12.01 – Keeping The Books
To survive and prosper in business, it’s crucial to know how much cash you have, who owes you money, and what your profit or loss on sales is. These financial details are essential on a monthly, weekly, or sometimes even daily basis to ensure business success and growth.
Recording Financial Information
While bad luck can contribute to some business failures, a lack of reliable financial information is often a major factor. However, businesses typically have all the information they need to manage well. Among the bills to pay, invoices to raise, petty cash slips to file, and bank statements to review, there’s enough data to provide a clear picture of your business’s performance.
Recording and organizing this information is known as bookkeeping. Not only does the business owner need these financial facts, but bankers, shareholders, and tax inspectors also require well-documented records. For instance, if a tax authority presents a business with a tax demand, the business must use its records to agree or dispute the sum claimed.
If you plan to trade as a limited company, the Companies Act 1985 requires you to ‘keep adequate records sufficient to show and explain the company’s transactions.’ By law, a sole trader must keep records of all business income and expenditures for five years from the latest date of sending back a tax return.
Reasons for Keeping Proper Records
- Know the cash position of your business precisely and accurately.
- Discover how profitable your business truly is.
- Identify which activities are profitable and which aren’t.
- Give bankers and other financial sources confidence that your business is well managed.
- Accurately calculate your tax bill.
- Prepare timely financial forecasts and projections.
- Ensure correct collection and payment of money.
- Minimize accountancy and audit costs.
Starting Simple with Single Entry
If you’re handling the books by hand and have few transactions, the single-entry method is the easiest acceptable way to go. Single entry means writing down each transaction once, preferably on a ledger sheet. Record the flow of income and expenses by making a running total of money taken in (gross receipts) and money paid out (payments or disbursements). Summarize receipts and payments daily, weekly, or monthly as needed, and at year-end, total the summaries for tax time.
Consider separating different types of income and expenses into categories, such as stock, vehicles, and telephone, to see how much you’re spending or receiving in each area.
Example of a Cash Book
You need to keep copies of paid and unpaid sales invoices, purchase invoices, and bank statements. Reconcile (match) bank statements to your cash book to tie everything together.
Double-Entry Bookkeeping
If you operate a partnership or trade as a company, you may need a double-entry bookkeeping system from the start. Double-entry bookkeeping requires two entries for each transaction—one entry on the debit side and one on the credit side. For example, when you buy stock and pay for it in cash, your cash balance decreases, and your stock balance increases by the same amount, keeping everything in balance.
Choosing the Right Accounting Program
With basic computerized accounting systems starting at barely £12 a month, and reasonable packages costing around £20 a month, using such a system from the outset is sensible. For instance, Intuit’s SimpleStart offers a low-price trial at £1.20 a month plus VAT, with regular costs around £12 a month. Alternatively, Wave offers a free-forever accounting package, though it includes occasional ads.
Using a computerized accounting system means no more arithmetic errors, as long as you enter the data correctly. With a computer, routine tasks such as filling in tax and VAT returns take minutes rather than days, and invoices are always accurate. Additionally, you can see at a glance which customers regularly take too long to pay.
Popular Accounting Software Options
- Mamut (www.visma.co.uk/mamutone): Offers a range of accounting systems starting at £19 a month, excluding VAT.
- Sage Accounting (www.sage.com/en-gb/sage-business-cloud/accounting/pricing): Three levels of software priced from £12 to £30 a month, excluding VAT, with periodic three-month free trials.
- Tech Radar (www.techradar.com/uk/best/best-accounting-software): Reviews some of the top free and paid accounting software packages, updated periodically.
In 2019, HMRC started the initiative for VAT-registered businesses to submit their VAT returns via an online portal, known as Making Tax Digital (MTD). Eventually, all businesses will be required to have digital records for their VAT returns, pushing businesses to adopt commercially available software packages.
Outsourcing Bookkeeping
Accountants and freelance bookkeepers can handle all your bookkeeping work—at a price. Rates start from £20 per hour upwards. Bookkeeping services range from basic entry recording to providing weekly or monthly accounts with pointers on business performance. Some services act as virtual finance directors, giving access to senior accountants
Tasks and Costs
- Payroll Services: Weekly payroll service for up to ten employees costs upwards of £85 per month, with monthly payroll services costing about a third of that figure.
- Finding Bookkeepers: Local referrals, phone books, or services like Servicestart (http://uk.servicestart.com) can help find reliable bookkeeping service providers.
Professional Associations
- International Association of Bookkeepers (IAB; www.iab.org.uk)
- Institute of Certified Bookkeepers (www.bookkeepers.org.uk)
Checking qualifications and ensuring that a bookkeeper is adequately certified can be done through the Directory of Essential Accountancy Abbreviations by the Institute of Chartered Accountants in England and Wales (www.icaew.com/en/library/subject-gateways/accounting/abbreviations).
By implementing proper bookkeeping practices and using the right tools and services, you can maintain a clear financial picture, ensuring your business runs smoothly and stays compliant with legal requirements.
