What is Bookkeeping? A Small Business Bookkeeping guide

Bookkeeping is the name given to the process of recording all financial transactions carried out by a business.

The job of a bookkeeper is to record, group, and arrange every financial transaction made during each tax year.

It’s important to note that bookkeeping and accounting are different with accountants using bookkeeping records to prepare accounts, tax year end accounting statements and applicable tax returns under self assessment.

The way a bookkeeper works and produces bookkeeping records all depends on the size and nature of the business.

Small businesses’ may use a straightforward single entry bookkeeping system that records each financial transaction individually or double entry bookkeeping could be used for businesses with more detailed accounting requirements.

What does a Small Business Bookkeeper do?

Describing a bookkeepers responsibilities can be done by separating the fundamentals into four key stages:

• The initial step is to analyse financial transactions and assign them to specific accounts.
• Afterward, original journal entries are made to credit and debit the appropriate accounts.
• The next step is to post the entries to ledger accounts.
• And finally at the end of each accounting period adjustments are made.

The process of bookkeeping is based on two key accounting principles:

• The first principle is that every debit entry must have an equal credit entry.
• The second principle is that all accounts must balance which stems from the first principle.

Why is Bookkeeping so important?

Bookkeeping is at the core of producing accurate tax and other financial records.

If your bookkeeping isn’t up to scratch what you submit to HMRC might not be compliant which can increase the risk of HMRC penalties for inaccuracy.

It’s not all about tax with bookkeeping records being an ideal source of information to support you in making business decisions about things like budgets and assessing your businesses overall financial performance.

What records do I need for Bookkeeping?

At a minimum you should maintain records of sales invoices and purchase invoices. These documents provide the needed information about income generated from sales transactions and expenses incurred through purchases.

Sales invoices reflecting revenue from goods or services sold:

Your sales invoices are vital as they detail the revenue your business generates from selling goods or services.

Ensure that each invoice includes details such as the date, description of products or services sold, quantity, price per unit, total amount due, VAT (if applicable) and payment terms.

Purchase invoices detailing costs associated with running your business:

Purchase invoices record all costs associated with running your small business. This includes expenses like inventory purchases, shipping/postal fees, digital marketing costs, office supplies etc.

Your purchase invoices should show:

• Date: The date the purchase was made. For better tracking of cash flow you can record the date when an expense was incurred and paid for (if different).
• Description: Provide a clear description of what each expense represents to avoid confusion during audits or reviews later on.
• VAT (Value Added Tax): If applicable make sure purchase invoices include the VAT amount for each purchase.

Organise your financial documents efficiently

Keeping your financial documents organised is crucial for efficient bookkeeping and can save both time and money spent on bookkeepers’ fees.

By sorting all bank statements, receipts, and invoices in chronological order you’ll have easy access to essential information when you need it.

Having your accouting records readily available is useful for many reasons including an HMRC enquiry into your tax return or if you need to apply for a business loan.

You can start by creating separate folders for each month or quarter depending on the volume of transactions within your business.

Within these folders you can store sales invoices, purchase invoices, bank statements and any other relevant paperwork in sequential order based on their dates.

A further breakdown can be made at the end of each financial year by storing your folders in tax year order.

Bookkeeping and managing cash flow

Cash flow management is crucial for any small business and it can determine how you meet obligations such as payroll and supplier payments.

Accurate bookkeeping allows for a clearer understanding of your cash flow which can help you predict and prevent future cash flow issues.

By monitoring your cash flow regularly through proper record keeping practices you can anticipate potential issues before they become critical problems.

Timely payment management

Managing timely payments is crucial for maintaining good relationships with suppliers and clients. It promotes smooth processes so you can avoid cash flow and other potential issues that may arise from late or missed transactions.

Payment of work done:

Getting paid on time is important for cash flow and so you don’t have to waste time following up unpaid invoices.

By setting up clear payment terms with clients from the beginning of your business relationship is a good idea to avoid confusion from both sides.

Implementing an invoicing system that sends out automated reminders when a payment deadline approaches is one way of encouraging clients to pay on time.

Payments to your suppliers:

Maintaining a good relationship with your suppliers is vital in ensuring an uninterrupted supply of goods or services required for running your business.

Making timely payments to your suppliers should be a priority and scheduling regular reviews of outstanding balances and setting up automatic bill pay options are recommended.

Incorporating these payment management practices into your small business bookkeeping process will not only help maintain healthy financials but also contribute towards building strong long lasting professional relationships.

Making business decisions based on accurate financial data

Making well informed decisions to sustain profititabilty or drive growth are critical elements of running an effective business that’s going to last for as long as you want it to.

To make those big business decisions you need to know that you are basing them on financial data that you can trust.

Your bookkeeping records can be used to provide you with the up to date financial data you (or your financial adviser) need to analyse your businesses performance objectively.

Does the type of Accounting method effect Bookkeeping?

If you’re planning to do bookkeeping for your business it’s crucial to determine the type of accounting you’ll be using before you start.

There are two main accounting styles: Cash and Accrual accounting.

Each method has its own advantages and disadvantages with the accounting method chosen determining  the type of bookkeeping your business will need.

Cash accounting uses single entry bookkeeping and accrual accounting the double entry bookkeeping method.

What is Single Entry Bookkeeping?

Single entry bookkeeping is a simple method in which a transaction is recorded against only one category, either income or expense.

In single entry bookkeeping a transaction is recorded when cash changes hands in comparison to double entry bookkeeping which records purchases or sales as soon as they occur regardless of when the actual cash exchange takes place.

If you are using cash accounting the single entry bookkeeping system is normally operated which uses a cash book to track incoming and outgoing transactions.

The single entry bookkeeping approach is generally used by smaller businesses and is often seen as the most straightforward way to maintain HMRC compliant financial records.

You can switch over to accrual accounting at a future date if your business grows or you just want to take advantage of some of the benefits accrual accounting can bring.

What is Double Entry Bookkeeping?

Double entry bookkeeping is a system of recording financial transactions which involves keeping a record of every transaction in at least two accounts as either a debit or credit.

It’s the choice of businesses using accrual accounting and requires that the total amount of debits must always be equal to the total amount of credits.

The more advanced nature of double entry bookkeeping means that more financial information is created which can help create more in depth reports for reasons like performance tracking.

Using double entry bookkeeping can also make it easier to highlight any errors because of the fact that all debits and credits must be the same.

If the debit and credit entries aren’t the same and don’t balance an error is highlighted which can then be corrected at the earliest opportunity.

Bookkeeping Software for a small business

Using bookkeeping software is a great way of maintaining your tax records inexpensively and in a format that meets HMRC expectations.

If you are doing your own bookkeeping in house choosing the right software is vital to make sure your bookkeeping records are accurate and taking the minimum amount of time possible to manage.

Finding the best software for your business will depend on a number of factors like the size of your business whether your use cash or accrual accounting and the cost of the bookkeeping software.

Should I use Small Business Bookkeeping Service?

For a small business hiring a bookkeeper can make sense for a number of reasons starting with freeing up some of your time.

When you’re not involved organising your own books you can devote more time and effort to the core activities of your business.

Other benefits of using a Bookkeeping service include:

• Bookkeepers have the expertise in managing financial records which naturally reduces the risk of errors and mistakes which could cost you in the future.
• Outsourcing your bookkeeping can bring cost savings because you don’t have to employ people in house (which also means you avoid employee work related issues).
• Keeping your accounting records compliant with making tax digital requirements.
• Ideas on how you can effectively manage your budget and operations.

There’s a number of different options when it comes to choosing a small business bookkeeper with accountants, freelancers and agencies all offering packages that can take care of your businesses accounts.

How do I find a Bookkeeper near me?

If you’re looking for a bookkeeper for your business there are a few things you should keep in mind.

• Firstly focus on what your specific needs are concentrating on things like the experience a bookkeeper may have in handling the accounts of similar businesses.
• Secondly your bookkeeper will have access to sensitive financial information so it’s important that they can demonstrate to you that the correct data protection protocols will be followed.
• Thirdly the cost – employing a bookkeeper can differ depending on their proficiency and the exact tasks they will take care of. Do a bit of online research of local market prices or ask around fellow business owners if you need to compare.