While all business owners recognise the need to file accounts and stay up to date with tax obligations, start-up and small business bookkeeping can be one of those tasks left until the last minute – with potentially disastrous consequences when your annual returns are overdue.

The best way to manage small business accounting tasks is to begin with an organised, systematic approach, avoiding backlogs of reconciliation statements or records that can create an administrative headache.

In this article, the expert accountants at James Todd & Co provide tips and advice to help you set up a manageable small business bookkeeping process, choose the right software, and decide whether to handle basic bookkeeping in-house or outsource to a bookkeeping and payroll provider.

 The Basics of Bookkeeping

Bookkeeping originates from a time when businesses would use a book to enter transactions at the end of each day – hence, keeping the books up to date.

Today, most businesses use accounting software to enter sales, expenses, outgoings, purchases, and other financial information. In essence, they need financial data to know whether they have made a profit, how much they are spending, and when their bills become payable.

 Picking an Accounting Period

If you are incorporating a limited company, you must select a financial reporting period. Limited companies can pick their accounting dates, which cover one year. However, you can request a longer period for your first year of trading (more information about this is available through the HMRC corporation tax pages).

Most businesses begin their first accounting year from the day they start trading, perhaps from 1st February to 31st January. This date is when your annual accounts and corporation tax return will be made up to.

Others choose to align their accounting with the tax year for consistency with self-assessment returns and personal finances. This setup will become mandatory for non-incorporated businesses from April 2024 – otherwise, you can choose the period that makes the most sense for your trading cycle.

Choosing the Right Accounting Method

The next consideration is your accounting method. Normally, this is the accrual method, where you account for business expenses or income that become payable or receivable in this period but have yet to be settled.

In your chart of accounts (the list of all your income, expense, asset, and liability accounts in your general ledger), you will usually find ‘prepayments’ and ‘accruals’ – these are how you account for financial transactions that occur in one period but relate to another.

For example:

    • Your accounting year runs from 1st January to 31st December each year.
    • You pay £60,000 in rent on 1st August, for the 12 months ahead.
    • Five months of that rent covers the current period, but you have already paid in advance for seven months of the following year.
    • Your accounts show an expense of £25,000 and a prepayment of £35,000, which appears in your balance sheet as an asset.

The alternative is to use the cash method, where your bookkeeping includes all the money the business receives or spends in real-time. This cash-based accounting approach is typically better suited to micro businesses and self-employed traders.

Essential Aspects of Small Business Bookkeeping

There are several key components of bookkeeping, each of which helps you track performance and ensure you are up to speed with your finances:

    • Sales transactions: entering invoices raised or sales completed. You can import these transactions into your accounting software if you sell through an e-commerce or till-based system.
    • Expense transactions: everything your business spends needs to be recorded and assigned a code. You may have codes for rent, materials, staffing costs, tax, depreciation, and phone bills – anything you spend or incur should be traceable.
    • Reconciliations: reconciliation means matching each transaction on your bank statements or business credit card to the right invoice or expense.
    • Accounts receivable: shows who owes you money and when it falls due. You need an accounts receivable function to send payment reminders and statements.
    • Accounts payable:  indicates money payable by your business. You can run regular accounts payable statements to ensure you pay suppliers on time.
    • Payroll: if you employ staff, pay yourself or claim dividends from your business, this will need to be recorded accurately, including deductions made from employee payslips for tax and other obligations.

An organised small business bookkeeping system will ensure you make all entries in good time. Leaving bookkeeping to become outdated can make it difficult to spot errors or inconsistencies and can mean making and receiving late payments, which impacts your cash flow.

How to Set Up Bookkeeping for Small Business

Businesses use cost-effective digital bookkeeping software packages such as Xero for business finances, because they make it significantly easier to file returns, produce management accounts, submit year-end financial statements, and analyse profitability.

There are two other options:

    • Manual bookkeeping: paper-based accounting records or transactions entered on a simple Excel spreadsheet can pose an issue where you depend on written lists to keep track of your finances.
    • Desktop bookkeeping: older legacy software may be desktop based and is inadvisable due to the risk of data loss and incompatibility with evolving requirements such as Making Tax Digital.

Making Tax Digital (MTD) is a government initiative that requires businesses to submit financial records digitally. The transition is phased and tiered, so larger companies already need MTD-compatible software to submit VAT returns.

Smaller and newer businesses may not yet be obliged to enrol in MTD but are strongly advised to make informed choices when picking a bookkeeping software to avoid non-compliance or needing to invest in a replacement system.

Most accounting software is relatively simple to set up. However, you can source assistance from our capable teams, who can manage tasks such as creating a customised chart of accounts and ensuring your bank accounts are integrated.

Advanced bookkeeping tools can provide several advantages, such as automatically importing your bank statements every 24 hours and issuing invoice reminders to reduce administrative time.

The Importance of Bookkeeping for Small Business Accounting

Bookkeeping is vital, ensuring you have an accurate record of all the money flowing into and out of your business. Without bookkeeping, you would not have oversight of your business’s finances or a clear picture of your revenue, debts, profit, costs, and overall financial health.

You can manage your own bookkeeping, hire a bookkeeper or in-house accountant, or outsource to a local accountancy firm, depending on your expertise, confidence, time availability and budget.

Growing businesses may find that bookkeeping becomes increasingly time-consuming as their transactional volume expands and can outsource at any stage – professional accountants can manage both bookkeeping and accounting tasks as required.

We work with a diverse range of businesses and small business owners, offering payroll management, reliable bookkeeping, and other accountancy services such as auditing, preparing tax returns, and creating management and year-end accounts.

If you would like further advice about bookkeeping for your small business start-up, please contact the James Todd & Co team at any time or browse our online articles and knowledge guides for additional support.