Starter guide to bookkeeping for small businesses

YOU ARE READING: Starter guide to bookkeeping for small businesses | unbiased.co.uk AT PhebinhvanhocEN

Updated September 13, 2022

4 minutes of reading

You are reading: How to start keeping books for a small business

Accounting for a small business is a vital function if you want your finances to make sense. Initially, the bookkeeper may be you, but as your business grows, you may no longer have time to spare.

Whether you plan to handle the position yourself or hire someone to help you, this brief introduction will help you understand the basics of accounting and why it’s so important to a successful business.

what is the difference between bookkeeping and accounting?

Bookkeeping and accounting are often confused. In fact, bookkeeping is a small but vital part of the overall accounting function. accounting is the process of recording and reporting financial information, while bookkeeping is the process of using such data to establish the financial position of the business and make decisions about how finances are managed.

in short:

accounting= the recording and reporting of financial information

accounting = analyze financial information and create a financial strategy

what does accounting entail?

Accounting is managing the day-to-day finances of a business. includes:

make payments (e.g. invoices)
track payments from customers and clients
make sure your business pays the correct amount of tax
claim taxes for your business (eg expenses)
manage payroll to pay your staff and hmrc correctly

Accounting tracks payments into and out of the business using three financial records:

cash book: records your cash flow (everything that goes in and out of your company account)

Bill of Sale: Records what you have sold, including paid and unpaid invoices.

purchase invoice: records what you have purchased (including services) and how you have paid for each purchase.

Generally, these are the minimum records (“books”) you will keep; there will probably be more. Keeping accurate books is important for financial reporting and vital if your business is facing an audit.

8 accounting tips for small businesses

The following tips will help you get started with accounting for your small business.

1. keep records of each payment

Use your ledgers to keep track of each payment and make it clear when it was made or received so you can easily find it if you need to refer to it later.

2. choose an accounting method

Your accounting will support your accounting, so decide up front which method you’ll use. Traditional accounting records income and expenses as of the date of the invoice. cash accounting records them on the date you actually receive or pay the money. cash accounting reduces the risk of having to pay tax on money you haven’t yet received, but is only available if your turnover is £83,000 or less.

3. be strict with deadlines

Never make late payments (especially to hmrc) and give your clients a payment due date so you can pursue them effectively. take note of defaulters and consider not working with them if they continue to default. this is called credit control and the goal is to maintain a healthy cash flow.

4. track expenses

You can claim a tax refund on many business expenses to reduce your overhead. You’ll need receipts to substantiate your hmrc claims, so keep them in a safe place and organized into different business categories.

Be sure to keep business expenses separate from personal ones, so you can easily identify which ones can be claimed against earnings for tax relief.

5. file bank statements and invoices in order

Or, don’t waste your bookkeeper’s time and money. make sure all bank statements and invoices (purchase and sale) are present, correct, and in date order. Otherwise, you’ll be paying your bookkeeper for the time it takes to find and sort these documents, when it’s easy to do yourself. What’s worse, if the documents are lost, you could end up facing a late filing penalty.

For purchase invoices (ie, money you owe), keep separate files for paid and unpaid invoices, and file both alphabetically by vendor name. always remember to move bills once you’ve paid them.

for bills of sale (i.e. money owed to you), number them sequentially in order of when they are due, so you can track them effectively.

6. choose the right software

you may not need specialized accounting software; You can do it with Microsoft Excel or its free software equivalents. however, as your needs grow, you may want a more specialized package. ask your accountant what software they recommend.

7. produce monthly reports

Generating reports at least once a month is the surest way to stay on top of your company’s finances and make sure you don’t get any nasty surprises. Your monthly reports should include a profit and loss statement and balance sheet, at a minimum. now you have continuous feedback on how your business is performing.

8. know when to outsource your accounting

If your business starts out small, it may make sense to handle the accounting yourself. As you get older, keep track of how much time each week you spend on books. Calculate the monetary value of your own time (for example, how much you generate for the business per hour) and compare it to the cost of a bookkeeper. It may take a professional bookkeeper only a couple of hours to handle a month’s accounts, so it won’t be long before this is a better value.

Which is more important right now, the bookkeeper or the accountant?

For a small business, finding a bookkeeper may initially be more urgent than finding an accountant. however, in most cases it is not an either/or decision. If you outsource your accounting function, bookkeeping and payroll can usually be included as part of the service. having a comprehensive finance function can put your mind at ease, save you time, and allow your business to grow as fast as you want.

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Starter guide to bookkeeping for small businesses | unbiased.co.uk