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What is bookkeeping and keeping financial records for your business? What is bookkeeping and keeping financial records for your business?

What is bookkeeping and keeping financial records for your business?

06 Aug 2021

Bookkeeping is a vital aspect of any business, so every successful business requires accurate bookkeeping. For most business owners, bookkeeping seems confusing at first. This guide aims to simplify bookkeeping and help you choose the right bookkeeping for your business.

What is bookkeeping?

Bookkeeping is the process of recording your daily business transaction to show your income and expenditure accurately. A bookkeeping record should show all money spent and received by the business and the business projections.

For example, if you get an invoice from a supplier that you have not paid for, you need to include it in your bookkeeping since you have to pay for the invoice. Your bookkeeping records can help in planning what you need money for and when you need it.

What is double-entry bookkeeping?

Double-entry bookkeeping shows that a business transaction represents an exchange. It involves recording a transaction twice, so it shows the two sides of the transaction. For example, when you have a supplier’s invoice, double-entry bookkeeping shows that money left your business, then you balance your records by including the goods or services received.

How does double-entry bookkeeping affect a business?

Using a double-entry bookkeeping system helps run a business because it shows where the money in the business comes from and where it is going.

For example, when you make a sale, it means you no longer have the product. Even when you haven’t delivered the product or service, you can’t resell or reuse them because you have committed them to someone else.  

Your invoice will show that your business has offered service or product, but you balance it up with the resource you get, usually the money paid by your customer. The same goes for paying staff or buying a material – you balance it with the resources provided.

How will transactions show in a double-entry bookkeeping system?

An example of double-entry is sending a customer an invoice and getting paid for the invoice. When you raise an invoice, the amount in the invoice goes to credit while the debit goes against debtors control as an amount owed to your business.

You also make a double entry when a customer pays a bill. When you get paid for a bill, you apply the debit to your banking ledger because your bank balance will increase, then apply a credit to debtor control to reduce what the customer owes you when they make the payment.

With the double-entry bookkeeping system, it is easy to mix up credits and debits with the bank. When you pay in money into the bank, it means the bank owes you that money, so you refer to it as credit. However, from your accounting records, an increase in your bank account is a debit.

How do I know if transactions balance in double-entry bookkeeping?

You have to record all transactions as debit and credit. One side of the transaction will be the debit while the other is a credit, so they cancel each other, leaving a zero balance. You can confirm if your entries match by running a trial balance.

Do I need bookkeeping records for my business?

If you run a business, the HMRC expects that you maintain good booking records to show the activities in your business, whether you are a sole trader, in a partnership, freelancer, limited company, VAT registered or a combination of any of these.

Your bookkeeping records are the basis for the tax return you have to file, so having an accurate bookkeeping record is necessary. If your bookkeeping records are accurate, you can avoid fines and uncomfortable conversations with HMRC auditors.

Aside from this, an up-to-date and accurate financial record helps you know how much you owe and identify areas in the business where you can save more money. An accurate financial record also helps manage cash flow and allows you to claim tax relief, which is important for many businesses.

What bookkeeping records do I need?

Your bookkeeping records have to show all transactions carried out in the business. This means you will record all invoices sent out and received, expenses, bank transactions and everything associated with them.

The amount of information you will record in your bookkeeping depends on the size of the business and the number of transactions performed. The information recorded may be more because you have to include the dates of transactions, the purpose of each transaction, the customers, suppliers, and the amount of each transaction.

If your business also carries out overseas transactions, you need to deal with the tax implications and different currencies. All these may make your bookkeeping a tasking job, but you can use bookkeeping software to speed the bookkeeping process up and make it easier.

Asides from inputting data into your bookkeeping records, you have to include the supporting document and list of invoices.

Bookkeeping for sole traders and limited companies

As a business owner, you have to consider how your business structure affects your bookkeeping records. If you are a sole trader, you and the business are one entity, so you can keep all the profits from the business, although this has tax implications.

If you run a limited company, you and the business are legally separate entities, so you must report the business’s finances and your income separately.

Is bookkeeping and accounting the same?

People often use accounting and bookkeeping interchangeably, but they are different and provide different functions.

Bookkeeping involves the day-to-day financial activities in a business, recording the activities and managing cash flow.

On the other hand, accounting uses bookkeeping information to analyse and report the business’s financial standing and helps the decision-makers make the right decision for the business.

Both accounting and bookkeeping are essential for a business to be successful; know what works best for the businesses and areas that need attention.

Should I outsource my bookkeeping?

You can outsource your bookkeeping services in London or hire someone to do the bookkeeping in-house. Regardless of which bookkeeping option you choose, it’s essential to get a professional bookkeeper or accountant to save you more time and eliminate the stress of running the business and handling its bookkeeping.

Can I do my bookkeeping?

If you operate a small company or a sole trader, your bookkeeping will likely be straightforward. Outsourcing your bookkeeping is not compulsory, so you can do it yourself using accounting software if you want to save money.

If you have no idea about bookkeeping or don’t have the time for bookkeeping, you can outsource an accountant or bookkeeper. It comes down to checking the cost and time, but you should be realistic about your ability to maintain an accurate and up-to-date bookkeeping record.

How often should I do my bookkeeping?

You should do your bookkeeping regularly, as this saves you from the last-minute rush when it is time to file tax returns. It is best always to update your bookkeeping records to avoid mistakes. If you decide against outsourcing your bookkeeping or employing someone to handle it, check for bookkeeping software to make the task easier.

How to stay ahead with your bookkeeping?

Your bookkeeping will give you the information needed while filing your tax return (Self Assessment, VAT return, Company Tax Return). Instead of struggling with your bookkeeping and risking penalties, get a professional to handle your bookkeeping and keep it up-to-date.

Deciding how to keep your records

In running your business, you would have to decide how to record your expenses and cash flow. You may decide to write it down in a book, use software or a spreadsheet. With the HMRC rolling out Making Tax Digital (MTD), digital bookkeeping may be a better option.

Record important dates

Ensure you have a reminder for all important dates throughout the year. This includes your payment and submission deadlines so you can avoid penalties and interest payments. Your reminders should also cover payroll dates or loan payments.

Separate your finances from the business

Although there is no legal stipulation to have a business account except you run a limited company, it may be better to have a business account. When you separate your business and personal finances, it makes watching your cash flow and claiming expenses easier. You won’t have to go through each transaction to separate those for the business from the personal ones.

Keep all invoices and receipts

Ensure you have all documents for data entered into your bookkeeping records. This makes sorting out issues in the business easy, and it is a requirement from HMRC. Having your documents allows you to claim certain expenses.

Complete and review your bookkeeping regularly

If you want the perfect time to update your bookkeeping, you may never get it. You’d always have different responsibilities while running a business, and bookkeeping is as vital as other responsibilities.

Get professional advice

If you don’t have training in bookkeeping, consult your accountant for professional advice. An accountant can assist you in setting up a system that makes bookkeeping easy for you to handle if you decide to handle your bookkeeping.

Irrespective of your business structure, you need a good bookkeeping system to make running your business and paying taxes easier. Getting a professional to handle your bookkeeping helps makes things easier for you, and you won’t have to worry about filing the required documents late.

If you need help with your bookkeeping, reach out to The Accountants London today on 020 7183 2362.