How to do bookkeeping for self-employed?

Self-employed persons should have a basic understanding of their bookkeeping needs even you are having an accountant who file your taxes every year to HMRC. Clear understanding of bookkeeping concepts will make you aware of what is going on in the books of accounts and it becomes easier for you to produce accurate books at the end of the tax year.

Use of bookkeeping software

Now days, use of bookkeeping software is very necessary as it manages your bookkeeping system from start to end. Use of bookkeeping software will help you in remembering types of records you need to keep and also helps in developing a list of income & expenses in the software at the end of the tax year. Managing income & expenses in the software will helps in generating more detailed reports for your accountants and it will save time of your accountant in preparing your books & lowering your tax bill.

Managing receipts

Managing receipts of every purchase is an important task to perform. You should organize the receipts of your every business purchase or for any activity you paid for while doing business. Missing of any receipts may cause errors in bookkeeping. For ex – Meal receipts for business lunches, dry cleaning receipts for your suits and hotel receipts for business stay.

Keep your receipts in an expandable file folder & organize them by their function so that you can easily classify them under different headings. For example – Meal & concert ticket receipts for entertaining clients will be classified under the entertainment tab.

Keeping logs

You have to keep track of such things which you are doing for business purpose but cannot get receipt for the same. The most common type of such expense is Travel expense. If you are using your personal vehicle for your business, you are entitled to a tax write-off for each mile.

You can create expense forms, fill them in detail and sign the expense sheet, when the expense is completed. File your all forms in expandable file folder.

Separate accounts

There should be two separate bank accounts i.e. one for personal and one for business. If you will make a separate bank account for business purpose, it will become easier for you to divide personal expenses and business expenses.

With the help of a separate business account, you can easily track your business transactions separately from personal transactions. Keep a record of your business statement & account invoices every month and file them as backup to your receipts.

Claim your business expense

As a self-employed person, you can claim number of business expenses from HMRC. It includes –

1. Cost of advertising.
2. Cost of stock.
3. Cost of equipment.
4. Rent of your business premises.
5. Delivery charges.
6. Stationery charges.
7. Postage charges.
8. Heating & lighting charges.
9. Bank charges.
10. Telephone charges.
11. Travel charges.
12. Bank charges on business accounts.
13. Relevant books & magazines.

Expenses you may not be able to claim includes the following –

1. Child care cost.
2. Parking fines.
3. Speeding tickets.
4. Client entertainment.
5. School fees.
6. Hairdresser’s cost.
7. Gym membership.
8. Training courses not related to your job.

How to do bookkeeping?

Not sure where to begin when it comes to bookkeeping? Here are our top five tips you must adhere to –

1. Decide on an accounting system -

   To begin, you must decide on an accounting system for your business: cash basis or traditional accounting. What's best for your business will be based on how you've structured it, so if you're unclear, it's best to consult an accountant.

2. Establish a system and organise everything -

   Your business's size will almost certainly determine how you wish to organise your financial administration. There are numerous free and commercial accounting software alternatives available that may help you organise in a better way. The major consideration is that everything is organised, and your receipts, invoices and bank statements are correctly filed.

3. Determine the duration of your financial records -

   You must retain company records for a period of at least five years following the self-assessment deadline. Limited companies must maintain accounting records for a minimum of six years.

4. Claiming tax back on allowable expenses -

   When calculating the amount of tax you'll owe each year, you can deduct part of your self-employed expenses from your revenue. Ensure that you are not one of the small firms that lose thousands of pounds in unclaimed business expenses, whether as a result of misplacing receipts or a lack of awareness about what you may and cannot claim.

5. Create a budget for your tax bill -

   While calculating the amount of tax you'll owe HMRC by the self-assessment deadline of 31 January can be challenging, it's essential that you've planned enough money for the bill payment. If this is your first year in the company, you must pay both the current year's tax bill and the first instalment of the next year's bill on the same day - this is referred to as payment on account.

Why is maintaining accurate records essential?

Maintaining accurate and timely records is vital for every entrepreneur. Proper bookkeeping is not a legal obligation; it also enables you to –

1. Recognise discrepancies and disparities immediately.
2. Understand your business's performance in detail and in real-time.
3. Monitor cash flow.
4. Ensure that you avoid making errors and misplacing documentation.
5. Ensure sound business management and decision-making.

Bookkeeping mistakes a self-employed person should avoid

A self-employed person should avoid the following mistakes while doing bookkeeping –

1. Leaving it until the last minute

   – Bookkeeping is a continuous process and it should not be left until the last minute as it may cause many problems. Delaying the bookkeeping will pile up your work and extreme hurry in filing of tax returns close to deadline may cause errors which leads to fines & penalties from HMRC.

2. Mixing business spending with personal spending

   – You should not mix your business spending with personal spending as it takes much of your time and money in the long run. It is worse situation, if you will ask your accountant to do the same on your behalf as you are paying them as per time spent. Keeping business transactions separate will helps you in minimizing errors. Right amount of income & cost will leads to paying right amount of tax.

3. Paying for somebody unnecessarily

   – You should use your accountant well and keeps your books updated and in good state which free accountants to spend time on what they do best. Keeping proper records will give more time to accountants to think & advice you on other important matters.

4. Fail to keep good record

   – Failing to keep good record means you don’t have your eyes on the health of your business. You should update record of your each & every income and expenses on daily basis whether it is small or big. For example – Buying a coffee for a client in the last minutes of meeting.

   If you are claiming back your past business expenses, HMRC may ask you for evidences of your receipts. Therefore, it is necessary that you should even keep the track of small expenses. Maintaining the records will help you in avoiding any kind of disputes.

   You should record, number your invoices and arrange them in a sequential order. Make a billing system to ensure that every client should be paid on time.

   Now days, regardless of keeping records of income & expenses, many businesses are using cloud-based software which scan your receipts, input information about cash flow and even generate invoices.

5. Paying cash

   – Try not to do any transactions in cash as paying through cash will not create proper evidence. If you will pay through card or an electronic transfer, bank will record the date of transaction, amount as well as the recipient’s name. It will also save you from inputting information into spreadsheet.

6. Beware of distraction

   – Bookkeeping is a continuous process and it should be done without any distraction. If you are working from home, you may be distracted by your family or flat mates. Therefore, it is recommended that bookkeeping should be done at a silent place so that you can easily complete your work with no or fewer mistakes.

7. Not reconciling your accounts each month

   – Not reconciling your account every month may lead to many errors in the future. It is essential to reconcile your accounting system with the financial accounts ensuring that your income & expenditure record should match with your financial statements. Reconciling your accounts monthly will help you in showing how your business is going on & whether any improvement is needed or not.

How dns helps self-employed for bookkeeping?

dns accountants is one of the leading UK firm with more than 10 years of experience in advising self-employed persons about how to handle bookkeeping and what things a self-employed person have to take care of while doing bookkeeping.

For free consultation, you can call our dns accountants at 03330 886 686 or e-mail us at enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.