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A business owner's guide to bookkeeping

July 27, 2022
As a small business owner, you’ll know that organisation is essential. From tracking orders and invoices to filing tax returns and paying tax bills on time, knowing what’s happening with your business finances is an essential part of building a successful business.To make sure you’re on top of your record keeping, you’ll need to have a good bookkeeping system in place. Whether that’s jotting everything down in a ledger or scanning it into a secure accounting software, having an accurate and up-to-date record of your business transactions can save you a lot of trouble with your tax and accounting obligations further down the line.But what exactly is bookkeeping? We’ll be defining what bookkeeping is, what is consists of and the different ways you can take care of your small business bookkeeping.

What is bookkeeping?

💡Bookkeeping is the process of recording, storing and tracking the financial information and transactions of a business on a day-to-day basis.💡Once the data has been collected and collated, it’s then used to create reports that are used by business owners to carry out obligations and make business decisions. This can be anything from filing their annual Self Assessment, to deciding where to allocate resources.With this is mind, ensuring records are accurate and up-to-date is essential. Incomplete or incorrect information could create erroneous reports that lead to bad business decisions and cash flow problems further down the line.While bookkeeping is necessary, it doesn’t have to be difficult. Once you have a firm grasp of your bookkeeping obligations and the different approaches you can take to meet them, you’ll have no trouble taking bookkeeping from burden to breeze.

How does bookkeeping differ from accounting?

Bookkeeping and accounting have a lot in common, so it’s unsurprising that the differences between the two aren’t always clear. With this in mind, it’s better to think of bookkeeping and accounting as working towards a common goal at different stages of the same cycle, as opposed to two completely different job roles.As mentioned above, bookkeeping focuses on the transactional and administrative part of the financial cycle, such as tracking transactions, compiling receipts and invoices, and transforming the business’s financial information into legible reports.Once compiled, these reports then become central to the accounting stage of the financial cycle. Where bookkeeping gathers, records and organises a business’s finances, accounting analyses this data to provide insights into the business’s financial health, helping business owners to make decisions that enable them to meet their obligations as a business owner without disrupting their cash flow.Occasionally bookkeepers will take on accountant responsibilities, but for the sake of simplicity the key differences between bookkeeping and accounting are as follows:
Record financial statements and categorise transactionsPrepare adjusting entries
Send invoices and records transactionsAnalyse operation costs
Conduct bank reconciliations every monthMaking financial decisions based on data
Generate monthly financial statementsReview and analyse financial statements
Process payrollAssess financial health to map financial forecasts
Prepare books for accounting analysisRun audits
Generate year-end financials and tax documentsFile tax returns, conduct tax planning and provide tax advice

Bookkeeping tasks

Bookkeeping is comprised of the following tasks:
    Recording financial transactionsConducting bank reconciliationsMonitoring asset depreciationPosting debits and creditsProducing invoicesPreparing financial statements, such as balance sheets, cash flow statements and income statementsMaintaining and balancing subsidiaries, general ledgers and historical accountsCompleting payroll
Before settling on the right bookkeeping solution for your business, we recommend first considering what you need from your bookkeeper to get the most accurate quote possible.
For example, with Ember you can auto-generate invoices and run payroll with ease, but you might want to work with one of our bookkeepers to conduct bank reconciliations and monitor asset depreciation on your behalf.

Why is bookkeeping important?

If you’ve just started your business, you might find keeping track of your business finances relatively straightforward. As a result, when it comes to meeting business obligations, such as filing your Self Assessment tax return, you have relatively few receipts and invoices to sift through and compile.However, if you don’t have a bookkeeping system in place, you might find it harder to keep to on top of your business’s income and expenses, which could cause problems for your cash flow further down the line. Missing receipts for expenses could mean missed opportunities for tax deductions, and unaccounted for invoices could land you in trouble with the taxman.Bookkeeping is also essential if you’re planning on making any big business decisions any time soon. For example, if you’re looking to move to a bigger office with a more expensive rent, an incorrect cash flow forecast could see you struggling to pay rent further down the line.In short, if you haven’t started bookkeeping yet, we strongly recommend getting into good habits now. Your future self will thank you for it.

What’s the difference between single-entry and double-entry bookkeeping?

As the names suggest, these two types of bookkeeping determine the number of entries made into a ledger — a document used to record sales and expenses — whenever a transaction takes place in the business.

Single-entry bookkeeping

Typically used by smaller businesses with few transactions, single-entry bookkeeping consists of recording one entry per transaction against either an income account or an expense account.This approach to bookkeeping is used in tandem with cash-basis accounting, a system that records incoming cash (revenue) and outgoing cash (expenses). Keep in mind that “cash” can include physical tenure, checks, credit card payments and electronic fund transfers, such as debit or wire transfers.

Double-entry bookkeeping

As your business grows, so will the number of transactions you’ll need to keep an eye on. To minimise the risk of missing anything, double-entry bookkeeping would be your best bet.Double-entry bookkeeping consists of creating two accounting entries — debits and credits — for each of your business transactions. This approach is based on the idea that when something is gained in a business, another thing has been given up.To demonstrate this, imagine you’ve spent £100 on office supplies. Since you’re £100 out of pocket after this transaction, you’ll record £100 against your credit in your liability account. However, you’ve also gained £100 worth of office supplies, meaning your asset account and total debit increases by £100 in assets.By accounting for both debits and credits, there’s a higher chance that you won’t miss anything off the books. To check everything is in order, you can conduct a bank reconciliation, where you match your debits to your credits, before comparing your financial records to your receipts. If something’s missing, you’re much more likely to notice and rectify the issue sooner than if you were to use single-entry bookkeeping.While double-entry bookkeeping, as the name suggests, typically involves recording two transactions, depending on the complexity of the transaction you may need to record more. This is to ensure that all the knock-on effects of any financial movements in your business are recorded, creating the most accurate picture of your business’s financial position.
For example, if you make a sale and are VAT registered, you’ll find you need to account for the increase in revenue, the decrease in stock and the tax liability on the VAT collected.

Double-entry bookkeeping also uses accrual accounting, which paints a more detailed picture of your business by taking 5 accounts into consideration: assets, liabilities, equities, revenue and expenses.
The former 3 accounts can be used to create balance sheets, which determine the value of a business by subtracting a company’s total liabilities — or things owed — from the total of its assets. Profitability can be worked out by subtracting business expenses from total revenue, and can be used to generate profit and loss statements.
To keep things simple, you can use a chart of accounts to quickly see how daily business activities affect the 5 main accounting buckets. Using accounting software — such as Ember — you can input a transaction, watch it categorise instantly and generate the relevant report when it’s needed.

How can I manage my bookkeeping?

While there’s nothing wrong with writing transactions out by hand, manually accounting for your incomings and outgoings may get a little tricky when your business starts to scale.There are, fortunately, a few alternatives that can make balancing the books a lot easier.

Using spreadsheets

If you’re not quite ready to abandon the manual approach, using spreadsheets might be the method for you.Whether it’s Excel or Google Sheets, using spreadsheets to do your bookkeeping means you can stay up to speed with your transactions and, with the right formulas, can easily manipulate the data to generate the charts that you can use in the accounting process.While this may be the cheapest option, the risks that come with manually doing your bookkeeping still apply to spreadsheets. You might find it difficult to keep up with inputting data, and a single mistake in one cell can completely skew your data. It also means you’ll still have to keep physical copies of your receipts in the instance that HM Revenue and Customs (HMRC) come to audit your business — and over time, things can get disorganised very quickly.

Good bookkeeping practices

That being said, if you’re a small business owner who doesn’t have a lot of transactions to worry about, there are a few bookkeeping tips to follow ensure your financial records are always accurate and up-to-date.
Start bookkeeping early
Rather than scrambling to backdate your records as deadlines for tax filings approach, start gathering and recording financial data from day 1. Not only is this likely to drastically increase the accuracy of your records, but it’ll also save you from a lot of stress in the future.
Keep work accounts separate from personal accounts
If you’re a sole trader, there’s no obligation for you to open a separate business bank account. However, it’s strongly recommended you do so.

When sifting through your bank statements, you might find it difficult to decipher between personal expenses and business expenses. You may have the receipts to prove your purchase, but some expenses may seem ambiguous: it might be harder to prove that the £20 you spent on stationery was for the office, not for getting your kids ready for the new school year.
To avoid making a mistake on your tax return or from getting into hot water with HMRC, it’s definitely worth opening a bank account to manage the money in your small business. If you're an Ember user and in need of a business bank account, you can set one up today with Tide and we'll get you started by putting £75 in your shiny new bank account.

Record all transactions
When we say all, we mean all. You might be hesitant to jot it down if it’s a minor expense, but if you fail to record enough small purchases you’ll quickly find the numbers don’t add up. Plus, depending on the purchase, there’s a chance you could benefit from a trivial expense tax break.
Always keep receipts
Not only is this a legal obligation, but failing to produce receipts in the event of an audit could get you in trouble with HMRC. Keep in mind these don’t have to be physical receipts — scans and pictures are acceptable, too. Just make sure you keep them in a safe and easily accessible place.

Hiring a bookkeeper

If you’d rather someone else took care of your transactions for you, you might consider hiring a traditional bookkeeper.Traditional bookkeepers are trained to carry out bookkeeping duties on behalf of your business — all you need to do is email them your monthly bank or credit card statements, or grant them access to your chosen accounting software, and your bookkeeper will do the rest.If you’re a busy business owner who doesn’t have enough time to do their own bookkeeping, this option is for you. Traditional bookkeepers will typically:
    Record transactionsConduct bank reconciliationsGenerate monthly reports and financial statementsOversee accounts receivable by creating and sending invoicesOversee accounts payable by ensuring invoices from suppliers are paid in full in a timely mannerMaintain and balance subsidiaries, general ledgers and historical accountsComplete payroll
While hiring a bookkeeper can take a lot of weight off your shoulders, keep in mind that the services offered by bookkeepers can differ depending on their experience level and capacity. You’ll also need to factor in what happens if your bookkeeper gets sick or takes annual leave, with the likelihood that it’ll be down to you to fill in the gaps while they’re gone.

Bookkeeping with Ember

If you’re looking for a service that offers expert support at every stage in the financial cycle, Ember is the solution for you.Not only will we automate the tax and accounting for you, but with our new bookkeeping service, you’ll get a team of trained bookkeepers to help you stay up to speed with your bookkeeping without having to transfer your records to an accountant.
For more on what exactly we can do for you, book a call with a member of our team today to discuss your options and to get a quote.

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