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Self-Employed Bookkeeping: The Ultimate Guide

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If you’re new to the world of business ownership and/or self-employed bookkeeping, then the idea of recording your every working transaction probably doesn’t fill you with excitement and joy.

More likely it can seem like yet another complicated and daunting task. Effective bookkeeping does take time, effort and some initial self-education to learn how to do. 

However, once you get to grips with it, bookkeeping can provide self-employed business owners with valuable oversight of their finances. And a solid foundation for informed business decisions and financial stability. 

Furthermore, it's a legal requirement, so you may as well embrace it as a new skill. That with the right approach, can be a powerful tool for success.

In this guide we’ll tell you all you need to know about the basics of bookkeeping for self-employed professionals, to make it as straightforward and productive as possible. 

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Understanding Bookkeeping

Before we begin discussing the fundamental principles and actions involved with best practice of self-employed bookkeeping, let's clarify exactly what this essential business finance task is and how it fits into the wider spectrum of accountancy.

What is Bookkeeping?

Put simply, bookkeeping is the systematic recording of financial transactions. A cornerstone of maintaining a healthy business. 

It involves tracking income, expenses, invoices, and payments, ensuring a clear financial picture of your business operations.

In the past this was done by hand, and on paper. Some business and self-employed individuals still keep paper records as a back up, but nowadays this is more or less always done using bookkeeping software.

Differences Between Bookkeeping and Accounting

It’s important to distinguish bookkeeping from accounting, which interprets and analyses financial data provided by bookkeeping.  

An accountant is more focused on finding tax-savings and obtaining revenue via tax-reliefs/rebates. And preparing financial statements, filing tax returns and dealing with HMRC regarding any tax issues. 

They make a more comprehensive assessment of all your business finances and suggest strategies for optimisation and business development.

Typically an accountant and a bookkeeper will work in partnership - the bookkeeper lays the groundwork for accurate financial reporting.

Setting Up Your Bookkeeping System: Single or Double-entry?

The first basic step in setting up bookkeeping for your business is to select which system you will use. There are two main systems to choose from: single-entry and double-entry.

Each has its pros and cons, and appropriate use depending on the nature of your business. We can understand the implications by examining the advantages and disadvantages of each method in detail.

Single-entry bookkeeping vs double-entry bookkeeping

The primary distinction between single and double-entry bookkeeping lies in the frequency of transaction recording. 

In single single-entry bookkeeping, each business transaction is recorded one single time. Conversely, double entry bookkeeping necessitates that every transaction is entered twice: as a debit in one account and a credit in another.

Although this seems like a minor variance, it significantly influences how businesses manage their financial records. 

Single-entry example (only one side of a transaction is recorded): 

  • If you spend £180 on supplies this month with your credit card, only your expenses account would reflect an increase of £180.

Double entry example (both sides of a transaction are recorded):

  • If you purchased supplies using your credit card, then your cash account would be reduced by £180, while your expenses account would simultaneously rise by £180.

Which is better? 

Single-entry bookkeeping system is tailored for businesses with straightforward or minimal transactions. Traditionally, this method is not employed by businesses dealing with accounts receivable, accounts payable, or numerous capital transactions.

Double-entry bookkeeping systems cater to businesses engaging in multifaceted transactions on a regular basis. Firms that garner revenue via accounts receivable and procure merchandise and inventory on credit find this approach more fitting.

  • The single-entry method is quicker and more straightforward, and good for small businesses, but can be prone to errors.
  • The  double-entry method is more accurate and provides traceability for transactions. However, due to being more complex, realistically it needs to be done by a professional accountant. 

Whichever system you choose we recommend using online self employed bookkeeping software, which is included in Crunch’s Limited Company Plans, or available as an add-on and single service for sole traders. As the task of bookkeeping is most definitely best done digitally - it’s much faster, more efficient, accurate and secure. 

Bookkeeping Basics for the Self-Employed

Once you have chosen a bookkeeping system and have software set up you’re ready to begin keeping transaction records. Here’s the key points on what’s involved in its practical application:

Recording Income:

Track All Income Sources - Document every source of income, whether from client payments, sales, or services. Use a dedicated business account to simplify this process.

Issue Invoices Promptly - For services rendered, issue invoices immediately. Include all relevant details (date, services, payment terms) to ensure clarity for both parties.

Log Income Regularly - Enter income into your bookkeeping system as soon as payment is received. This could be daily, weekly, or monthly, depending on the volume of transactions.

Managing expenses and invoices: 

Invoicing and Payment Tracking - Craft clear, detailed invoices including payment terms to ensure timely remittance. Use digital tools for tracking payments and follow up promptly on overdue accounts to maintain steady cash flow.

(Download all kinds of free professional invoice templates for Sole Traders and Limited Companies here.)

Categorise Expenses - Begin by establishing clear categories for your expenses. Common categories include office supplies, software subscriptions, travel expenses, marketing costs, and home office expenses. This categorisation simplifies the tracking process and is crucial for tax purposes.

Keep Detailed Records -  Maintain detailed records of all expenses, including receipts, invoices, and bank statements. This documentation is essential for accurate tax filing and can be invaluable in the event of an audit.

Understanding Taxes and Deductions

For good self-employed bookkeeping it’s important to understand the basics of self-employment taxes and deductions. Including estimated tax payments and how to calculate them.

Deductible expenses can significantly reduce taxable income, and familiarising yourself with them will help you make accurate entries into your books.  Deductions range from home office costs, health insurance and business supplies to travel expenses and professional development fees. 

Tax administration is usually done by an accountant, as it’s part of broader financial management. Working with a tax professional can provide tailored advice, ensuring you make the most of your tax situation.

Regular Bookkeeping Practices

A monthly checklist can streamline this process, ensuring all financial activities are accurately recorded and reviewed. Here’s one you can follow:

1. Reconcile Bank Accounts - Verify that your bank statements match your bookkeeping records.

2. Record Transactions - Log all income and expenses, ensuring each is categorised correctly.

3. Invoice Clients - Send out invoices and follow up on outstanding payments.

4. Review Receivables - Check for any overdue invoices and take action as needed.

5. Pay Bills - Settle all due bills to avoid late fees and maintain good vendor relationships.

6. Expense Tracking - Review and categorise business expenses, keeping receipts organised.

7. Prepare Financial Statements - Generate profit and loss statements to assess monthly performance.

8. Tax Planning - Set aside funds for taxes based on current earnings and expenses.

9. Budget Review - Compare actual spending against your budget and adjust as necessary.

*10. Prepare for Year-End and Tax Season -  This involves summarising the year's financial activities, organising records for tax filing, and evaluating the business's financial health. So allow sufficient time for closing the books to reduce stress and last-minute rushes.

Bookkeeping for a Better Business

As you can see, self-employed bookkeeping is a critical part of your finance management. It’s something that freelancers, contractors and small business owners need to understand. 

When your bookkeeping process is functioning efficiently, you will have instant insight into your financial status and possess a clear strategy for making decisions.

Which in turn will enable you to communicate effectively and professionally with others, and bolster your self-assurance as a business proprietor.

Maintaining good bookkeeping practices is a must for any serious business owner. And the essential underlying practice of healthy business finances.

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James Waller
Content Specialist
Updated on
February 15, 2024

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