Keeping accurate financial records helps business owners understand their finances, manage cash flow and meet their tax and reporting obligations. Bookkeeping need not be complicated, but it does need to be consistent.
1. What is bookkeeping?
Bookkeeping is the recording and organisation of business transactions, including sales, purchases, receipts and payments. Good records help you identify what customers owe, what bills need paying and how the business is performing.
2. Understanding the basic terms
Assets: Resources the business owns or controls, such as cash, stock and equipment.
Liabilities: Amounts the business owes, including supplier bills and loans.
Capital or equity: Broadly, the residual interest in a business after deducting liabilities from assets.
Income: Amounts earned from sales and services; this is not necessarily the same as cash received.
Expenses: Costs incurred in running the business, subject to the relevant accounting treatment.
Profit: Income less expenses for a period; profit is not the same as cash in the bank.
Invoice: A document requesting payment for goods or services.
Receipt: Evidence that a payment has been made.
3. Setting up a reliable bookkeeping system
Choose a suitable method: A spreadsheet may be sufficient for some very small businesses, but accounting software can help with invoicing, bank reconciliation and reporting. Check whether Making Tax Digital requirements apply before deciding.
Set up appropriate categories: A chart of accounts groups transactions into income, costs, assets and liabilities. Categories should reflect what the business actually does.
Record transactions promptly: Capture the date, amount, supplier or customer and business purpose. Keep supporting invoices, receipts and other relevant documents.
Keep business and personal spending distinct: A separate business bank account is often helpful. Limited companies should take particular care to record payments involving directors correctly.
4. A simple bookkeeping routine
Regularly: Issue sales invoices, record purchases, retain evidence and review payments received and made.
Weekly or frequently: Reconcile bank transactions, check overdue customer invoices and review upcoming supplier payments.
Monthly: Review the profit and loss report, outstanding debts, bank balances and expected cash requirements. Investigate unexplained balances rather than allowing errors to accumulate.
5. Making sense of financial reports
Profit and loss account: Summarises income and expenses over a period and indicates whether the business has made a profit or loss.
Balance sheet: Shows assets, liabilities and equity at a particular date.
Cash-flow information: Helps explain cash received and paid, and whether the business can meet upcoming commitments. A formal cash-flow statement is not necessary for every small business.
6. Common bookkeeping pitfalls
The risk: Missing receipts, duplicate entries, unreconciled bank accounts and incorrectly classified payments can distort results and create difficulties when preparing tax returns or accounts.
What to do: Use a consistent filing process, reconcile regularly, check unusual transactions and review the reports. Keep records for the applicable statutory retention period; this varies with business type and tax obligations.
For more information about why supporting records matter, read our FAQ: Why does my accountant keep asking me for information?.
How an accountant can help
An accountant can help you choose and set up a bookkeeping system, review records, explain reports and identify tax and reporting requirements relevant to your business. Johnson Accountants supports UK small businesses with bookkeeping, accounting and tax compliance.
If you would like help organising your bookkeeping or understanding your business finances, you can book a meeting with Johnson Accountants Limited to discuss your requirements.
This article provides general information and is not a substitute for advice based on your circumstances.
