The importance of bookkeeping for small businesses

What is bookkeeping?

Bookkeeping shows you how your business is performing by keeping track of the money coming in and out of your business.

Bookkeeping involves keeping accurate records of all your income, costs and expenses which helps you to understand the profitability of your business. It also provides the information you need for completing annual self-assessment tax returns, process purchase and sales invoices and chase unpaid bills.

The term ‘bookkeeping’ originates from the use of physical daybooks, cashbooks and ledgers. Nowadays, most small businesses use digital accounting software.

What is double-entry bookkeeping?

Double-entry bookkeeping is a system of accounting that has been used since the 13th century.

Using double-entry bookkeeping, a business owner can track all financial transactions and understand how the company is performing in terms of profitability, cash balances and business growth.

It also allows a business owner and their accountant to access the information needed to deal with tax and financial submission requirements such as VAT returns, annual accounts, tax returns and cash flow projections.

The key principle of double-entry bookkeeping is that every transaction has two equal and opposite elements. For example, when you sell goods, your cash balance increases and your stock levels go down.

A business’ accounting records are an accumulation of double entries which can be summarised in what is known as a general ledger.

A general ledger is usually divided into at least nine main categories:

• Assets
• Liabilities
• Capital Introduced
• Owners’ equity/shareholding
• Income
• Expenses
• Drawings
• Gains
• Losses

For more detailed advice on double-entry bookkeeping, read this guide.

What are the differences between bookkeeping and accounting?

Bookkeeping and accounting can sometimes be confused because they overlap in many ways.

Bookkeeping is the day-to-day recording and categorising of a business’ financial transactions, while accounting is the process of putting that financial data to use through analysis, strategy and planning.

Find more details about the differences between bookkeeping and accounting in this guide.

Basic bookkeeping for small businesses

Keeping an accurate, up-to-date set of books is a key feature of a well-run business.

Bookkeeping allows you to:

• track whether your business is making a profit
• access the information you need for accurate tax returns and business planning
• monitor if a cash flow problem is approaching so you can prepare for it
• spot incorrect payments or potential fraud

Traditional accounting vs. cash basis accounting

To do your bookkeeping and work out your taxable profits, you need to select an accounting method. Your choices are traditional (accrual) accounting or cash basis accounting.

Traditional accounting involves recording income and expenses according to the actual date you invoiced or were billed. Cash basis accounting means you only need to declare income or expenses when it comes into or leaves your business. 

An example of traditional accounting: You sent an invoice on 18th February 2021 but didn’t receive the money until 20th April 2022. The invoice is recorded for the 2021/22 tax year even though it was paid in the 2022/23 tax year. The income needed to be included on the 2021/22 tax return.

An example of cash basis accounting: You sent an invoice on 20th March 2021 and were paid on 30th April 2022. The invoice is recorded for the 2022/23 tax year because that is the tax year in which you received the money. Even though the invoice was sent in 2021/22, you can declare it on your 2022/23 tax return.

You can use cash basis accounting if you’re a self-employed sole trader or partnership running a business turning over less than £150,000 a year.

If you run more than one business, cash basis must be used for them all and the combined turnover of the businesses must not exceed £150,000.

If your business grows beyond a £150,000 turnover during the year, you can continue to use cash basis up to a total turnover of £300,000 a year. Go beyond that figure and you need to use traditional accounting for your next tax return.

Limited companies and limited liability partnerships cannot use cash basis. There are also some specific types of businesses that cannot use the scheme. They are listed on the gov.uk website.

The government says cash basis may not suit your business if:

• want to claim bank charges or interest of more than £500 as an expense
• have a more complex operation such as holding high levels of stock
• you’re looking for business finance - a lender may request to see accounts drawn up using traditional accounting before agreeing to provide funding
• have losses that you want to offset against other taxable income (‘sideways loss relief’)

For traditional accounting, you need to keep the following records as well as standard income and expenses:

• what you’re owed but have not received yet
• expenses you’ve committed to but have not paid yet
• value of stock and work in progress at the end of your accounting period
• year end bank balances
• how much you’ve invested in the business during the year
• money you’ve taken out of the business for your personal use

It is recommended that you speak to a professional accountant for help on which is the best accounting method for your business.

Bookkeeping software for small businesses

If you use bookkeeping software, the process will likely be much more efficient.

The automation provided by bookkeeping apps for small businesses speeds up processes and makes it easier for your accountant to help you as they can simply login and check how items are being classed.

Other advantages of online bookkeeping and accounting software include:

• automatically send invoices to customers
• automatically pay bills
• keep track of what your customers owe you
• keep track of what you owe your suppliers
• access financial information on the move
• get up-to-date details required by lenders or suppliers offering credit

Can I do my own bookkeeping?

While it is advisable to employ a professional bookkeeper or accountant, it is possible to do your own bookkeeping. If so, you need to bear in mind what’s involved. It may be more cost effective to use the service of a professional.

Doing your own bookkeeping means you need to:

• select and understand an accounting method
• understand what records you need to keep and maintain them (read advice for sole traders and landlords)
• keep a robust audit trail of all financial activities
• select suitable accounting software
• allocate funds for tax
• stay aware of tax return deadlines to avoid fines

Small business bookkeeping course

Although it is not a legal requirement for business owners to have a qualification to handle their own books, it is advisable for individuals to complete a bookkeeping course or to appoint an experienced professional to provide support and ensure all financial activities are recorded accurately.

Bookkeeping qualifications are offered by various organisations. They include:

• Institute of Certified Bookkeepers
• Association of Accounting Technicians
• International Association of Bookkeepers

Bookkeeping can be self-taught over time but business owners need to decide if they have the time to do it. Some bookkeeping techniques take many months to master, and most owner-managed businesses don’t have the capacity for daily tracking of income and expenses.

Given the time and expense involved in completing a bookkeeping course, it could be more cost-effective and beneficial to invest in the support of a professional bookkeeper.

We make bookkeeping simple for small businesses

TaxAssist Accountants are experienced bookkeepers. We remove the need for time-intensive manual record keeping and improve the overall efficiency of your books, giving you real-time, valuable insight into your operations.

To find out how we can make bookkeeping easier for your business, call 01302 957020 or use our online enquiry form.

Date published 21 Jul 2022 | Last updated 20 Mar 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.