How To Do Your Bookkeeping

Not like this

How do I keep my books straight?

This section deals with a system for organising your records and paperwork that will help you keep your accountant happy and make sure you track your business accurately. We’ll return to the actual detail of what expenses to claim later on - see How do I work out my business expenses?

To manage your money and keep track of it all you’ll need to:

But you’ll have a hard job managing any of this unless you have created a basic paperwork flow that enables you to keep the right records for Revenue & Customs and understand what is happening in your business

A basic office system

The photo above is one that I saw recently, this kind of mobile filing system will eventually cause trouble for you. Remember that you need to keep your records for six years and they need to be clear enough to help your accountant minimise your tax bill AND thorough enough to make sure you claim all your expenses. Here’s a reminder of what you need to keep:

Setting up your bookkeeping and paperwork

Actually, it’s much easier than it looks - two ring binders, a bank statement folder and a box or plastic file is pretty much all you need. You’ll also need either a manual or electronic cashbook. These suggestions represent the minimum records required by the HM Revenue & Customs. Please check this list with your accountant who may prefer you to use his system.

Two tips for effective record keeping:

Here’s a simple system I evolved to take as little time as possible. You’ll need three ring binders and a cashbook.

Money In

Label one ring binder “Money In”. When you send an invoice, file it in this folder. After a while insert a divider to separate “unpaid” and “paid”. Print copies of all the invoices you send or bills you raise and keep them in this folder on the “unpaid” side. When you get paid, move the copy behind the divider to the “paid” side. That way you always know who owes you money.

Money Out

Label the other binder “Money Out”. Any time that money leaves your business you must keep a paper record - receipts, delivery notes, invoice copies etc. File these in date order in this file. Smaller receipts can go in an envelope attached to the bank statement where they appear.

Start a separate or business bank account and get yourself a business debit card. Use this debit card for as many expenses as possible. Keep your receipts.

Bank Statements

File your statements in date order. When the statement comes, check every line to make sure you have proof of each debit which will usually be the receipts that you have been keeping. You will either have a physical receipt or there will be a bill in your Money Out binder. The smaller receipts can go in a envelope which staple to the back of the statement. The bigger receipts, bills and delivery notes can stay in the Money Out folder in date order. The important thing is that every line on your bank statement has a physical proof of purchase or copy invoice. To deal with Money In on the bank statement, just tick each item and move your copy invoices to the “paid” side of the divider.

Cashbook: manual or software

Once you have checked your bank statements, enter every transaction into a cash book. Use electronic cash book software to make this much easier. Use transaction / budget codes to identify the cash movements in and out of your business. You can then run reports to help you manage the business. Of course, you may be using spreadsheets instead of a formal cashbook, just make sure that you have checked what you are doing with your accountant because it is this bit that saves you a lot of money on the final bill. You don’t want your accountant have to manually enter the last twelve months data on your behalf.

If you spend your own money on something for the business (like buying a coffee!) then get a receipt. At the end of the month, create an expenses claim form which can be a simple list on a spreadsheet. Put all the receipts in an envelope and staple to the back. Put the expenses claims in your “Money-Out” ring binder then pay yourself from the business bank account. This transaction will show up on your bank statement the following month and you will have an expenses claim form as proof of your spending.

If you are claiming mileage reimbursement from your company (see “Should I Buy A Company Car?”) then you will need to keep a physical mileage log among your records. Keep a book or monthly sheet in the car and fill in your miles at the end of every journey. Each month when you do your bookkeeping simply total up the business miles and make a payment to yourself from the company account. File the mileage log in your “Money Out” folder as supporting evidence for the payment.

It helps if you get into the habit of putting business receipts in the same place.

If you (or someone else) keeps an accurate note of this in a cashbook or even better some cashbook software then you can present your accountant with a printed summary at the end of your trading year. She will be happy because she has less work to do and you will be happy because her bills will be smaller.

Doing this takes me about ¾ of a day a month and it means that at least once a month my bank statement and cashbook reconcile.

Your Accountant

At the end of your financial year (or the tax year if Self Employed), give your accountant these three binders plus your cash book / cash reports. Your accountant can then either produce statutory accounts or complete your tax return.

About Petty Cash

In a word, don’t! It’s easier to use your own money and submit an expenses claim to your business. Make a list of what you have spent, broken down by categories. Then put all the receipts in an envelope and attach it to the back. Only pay yourself expenses if you have got a receipt - it’s a good habit to get into!

Above all, create a system for yourself and stick to it.

Some additional habits that might be useful

I’ve assumed that you will mostly be using a debit card and electronic transactions but if you are still writing cheques and receiving cheques from customers, here are some additional good habits that will make all your year end accounts much easier and possibly reduce your tax bill

  1. Keep your chequebook stubs carefully. Write clearly all the details you need on each stub as you write the cheque. It’s so easy to skate over (and we’ve all done it) but you’ll need this information.
  2. Ensure that you write the cheque number on the invoices you are paying with that cheque and the invoice number on the cheque stub (as above).
  3. Do exactly the same for paying-in or deposit books and slips. Use a numbered deposit book or set up a numbering system.
  4. When you receive payment for one of your invoices, write the date and pay-in/deposit book number with which you paid in the cheque or cash received.
  5. Keep any till rolls in date order too.
  6. Keep all your suppliers’ original delivery notes, invoices, credit notes and statements in a separate ring binder, in the order that you received them, stating whether they were paid by cheque or cash.

Has all this frightened you?

If the thought of all this bookkeeping terrifies you, fear not because there are a group of people who specialise in helping people just like you and taking all that nasty paperwork away. They are called, not surprisingly, Bookkeepers and you can find them in the yellow pages. A book keeper will run a similar system to the one I’ve described and all they need from you is a pile of paperwork once a month. Buy a plastic box and get in the habit of depositing paperwork in the box at the end of every day. Then hand them the box once a month. Simple!

Check List For Bookkeeping

I have set up a straightforward bookkeeping system