Sep 26, 2019
Bookkeeping is the maintaining of formal records of income and expenditure for a business. It is a vital part of day-to-day commercial procedures.
If there is no formal list of monies paid into a company bank account and monies paid out, and what for, the company can head into serious trouble quite quickly.
Professional and consistent bookkeeping lets a business do two things:
1. The business manager can make sure the company is actually making a net profit on a day-to-day, week-to-week and month-to-month basis and not slowly going bankrupt;
2. End-of-year financial accounts can be compiled for taxation purposes.
The opposite of this is a clever businessman keeping an intuitive running total in his head, giving his receipts to his unqualified secretary and then taking a box of them to his accountant towards the end of the financial year. That is not efficient, to say the least.
What do bookkeepers do?
- Keep an eye on cashflow;
- Manage the accounts payable and receivable ledger;
- Prepare invoices;
- Send invoices to clients;
- Prepare the books for the accountant.
Limited company directors can be fined £3,000, or even disqualified, for not keeping proper business records. These should be kept for a minimum of 6 years from the end of the last company financial year.
Sole traders must keep paperwork for at least 5 years after the 31st January tax submission deadline.
→ Got a query? Email us
Here are some ‘books’ that you need to keep:
1. Sales Invoice File
You store invoices in chronological order, electronically.
2. Purchase Invoice File
Again, you file them in chronological order. This is logical and keeps the bill from your own accountantdown.
3. Cash Book
This lists the payments into and out of your bank account, and any cash payments, if applicable.
4. Sales Returns
This is where the credit notes for the return of goods by customers are posted.
5. Purchases Returns
This is where the credit notes for the return of goods to suppliers are posted.
6. Discounts Received
This is key to help you keep a log of any discounts received by suppliers.
7. Discounts Allowed
This is where you log discounts given to credit customers.
How you can help your bookkeeper:
- Send an invoice (keep a record) for everything you sell.
The temptation for the pseudo-clever small businessman is to hide his income. This is illegal and can easily end up being more trouble than it’s worth. Telling lies makes life complicated. The owner of a genuinely profitable business doesn’t have to do that. The owner of a very profitable business finds it more trouble than it’s worth.
- Keep a receipt for everything you buy.
HMRC could potentially ask to see your accounts. Your accountant will demand that you keep receipts and records of your transactions.
Anything that can be legitimately listed as a business expense can keep your tax bill down. ‘A penny saved is a penny earned’ becomes very apparent when your tax bill comes down a further 10% because your accountant has discovered even more legitimate expenses from your carefully-ordered records.
- Keep your business and personal expenses separate.
You'll pay more to your accountant to untangle the mess you cause if you use a personal bank account for your business expenses and vice versa.
Is that laptop you bought genuinely for the company or just for your own personal use? If you use your personal bank account for the transaction, who can tell who’s buying it; you or the company?
Is that £20k you received from ‘J. Arthur Banks’ a payment to your business, or a present from a dear friend?
You mess up your personal taxes as well as your company’s if you don’t have a separate business bank account.
- Regularly check business bank account statements.
Rejoice in your income and keep a wary eye on outgoings. Was that payment to Ace Foods on the 23rd a genuine duplicate purchase, or just sloppy invoice checking by your secretary?
- Maintain your books accurately and regularly.
Doing them at the last minute is a big pain and can lead to costly errors.
- Hire a bookkeeper when it becomes more than you can handle.
You don’t need a full-time bookkeeper in the early days. If the paperwork is wearing you down and getting in the way of your actually doing business, hire a bookkeeper on a part-time basis.
If you have been keeping good records yourself, their job will be easier, and thus quicker, and thus you won’t have to pay them so much.
Revenue, Expenses, Costs
Revenue is all the income a business receives in selling its goods.
Expenses are all the monies spent running the company that are not specifically related to goods being sold.
Costs is all the money a business spends to buy or manufacture that which it sells to others.
You need to keep:
- Sales and purchase invoices;
- Cheque book stubs;
- VAT information (if you are registered for VAT);
- Staff wage-slips;
- Credit notes,
- Remittance advice notes;
- Fuel receipts;
- Business expense receipts;
- Bank statements.
Having adequate bookkeeping systems helps you:
- Monitor cash flow;
- Keep track of debts;
- Keep track of credit;
- Process sales invoices;
- Prepare VAT returns;
- Process expenses;
- Prepare profit and loss accounts;
- Prepare balance sheets;
- Prepare reports;
- Anticipate when to pay suppliers;
- With bank reconciliations;
- Process petty cash reconciliations;
- Pay wages;
- Forecast your financial future.
Here are some popular software programs which let you and your accountant do bookkeeping electronically. Find out which he uses, get it and you can help him do your accounts much more quickly, thus saving you money.
Dedicated accounting software:
- Microsoft Excel;
- OpenOffice (Freeware, which includes a spreadsheet package called Calc).
A company that does not monitor income and expenditure may face serious difficulties at month-end or year-end. Only businesses that have high income and low relative expenditure, like casinos, can afford a buccaneering attitude when it comes to bookkeeping.
Badly kept books mean that you will spend a lot of time resolving payment disputes and scratching your head over the latest tax demand. Accounting is pretty low on the list of exciting things a startup does, but making money is pretty much the main reason to go into business in the first place.
Step 1 is to make a net profit. Step 2 is to manage the consequences.
A CEO that keeps a close eye on overheads and boosts cash reserves in times of plenty can easily weather a recession that puts his less careful competitors out of business.
→ Need accounting help? Email us some details