Self-employed barista serving coffee to a customer

1. What is sole trader bookkeeping?

2. How to do your bookkeeping as a sole trader

3. Can I do my own bookkeeping?

Bookkeeping as a sole trader: How to get started

December 15, 2022

Anyone who’s started their own business will tell you they’ll never forget their first sale. While that may be the case, you’ll need to remember more than just your first sale when managing your accounts.

Here’s where bookkeeping comes in. An essential part of running a business, bookkeeping is crucial for making sure that your tax records are accurate and up to date. With a good bookkeeping practice in place, you’ll find it easier to claim all the tax reliefs you’re entitled to, all the while keeping out of trouble with HM Revenue and Customs (HMRC).

In this article we’ll be exploring the ins and outs of bookkeeping as a sole trader, how to get started and which records you’ll need to keep.

What is sole trader bookkeeping?

Bookkeeping is the process of recording, storing and tracking financial information and business transactions on a day-to-day basis.Sole trader bookkeeping refers specifically to the bookkeeping practice carried out by small business owners for their sole trader business. This means keeping a record of all receipts and invoices made throughout the tax year, which can then be used when filing your annual Self Assessment tax return to claim tax reliefs, lowering your final Income Tax bill.

If you're a director of a limited company and want to find out more about bookkeeping, head over to our guide on bookkeeping for business owners.

What is the difference between bookkeeping and accounting?

Bookkeeping refers to the way a business organises their business finances and financial records. On the other hand, accounting focuses on analysing the data collected to make sure that any business decisions made are the right ones.

We’ve outlined the main differences between bookkeeping and accounting in the table below, but for a more nuanced overview of the different roles and responsibilities involved in accounting and bookkeeping practices, head over to our article ‘What is the difference between bookkeeping and accounting?’

	Bookkeeping	Accounting
Role overview	Record all business financial transactions	Analysing financial data to generate reports that can be used to make business decisions
Responsibility	Keep transaction information accurate and up to date	Monitor the company's financial health & stay on top of business owner obligations
Stage	Beginning of the financial cycle	End of the financial cycle

Single-entry bookkeeping vs. Double-entry bookkeeping

In short, the difference between single-entry and double-entry bookkeeping lies in the number of times a transaction is recorded.Single-entry bookkeeping involves recording all debits and credits in a single cash book once. This method is typically adopted by smaller businesses who have fewer transactions to keep an eye on.

Double-entry bookkeeping, however, involves recording every transaction twice, the first as a credit entry and the second as a debit entry. Each transaction must be stored in a ledger account, with there being 5 main account categories that you can record your transactions against:

Asset account: Anything of monetary value that the business owns, such as business equipment or property.

Revenue account: Money coming in, typically made through sales, but also through other streams of income, such as interest or royalties.

Expense account: Money going out of the business, typically towards running costs, such as stuff or office rent.

Liabilities account: Anything owed by the business, such as bank loans.

Equity account: Any investments made by an owner into the company.

While both bookkeeping methods take note of every financial transaction, double-entry bookkeeping takes into consideration not only what the company has gained in revenue, but what it has also lost in terms of stock.For example, if you’re running an online bookstore and you sell a book worth £15, using single-entry bookkeeping you’d make a single record to account for the revenue that’s come into the business.If using double-entry bookkeeping, however, you’d record +£15 on the left as revenue, whereas on the right you would record -£15 to account for the decrease in the total assets the company owns.Note: To check if your records are accurate, find the total values for each column. If the totals in both columns are the same, you’ve correctly accounted for every transaction twice. If there’s a difference, however, you’ll need to comb back through to find what you’re missing.

How to do your bookkeeping as a sole trader

As mentioned above, bookkeeping involves keeping accurate records of all business transactions — but exactly which records do you need to keep?

Choosing an accounting method

Before you start storing records, you’ll first need to choose an accounting method. The accounting method you choose will determine when you record a transaction, as well as the records you need to keep.

Traditional accounting is typically adopted by larger businesses, and involves recording business income and expenses on the date you were invoiced or were billed.For example, let’s say you issued an invoiced on 28th March 2021, but weren’t paid until 7th April. If you’re using the traditional accounting method, you’d need to record that invoice against the 2020/21 tax year, even though you didn’t get paid until the next tax year.Cash basis accounting, on the other hand, can only be adopted by small businesses with an income of £150,000 or less, and involves only recording any business income or expenses when you’re paid or have made payment.If we take the above example, under cash basis accounting you’d need to record the transaction against the tax year in which you received payment, which would be the 2021/22 tax year. As a result, you wouldn’t pay Income Tax on that transaction until filing your 2021/22 Self Assessment.

Which records do I need to keep?

According to GOV.UK, you’ll need to hold on to records of:

All sales and income All business expenses VAT, if you’re VAT registered PAYE records if you employ people Records about your personal income Your grants, if you’ve claimed through the Self Employment Income Support Scheme (SEISS)

If you’re using traditional accounting, you’ll also need to keep records of:

What you’re owed, but have not yet received

What you’ve committed to spend but haven’t paid out yet

The value of stock and work in progress at the end of your accounting period

Your year end bank balances

How much you’ve invested in the business in the year

How much money you’ve taken out for your own use

As a small business owner, it is a legal requirement for you to store records for at least 5 years from the 31st January Self Assessment deadline, where the records in question were used to work out your Income Tax bill.If your Self Assessment tax return was sent more than 4 years after the deadline, however, you’ll need to keep your records for 15 months after sending off your submission.

Storing your business records

While you currently can store physical copies of your business records (shoebox receipts, anyone?), as of April 2024 you’ll need to store your records digitally.Under Making Tax Digital for Income Tax, all business records will need to be stored using either spreadsheets that can connect to HMRC’s systems through bridging software, or accounting software.

For more on how Making Tax Digital will be changing the way you store your records, check out our article ‘MTD for Income Tax: How your Self Assessment is changing’.

Can I do my own bookkeeping?

In short, yes: you can do your own bookkeeping. If you’re a small business with very few transactions, or have just started out, you might find it simple to keep a single-entry log of your transactions.If you want to do your own bookkeeping, you might find it beneficial to set up a separate bank account. With your own business bank account, you won’t need to worry about deciphering between your personal and business transactions. Alternatively, you can use the Ember app to separate out your transactions with ease.However, as your business grows, you might find you don’t have the time to keep an up-to-date record of your accounts. As a result, you might find that records are lost or forgotten, making Self Assessment season far more stressful than it needs to be.With Ember, however, balancing the books has never been easier. Along with complete access to our Unlimited package, you’ll have a dedicated bookkeeper on hand to categorise your transactions for you, giving you one less thing to worry about.

To find out more on how we can take your bookkeeping from burden to breeze, head over to our bookkeeping page and get an instant quote, free of charge.

Rachel Cameron-PotterContent Marketer

Make tax less taxing

See how we can simplify your taxes today

Two people looking at documents on table | How to file a VAT Return

Caroline Wire

Startup

How to file a VAT Return: A step-by-step guide

Business woman in white office smiling at pink laptop

Rachel Cameron-Potter

Sole Trader

Can a sole trader be VAT registered?

Daniel Hogan