Bookkeeping helps you to understand the performance of your business by keeping track of the funds flowing within and out of your company.
The bookkeeping process involves keeping detailed documents of your earnings as well as expenses and costs of expenses. This aids in understanding the financial performance of your company. It also gives you the data that you require to complete annually Self-assessment Tax Returns processing sales and purchase invoices and tracking unpaid invoices.
The term “bookkeeping” originates from the usage of physical ledgers, daybooks, and cashbooks. Nowadays, the majority of small firms use software for digital accounting.
How do you keep double-entry bookkeeping?
Double-entry bookkeeping refers to a method of accounting that has been in use since the 13th century.
With double-entry bookkeeping techniques, the business owner can monitor every financial transaction and know how their business is performing in terms of cash balances, and expansion.
It also allows a company owner and their accountant access to the data needed to comply with financial and tax submission demands, including tax returns for VAT, annual accounts tax returns, as well as Cash flow forecasts.
The principle behind double-entry bookkeeping is that each transaction contains two equal and opposite components. For instance, when you sell items and cash flows increase, as do your inventory levels down.
Accounting records for a company consist of double entries, which can be summarized in what’s known as the general ledger.
A general ledger is typically divided into at most nine major categories:
- Assets
- Liabilities
- Capital Introduced
- Owners’ equity/shareholding
- Income
- Expenses
- Drawings
- Gains
- Losses
What are the major differences between accounting and bookkeeping?
Accounting and bookkeeping can be misunderstood because they are often incompatible in many ways.
Bookkeeping is the day-to-day recording and categorizing of a business’s financial transactions on the other hand accounting is the process of putting the financial information into use by analysis, strategy, and planning.
Basic bookkeeping and bookkeeping for small businesses
Maintaining a current, accurate collection of records is an essential aspect of a properly run company.
Bookkeeping allows you to:
- monitor whether your company is earning a profit
- Access the data you need for tax-efficient returns and business planning.
- Check to see the cash flow situation to determine if it is coming up so that you can be prepared for it
- identify incorrect payments or the possibility of fraud
Traditional accounting vs. cash basis accounting
In order to keep track of your books and calculate your tax-deductible profits. You must choose the accounting method you prefer. The options are either traditional (accrual) accounts or cash-based accounting.
Traditional accounting is the process of recording the income and expenses based on the date on which you invoiced or received a bill. Cash basis accounting implies that you will only have to declare the income or expense when it is incorporated into or departs your company.
A typical example of accountancy:
An invoice was issued on the 18th of February 2021, however, you didn’t receive payment until the 20th April of 2022. The invoice is recorded as for the tax year 2021/22 even when it was paid during the tax year 2022/23. The amount of income must be reported in the tax return for the year 2021/22.
A case study in cash base accounting. You paid an invoice on the 20th of March 2021 and then received the payment on April 30, 2022. Invoices are recorded as the tax year 2022/23 since it was the tax year that you paid the funds. Although the invoice was issued in the 2021/22 tax year, you are able to claim it on your tax return.
Cash basis accounting when you’re a self-employed solo partner or a partnership that has an enterprise that has a turnover of less than PS150,000 annually.
If you own multiple businesses Cash basis has to be used across all businesses and the total business’s turnover must not exceed PS150,000.
If your business grows beyond that, you will need to apply traditional accounting on the next tax return.
Limited liability and limited company partnerships are not eligible to utilize cash basis. There are certain kinds of companies that are not able to benefit from the cash basis scheme. These are listed at the gov.uk website.
The government suggests that cash basis is not suitable for your business in the following circumstances:
- You would like to claim bank charges or interest that exceed PS500 to be a cost
- are more complicated to operate like holding large amounts of stock
- If you’re in search of business finance the lender could ask to view the accounts drawn using traditional accounting before deciding to fund
- Have losses you wish to offset against other tax-deductible earnings (‘sideways loss relief’)
In traditional accounting, you must keep these files as well as your regular expenses and income:
- what you’re due but haven’t yet received
- costs you’ve committed to, but haven’t yet paid
- the value of your stock and work in progress at closing of the accounting period
- Year-end bank balances
- the amount you’ve put into the company during the year
- the money you’ve gotten from the business to use for personal use
It is suggested that you consult an experienced accountant to determine what’s the best method of accounting for your business.
Software for bookkeeping that is suitable for small-sized businesses
If you utilize the software for bookkeeping your process is likely to be more efficient.
The automated bookkeeping apps for small-sized firms speed up processes and allow your accountant to assist by allowing them to log in and see the way in which items are classified.
Other benefits of online accounting and bookkeeping software are:
- Automatically issue invoices to customers.
- Automatically pay bills
- You should keep track of the amount your customers owe you.
- Be aware of what you are owed by your suppliers.
- Access financial information about the move
- have up-to-date information that are required by lenders or providers who offer credit
Do I have to manage my bookkeeping?
Although it is recommended to hire an accountant or bookkeeper who is a professional, however, you can complete your bookkeeping. If you decide to do this, you have to be aware of the steps involved. It might be more economical to hire an expert.
If you do your own bookkeeping, you must:
- Choose and comprehend the accounting method you prefer.
- Learn what records you must maintain and keep (read instructions to sole traders andLandlord)
- Keep a solid record of every financial transaction
- Select the best accounting software
- provide tax-payer funds
- Be alert to tax deadlines to avoid penalties
We simplify bookkeeping for small-sized businesses.
Account-Ease has skilled bookkeepers. We eliminate the need to keep a long-running manual record and increase the efficiency of your bookkeeping providing you with real-time important insight into your operations.
To learn more about how we can help you with bookkeeping for your business, please call
or fill out our online form for enquiries.
