Knowledge

What is bookkeeping and why does it matter?

Posted on Jul 25th, 2018 | Get paid

What is bookkeeping and why does it matter?, image of man doing bookkeeping

We all have our own systems for keeping on top of our personal bookkeeping. Some of us are super organised, using budgeting apps and filing systems, whereas others simply hope for the best.

Like it or loathe it though, bookkeeping is essential, all businesses need to keep track of their income and expenses and if you don’t keep on top of your cash flow then sooner or later things will get tricky.

Downloadable Bookkeeping guide

Our essential business guide to bookkeeping features top tips on how you can manage your bookkeeping, from understanding the basics to how technology can streamline and simplify the whole process.

If you don’t have time to read our tips in this article right now, you can download and keep our Bookkeeping Guide and come back to it in your own time.

What is bookkeeping?

Bookkeeping is the art of recording your financial information so that it’s easy to see what money is coming in and what you’re spending.

In order for your business to be successful, you need to be balancing the books every single month, otherwise, you might struggle with paying for things like stock, suppliers and even your taxes.

It’s a good habit you really want to be getting into from the very beginning of running your own business.

Why is bookkeeping important?

You won’t be able to run your business for very long without sound knowledge of your finances.

There’s a number of different taxes small businesses need to pay throughout the year, and bookkeeping means you can correctly calculate how much they’ll be. This helps you prepare for the financial year ahead and allows you to think about what your next moves are, whether that’s growing your business or setting up a limited company.

Anyone who is self-employed needs to file a yearly Self Assessment. This is used to declare your earnings and other income to HMRC and calculate how much you’ll need to pay in National Insurance and Income Tax. In order to do this effectively, and for things like filing early (which has many benefits), your bookkeeping must be organised.

If you have an accountant, they’ll still need you to keep on top of your bookkeeping such as getting your invoices out and recording your expenses, as they simply can’t do their job without knowing your income and outgoings.

Some accountants will need you to record everything using online accounting software (or Microsoft Excel if they’re old-fashioned), others will take care of your bookkeeping for you (at Crunch we can do either).

When your bookkeeping is in good shape, your accountant can help you with things like making tax-efficient decisions such as how much to pay yourself, what business structure is right for you and whether you should register for VAT.

It’s also worth remembering that if you dream of expanding your business, you’ll need to be able to prove its profitability to investors, new partners, and banks. Good bookkeeping practices can help you with this.

Finally, the government is implementing the first stage of its ‘Making Tax Digital’ agenda from April 2019. This means you will need to submit information about the VAT you pay and collect to HMRC digitally and in real time using “MTD compatible” software.

As Making Tax Digital is fully rolled out, you’ll need to arrange all your tax accounting online.

What are good bookkeeping practices?

Start your bookkeeping early

A quick few minutes every day, or a designated time slot each week represents good bookkeeping practice. Failure to sort it out in a timely fashion could result in you paying more tax than necessary, or even worse, being penalised for submitting a late or incorrect return.

Keep your work accounts separate from your personal ones

Open and maintain a business bank account and save yourself the bother of rummaging through all your receipts, trying to work out which of your purchases were ‘wholly and exclusively’ for business purposes.

Use debit or credit card for transactions so they are recorded

This will make it much easier to keep track of the amount spent, where it was spent and when it was spent, making recording your expenses much easier.

Bear in mind that in some cases it might be sensible to use a personal card. For example, if you get the bus every day and pay for it personally, you can add up the total and then claim this as a business expense once per month, whereas paying with the company card means adding a separate record for every payment.

Update your records from anywhere with digital bookkeeping software

Even if you don’t use a complete online accounting package like Crunch, using a free cloud service like Google Sheets will mean you can access your spreadsheets from anywhere. The built-in data processing can help you avoid those tricky maths problems.

Always keep your receipts

Make sure you retain evidence of all your expenses in case HMRC want to investigate your business.

If you’re a Crunch client recording your expenses on the move, the ‘Snap’ app automatically captures receipt data and records it in your account. Everyone gets 15 free scans per month, or you can upgrade to unlimited scans for £5.50 per month.

But again, if you’re not a Crunch client then apps like Expensify or even simply taking a picture of a receipt with your phone and uploading to free online storage like Google Drive or Dropbox will be better than a jumble of fading receipts in a shoe box!

Make sure you’ve saved enough

Completing a last-minute tax return only to discover you don’t have enough cash to cover your liability, or that you hadn’t realised you needed to make a payment on account, is a classic newbie error, and one that can be easily avoided by diverting a percentage of every invoice payment you receive into a savings account across the tax year.

Get an accountant

It makes sense to consider appointing an accountant the moment the toiling over your paperwork costs you business or takes up too much of your time. By putting an expert in charge, you’re freeing yourself up to run your business how you imagined it would be without all the complicated number crunching getting in the way.

Need more help with bookkeeping?

As mentioned at the top of this article, our essential business guide to bookkeeping elaborates on these top tips.

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Written by Tom West

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