How bookkeeping works for a sole trader

What is bookkeeping and why is it important? 

Bookkeeping is the regular recording of business income and expenses and should be a priority for a sole trader business. Keeping track of your income and expenses is essential for understanding your finances at any given time. Bookkeeping helps you track progress against any targets or cash needs you may have. 

Bookkeeping should be a daily or weekly task to ensure that your record is kept up to date and allow you to keep an eye on how the finances of your sole trader business are doing. It pays to get into a routine and set some time aside for bookkeeping - preferably somewhere and when you know you won’t get disturbed. 

This regularity may seem onerous so for that reason some business owners look at outsourcing the bookkeeping function to save time to manage their business. 

Bookkeeping also helps you to provide your accountant with the information they require to prepare your annual self-assessment tax return.

How to keep books as a sole trader 

Keeping books for your sole trader business has never been easier, with huge improvements in technology and online software options. If you’re not good with spreadsheets or keeping a paper book up to date you don’t need to worry. Software lets you automate a lot of your bookkeeping, with automatic bank feeds and automated processes such as sending payment reminders to customers. 

There are resources online to help you get started with online bookkeeping, and your accountant will also be able to help you get started. Speak to your accountant to see if they can offer a tutorial and any training you may require. 

Sole traders should retain records of all your invoices and receipts. This makes it faster for your accountant to reconcile your financial records and process your self-assessment tax return and calculate any tax liabilities or refunds. It also helps you deal with any questions HM Revenue and Customs (HMRC) should raise about your tax affairs.  

Online software makes it easy to take photos and scan receipts and invoices straight into your accounting software as attachments to transactions. This means you no longer have to keep boxes of paper records. 

Accruals or cash basis 

There are two different ways of accounting for transactions. The accruals and cash basis in simple terms refer to when you record transactions in your books. 

For the accruals basis, you record transactions on the date of the invoice or bill. So, if you raise an invoice to a customer on the 15th, this is the date the income is recorded, regardless of when they pay it. 

For the cash basis, you record transactions on the payment date, so when you received income from a customer it’s recorded at that point regardless of when it was due. 

Your accountant will be able to clarify which method is best for your business. 

What records do I need to keep as a self-employed person?

Unlike the rigid bookkeeping and reporting requirements for limited companies, those for the self-employed are more relaxed. However, this does not make it any less important for individuals to track their finances. Do you keep asking yourself the question “What records do I actually need to keep?”.

We have set out a brief summary below as a guide:

• Income
  Keep track of your invoices or other supporting documentation for all income for your business or self-employed work. You should also keep details of personal income (e.g. lettings income from a buy-to-let property).
   
• Business expenses
  Keep all expenses and receipts that relate to your business or self-employment. These may be deductible from income when calculating your profits in your annual self-assessment tax return. 
   
• VAT records (for those VAT-registered)
  All VAT registered businesses must also keep a record of their VAT invoices charged to customers and all expenses where VAT has been charged to them. This will support the completion of VAT returns and submissions.
   
• Bank records
  All bank transactions relating to your business or self-employment should be recorded. Ideally you would have a separate bank account so these can be more easily identified. Your accountant can help you by supplying online bookkeeping software that links to your bank account, simplifying record keeping.

For more information on the records you should keep for your accounts and what your accountant will need for your tax return take a look at our article here.

Making Tax Digital 

Making Tax Digital for VAT and Making Tax Digital for Income Tax Self-Assessment have been introduced by HMRC to get businesses and individuals to keep digital records and submit more regular information to HMRC. Making Tax Digital does affect the records that you must keep, and it is important to ensure you have compliant software. 

How long do you need to keep tax records for a business?

The UK Government states that businesses should retain their tax records for at least five years after the 31st January submission deadline of the tax year in question.  

For example, for the 2022/23 self-assessment tax return, with a final submission deadline of 31st January 2024, you must retain these records until 31st January 2029.  

If you misplace records, you should make a note of estimated or provisional figures. There are additional record keeping requirements for limited companies that are not covered here. 

Do sole traders need to produce accounts?

Self-employed individuals and sole traders don’t need to submit accounts to Companies House. There are benefits to producing formal accounts: 

• it can help owners to better understand how their business is performing and  
• support banking relationships and requests for loans/finance. 

Do sole trader accounts need a balance sheet? 

When preparing accounts, whether you need a balance sheet will depend on who may need to see your accounts. A bank, or investor will probably want to see a balance sheet. 

If you are preparing your accounts under the accruals basis, as mentioned above, you will most likely have a balance sheet. A sole trader business using the cash basis will not require a balance sheet. 

What is the best accounting software for sole traders?

Sole traders should use accounting software to improve bookkeeping accuracy and efficiency. We would highly recommend the following accounting software solutions as a starting point:

Xero
Xero offers a bookkeeping and accounting solution incorporating modern technology. Xero can automate invoices, send automatic invoice reminders, import bank transactions and remember previous treatment to streamline your bookkeeping.

QuickBooks 
QuickBooks is designed to make bookkeeping easier. You can access the software 24/7 on any device, with real-time information, importation and reconciliation to your bank account. You can add personalisation, including your business logo, to invoices to build your brand image and reputation.

Dext 
Dext helps you easily scan or take photos of receipts, bills, and invoices to create accounting transactions in your accounting software. This means you can also include them as attachments to transactions to look back on, and you can dispose of the original! 

These software solutions will also make sure you’re compliant and ready for Making Tax Digital. 

Can I do my own bookkeeping?

You can complete your own bookkeeping if you’re concerned with overhead costs and want to keep accountancy fees low. However, there are risks and the consequences of making mistakes with your bookkeeping can be disastrous, particularly if this triggers an unexpected HMRC investigation.

Professional bookkeeping can help save time by taking the pain of maintaining your own records away, allowing you to focus on building your business and achieving the right work/life balance. It will also help you understand your business finances, monitor your cash balances, plan for future tax liabilities and pinpoint trends to help support important business decisions.

How TaxAssist Accountants can help 

We can look after your bookkeeping on your behalf, saving you time and money to focus on doing what you do best – running and growing your business.

To arrange a free initial consultation about our bookkeeping services call our team today on 0800 0523 555 or drop us a line using our online enquiry form.

Last updated: 22nd March 2024