Basic Bookkeeping for Your Small Business
We look at how to set up a bookkeeping system in your firm that will help you manage cashflow and avoid any issues with the tax man
As a small business owner, it can be tempting to dispense with time-consuming bookkeeping, and work on an ad-hoc basis to save time. However, this will almost inevitably turn into a complicated, confusing nightmare in the future as receipts are lost, invoices go unpaid, and the taxman wonders where all the money went.
This article breaks down the basics of a good bookkeeping system, and should be a useful starting point for business owners looking to get their accounts in order.
What do I need for a simple bookkeeping system?
Essentially, a good bookkeeping system will record all the money coming into and out of your business. This is useful for a business owner as they have to keep on top of costs and provide the HMRC with proper records.
In particular, a good bookkeeping system will include records of sales, purchases, bank account activity, records of petty cash payments and a cash book.
How you record sales depends on the kind of business you run. Companies that take cash, such as retailers and restaurants, will use till rolls and point-of-sale (PoS) systems. Business-to-business (B2B) firms will generally use non-cash payments, and should issue and make copies of invoices for every sale. Sales invoices should be split into a paid and unpaid section. Just as with sales, you should record all your business’ outgoings and enter them into your accounts system.
In regards to monitoring your banking, then a separate business bank account is essential. Monthly bank statements should suffice for record-keeping purposes. Also day-to-day business expenses (petty cash) can pile up, and shouldn’t be ignored. Keep receipts for all petty cash purchases and put them in a petty cash box.
Finally, create a Cash Book as this will provide a summary of the above information in a single place. Accounting software will produce one of these automatically.
How to keep track of sales
After each sale, issue invoices or receipts for every transaction and assign an individual number to each invoice, and always produce copies. Put unpaid invoices in a separate folder, with the most recent debtors on top – you can then work from the bottom up when chasing up late payers.
Make sure to always record how an invoice was paid. Use the paying-in book provided by your bank to put the payments in your bank account if necessary. On paid invoices, write ‘paid’ plus the date on the first sheet, and file it in your Sales Paid folder.
Finally, update your Cash Book or accounting software regularly. This should ideally be done once a week or less.
How to keep track of non-sales income
Sometimes, you will receive business income that doesn’t take the form of sales; these might be anything from loans and grants to cash rebates.
Just deal with these non-standard transactions by entering them separately into your accounting software or updating your Cash Book.
How to keep track of purchases
Always ask for an invoice or receipt. If you didn’t receive one, make sure you manually enter the details in your accounts. Make copies of invoices and receipts you did receive, and enter the details in your accounts. And separate bills and invoices into Paid and Unpaid folders.
Create records when you pay a bill. Make sure you note down the date, supplier and amount paid. When paid, take the invoice from your Unpaid folder and place it in your Paid folder. Also, make sure to update your Cash Book or accounting software regularly. Again, double check the amounts are correct when doing this.
How to keep track of petty cash expenditure
Left unchecked petty cash can cause a major headache for you and the taxman so make sure to keep on top of it.
For instance, try to always pay petty cash out of your own pocket – if possible, use your own money initially. You can pay yourself back later, and it avoids the confusing knock-on effect lots of petty cash purchases can make on your accounts. You can use personal credit cards in much the same way.
Make sure to insist on a receipt and write down any additional details of the purchase (like what it was used for) on the receipt. Keep receipts in a Petty Cash file and total up receipts at the end of every month. You can then pay yourself back from the total amount.
File the receipts in your Purchases Paid folder and enter the details in your Cash Book or accounting software.
Managing your business bank account
Your bank account should mirror your Cash Book after you have accounted for the differences. Take into account your direct debit, BACs, standing orders, and bank charges – these will not yet be recorded in the Cash Book, so enter the details manually and make sure the amounts tally up.
Also don’t forget about cheques. Both cheques paid in and cheques paid out will take a few days to show up on the bank statement.
Rectify the differences between your Cash Book and bank statement by working out your adjusted bank balance. This is what your bank balance would look like if all the money and cheques paid in and out were shown on the bank statement.
Finally write down the adjusted bank balance for the start of the month, then add it to the total sales and other income for the next month from your Cash Book. Do the same for purchases and expenditures. This figure should now reflect your adjusted bank balance for the end of the month.
What changes do I need to make if my business is registered for VAT?
If your company is registered for VAT, you will need to perform a couple of additional tasks when bookkeeping.
Firstly you need to issue VAT invoices for sales, and enter VAT details in a separate column in your Cash Book. You also need to have a VAT invoice for all purchases. You can work out the VAT paid on purchases of standard-rated goods by multiplying the purchase price by 1/6. Again, enter the VAT in a separate column in the Cash Book, enter the total under ‘total’, and enter the total minus VAT in the individual column (for example, IT equipment).
What do I need to know as a cash business?
Many consumer-facing businesses like restaurants and shops deal with cash on a daily basis. If this applies to you, it is vital to take extra care, as it is easy to lose track of what is going on with cash and the taxman will always be more wary of cash businesses.
To minimise issues, you should keep hold off till rolls and electronic point-of-sale (ePOS) cash summaries. Use them in much the same way as sales invoices when bookkeeping.
Also, keep a record of all money going into and out of the till. Check this regularly to see if it tallies up with the actual cash you have.
Though managing your outgoings in such a detailed and daily basis may seem like a lot of effort, it will save you time in the future and will be vital to keeping your cashflow on track. I For more information on bookkeeping and cashflow, check out our sister site Startups.co.uk’s designated section here.