or invoiced.
Let’s take an example: you sent an invoice on the 28th of March 2021, and weren’t paid until April 7th. If you’re using the conventional accounting system, you’d have to track the invoice against the tax year 2020/21 year regardless of the fact that the invoice wasn’t paid until the tax year following.
Cash basis accounting However, cash basis accounting can only be used by small-sized businesses that have an annual income of PS150,000 or less. It requires only registering any income or expenses once you’ve been paid or have received payment.
If we use the above example, in cash basis accounting, you’ll need to track transactions against tax years when you received the payment that would be the tax year 2021/22. Therefore you won’t have to be liable for Income Tax on the transaction until you filed your self assessment for 2021/22.
What records do I need to keep?
According to GOV.UK You’ll have to retain documents that include:
All business income and sales expenses VAT If you’re VAT registered payroll records for individualsRecords of your personal income grants If you’ve made claims under grants through the Self Employment Income Support Scheme (SEISS)
In the case of traditional financial accounting you’ll also have to keep documents of:
You’re owed money, however, you haven’t received what you’ve made a commitment to spend, but haven’t yet paid amount of your stock and projects in progress at end of your accounting year Balances at the end of the year in your bank account How much you’ve put into the business during the past yearHow much you’ve taken for personal use
If you own a small business It is legal for you to maintain records for at least five years starting from the 31st of Jan. Self Assessment deadline, where the documents were used to calculate your income Tax invoice.
In the event that the Self Assessment tax return was filed more than 4 years beyond the deadline but you’ll still need to keep your documents for a period of 15 months after you’ve sent off your tax return.
Record-keeping for your business
Although you can currently store the physical copy of company documents (shoebox receipts for instance? ) In April 2024, you’ll have to save your documents digitally.
As part of Making Tax Digital for Income Tax All documents for businesses must be kept in spreadsheets that are able to be connected to HMRC’s systems using bridge software as well as accounting programs.
For more information on the ways Making Tax Digital will be changing the way you record your tax records, read our article “MTD for Income Tax Your Self-Assessment has changed’.
Do I have to manage bookkeeping myself?
In short, yes you can handle yourself bookkeeping. If you’re running a small company that has a small number of transactions or just starting out perhaps, it’s easy to keep a one-entry record that records your business transactions.
If you’re planning to handle yourself bookkeeping then you may think it is beneficial to set up an account with a different bank. With a business bank account, there is no need to be concerned about distinguishing the difference between business and personal transactions. You can also use the Ember application to segregate your transactions effortlessly.
But, as your company grows, you may realise that you aren’t able to maintain an accurate account of your finances. This means that it is possible that the documents are lost or not remembered and this makes this Self Assessment season far more stress-inducing than it has to be.
For more information on how we can make your bookkeeping duties from a burden to an effortless, visit our bookkeeping page to get an instant quote, absolutely free of cost.