How bookkeeping works for a sole trader

Contents

What is bookkeeping and why is it important

How to keep books as a sole trader

Accruals or cash basis

What records you need to keep as a self-employed person

Making Tax Digital

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

Do sole traders need to produce accounts

Do sole trader accounts need a balance sheet

What is the best accounting software for sole traders

Can you do your own bookkeeping

What is bookkeeping and why it is important?

Bookkeeping is the regular recording of business income and expenses and should be a priority for a sole trader business.

Keeping track of all your income and expenses is essential for understanding your business finances at any given time. Bookkeeping helps you track progress against targets and give you a clear picture of the cash needs your business has. 

Bookkeeping should be a regular task to ensure your records are 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 when you know you won’t be disturbed.

Some sole traders look at outsourcing their bookkeeping 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 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 arrange a software tutorial and get any training you may require. 

Sole traders should retain records of invoices and receipts and other business transactions. This makes it faster for your accountant to prepare your business accounts, 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) may 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 reporting requirements for limited companies, those for the sole traders are more relaxed but this does not make bookkeeping and finances any less important. Do you keep asking yourself the question “What records do I actually need to keep?”.

We have set out a brief summary below:

• Income - keep track of invoices and supporting documentation for all income
• ​Business expenses - keep all expense receipts, these may be deductible from your business income when calculating your profits
• 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 - ideally you would have a business bank account to keep business transactions separate

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 is designed to get businesses and individuals keeping digital records and submitting more regular information to HMRC. Making Tax Digital affects 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?

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 2023/24 self-assessment tax return, with a final submission deadline of 31st January 2025, you must retain these records until 31st January 2030.  

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 but there are benefits to producing accounts: 

• they can give you a better understanding of how your business is performing
• they can 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 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 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 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 you do your own bookkeeping?

You can complete your own bookkeeping, however, there are risks and the consequences of making mistakes with your bookkeeping that can be disastrous, particularly if this triggers an unexpected HMRC investigation.

Professional bookkeeping can 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 take care of your business bookkeeping, 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 020 3793 2199 or drop us a line using our online enquiry form.

Last updated 22 Mar 2024 | First published 14 Jul 2021

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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.

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