Ultimate Small Business Guide to Bookkeeping
Leave your bookkeeping to the experts and concentrate on the finer things in life
What is bookkeeping?
Bookkeeping is the process of recording all of the financial transactions of your business in a set format. This includes keeping them in some form of the ledger (in the old days, this was a physical ledger book!), or using bookkeeping software in order to record them accurately. Bookkeeping should also include the reconciliation of the business bank account, which matches the entries both in and out of the bank account against the invoices and receipts of the business.
Frequent financial transactions involved in bookkeeping are:
- Recording your sales
- Documenting your purchases
- Recording receipts from customers
- Noting payments to suppliers
- Reconciling the bank account
- Reconciling the debtor and creditor ledgers
- Managing the VAT account
- Managing the PAYE/NI owed account
- Entering and balancing the petty cash
- Recording purchase receipts
Each of these tasks is vital to make sure that your accounts are accurate, as well as ensuring that all legal requirements are observed.
Is Bookkeeping different from Accounting?
Bookkeeping is one of the main processes of accounting within the business, for any company, no matter how big or small. While bookkeeping and accounting are part of the same overall body of work, there are differences between the two.
What does a Bookkeeper do?
Bookkeepers record the day-to-day financial transactions of your business, writing what used to be known as a daybook, which contains details on any purchases, sales, receipts, or payments. Think of the daybook as a kind of financial diary where the bookkeeper keeps a blow-by-blow account of the day’s transactions. Nowadays of course most bookkeepers use software to do this – but the premise of the daybook remains the same. By keeping on top of things on a regular basis in this way, it’s simple to notice any discrepancies before they turn into a more significant problem.
Of course, with internet banking and the technology of today, the concept of an actual daybook is a little redundant. Banking apps allow you to check your bank balance in an instant without you needing to consult a bookkeeper’s daybook to figure out how much money you have to spend! But the necessity to keep on top of your transactions in order to prevent future problems is still very much in existence.
Bookkeeping can also involve preparing source documents so that they can easily be evaluated or audited at a later date – think about MTD and the requirement for digital record keeping and you’ll get the idea.
It’s possible to use computer software such as QuickBooks, Xero or Sage as part of the bookkeeping process, but it’s generally far better to use a qualified bookkeeper or online accountant to complete your bookkeeping for you. It saves you time and effort as well as avoiding the risk of mistakes being made.
Working with your current accountant causing you stress?
What is the difference between bookkeeping and accounting?
Both bookkeeping and accounting are similar, but also have important differences. Think of the difference between plumbers and electricians, they tackle different jobs but you’d need both of them to work together if you were building a house! While a bookkeeper keeps track of the daily transactions, it’s down to the accountant to create reports from that information as well as advise on certain things like tax, compliance and legislation.
The bookkeeper brings the books to the trial balance stage, whereby you have a list of all general ledger accounts and details. From that information, the accountant prepares the profit and loss account and balance sheet. The latter sounds like the more complicated part of the process, but each role is just as vital for your business. It’s also where the idea of ‘balancing the books’ comes about, as the bookkeeper needs to ensure that the books quite literally balance – for every plus there is a minus across your accounts (debits and credits), and that’s the basis of bookkeeping!
What is double-entry bookkeeping?
Double-entry bookkeeping, in accounting, is a system of bookkeeping where every entry to an account requires a corresponding and opposite entry to a different account. The double-entry system has two equal and corresponding sides known as debit and credit. The left-hand side is debit and the right-hand side is credit.
Sounds complicated? Well, actually it is!
Cloud software such as Xero or Quickbooks disguises the complexity of bookkeeping by making assumptions about the way that most small businesses record transactions. That is fine if you know exactly what you are doing, but many businesses come unstuck when they have to move transactions to a different account or account for things like payments to HMRC. We regularly take on clients who have spent a whole year diligently recording their transactions into cloud software, only for us to have to break the news to them that their data is incorrect. Or worse, that they have been filing incorrect VAT returns . Yikes.
Unless you’ve studied bookkeeping or your ACCA or AAT qualifications, we’d advise leaving the bookkeeping to the professionals. It’s not as simple and just entering data – there are real life consequences for where that data ends up.
Getting in a pickle trying to manage your own bookkeeping?
Do I need to use a bookkeeper?
It’s possible to do your books yourself, but it makes far more sense to hire a professional instead. Doing it yourself takes up a significant amount of time that you could be investing in your business (or your personal life). As we mentioned above, cloud software can make things seem incredibly easy to do, but you may run into problems when things go wrong. And let’s face it, doing it yourself will take you considerably longer than it would take a professional to do the job – we’re sure you have far better things to be doing with your time!
Hiring a bookkeeper helps in many ways, such as:
- Relieving your workload
- Reducing potential stress
- Saving you money
- Increased accuracy of records
- Saving you the time of doing it yourself
- Ensuring your books are in order
- Peace of mind
Can I use Bookkeeping software and do it myself?
Yes you can. But just because you can doesn’t necessarily mean you should! Let’s take a look at the pros and cons.
Pros of online bookkeeping software
Simple data entry
The simplicity of entering data into accounting software is incredibly attractive to many busy business owner – and it’s usually really easy to do.
Presents data visually
The nature of accounting software means you can see all your data in one place – on one screen. You can view reports and analyses on profit and loss, debtors and creditors, and customer accounts.
Integration with other systems
For the tech junkies out there, online software offers the chance to integrate with other applications and pull data from your bank account automatically.
Cons of online bookkeeping software
Business owners need to do all the data entry themselves
You’re the one who needs to decide what is and isn’t tax-deductible. This means classifying your own invoices and expenses and knowing a good number of the rules surrounding the tax and accounting treatment of things. While some people have a natural aptitude for this kind of thing, we’d wager that the majority of the self-employed community just want to get on with running their business and not faffing around with receipts.
Learning how to use the software
Teaching yourself and becoming familiar with the software can take a lot of time and effort. For people used to manual accounting, it takes time to switch over to using software, which can delay accounts processing.
Doesn’t recognise specialist needs
If your business has specialist needs, you may need more refined accounting services. Software doesn’t present the opportunity for this to be an option. Every business is unique – something that accounting software doesn’t necessarily recognise.
Business owners spend on average 10 hours + per month doing bookkeeping
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