Record Keeping – The Basics: Purchases

When you first start a business, or if you are a small business, you will need to set up a system to keep your records.  As I’ve said previously, you don’t need to have a computerised system to do this nor do you have to follow the principles of double entry bookkeeping.  A single cash entry system is fine as long as you record what has come in and what has gone out of your business.  Below is a simple way to keep on top of your purchase invoices:

1. Get two files: one for invoices to be paid and one for paid invoices – I use a document wallet for the unpaid invoices and a lever arch file with A-Z dividers for the paid ones
2. File the invoices alphabetically and then, for each supplier, by invoice date. This way you can find any invoice quickly
3. When you pay (or part pay an invoice), write the date and method of payment at the top of the invoice, eg “paid 7.12.12 via internet banking”.  If you paid by cheque write the cheque number as well as the fact that you paid by cheque.
4. When you have paid an invoice, file it in the paid file.  However, if you are paying an invoice in installments, do not file it in the paid file until all installments have been paid, keep it in the unpaid file so that you don’t overlook it when you are paying invoices next month.

Once a month, I transfer the information to a spreadsheet or computer software ready for the end of the year.  Yes, I use computer software and prior to this I used a spreadsheet.  This is because it is easier to breakdown the categories of income/expenditure and to calculate the profit/loss at the end of the year.  If you are a limited company, your accountant will need a breakdown of the income/expenditure when preparing your accounts.  If you are a sole trader, the HMRC will need a breakdown if you earn more than £75,000.

Record Keeping – The Basics: Sales

When you first start a business, or if you are a small business, you will need to set up a system to keep your records.  As I’ve said previously, you don’t need to have a computerised system to do this nor do you have to follow the principles of double entry bookkeeping.  A single cash entry system is fine as long as you record what has come in and what has gone out of your business.  Below is a simple way to keep on top of your sales invoices:

1. Get a file and a set of A-Z dividers
2. When you send an invoice, put a copy of it in the front of the file, in date order.  This is so that you can chase payment when it is due rather than having to search through the file to see when invoices were sent
3. When you receive payment, write the date and method of payment at the top of the invoice, eg “paid 7.12.12 by BACS”.
4. When an invoice has been paid, file it under the customer’s name in the A-Z section of the file.  However, if you are being paid in installments, do not file it in the paid file until all installments have been paid, keep it in the front of the file so that you don’t overlook it when you are chasing invoices next month.

At the beginning of the year, I use the same file for paid purchase and sales invoices/records with 2 sets of A-Z dividers.  This cuts down on space used for the file and also keeps all the records in one place.  You do have to be careful though and make sure that you file the invoice/receipt in the correct section of the file.  However, as the year progresses I split the file into 2, one purchase and one sales, if there are a lot of transactions.

Bookkeeping Tips

If you are a very small business and don’t have the cashflow to get a bookkeeper to do your books, these are my tips to make keeping your records easier:

1.  Organisation

Make sure you have the right tools for the job and somewhere to keep your records.  You will need a file with dividers to keep your sales and purchases separate, pens, pencils, calculator, a cash book or accounting paper (you can buy this from a good stationery supplier) if you aren’t using a spreadsheet or computer software – actually it’s a good idea to keep a paper record even if you are using a computer.

I start a new lever arch file for myself and my clients at the beginning of each tax year and file the old one (you have to keep it for 5 years from the tax return deadline).

2.  Use a computer

You don’t have to use specific bookkeeping or accounts software, it doesn’t always help, but it is useful to have a back-up of your records in case your paper copies get lost, destroyed or just fade.  Even a basic Excel spreadsheet showing income and expenses will do.

3.  Training

If you didn’t go on any of the free workshops which HMRC offer to the newly self-employed, it is worth going on as many as possible to find out what records they require you to keep, for how long, how to complete the Self Assessment return online, what you can and cannot include in your expenses for your tax return etc.

4.  You have a box of receipts where do you start?

With the first one you pick up.  If you have a box full it really doesn’t matter where you start as long as you start somewhere.  This is where computer software helps as it doesn’t matter which order you enter the receipts/invoices etc, it will put it into the correct order for you.  If you use a spreadsheet you can enter the details in the order you pick them up and then sort the data when you have finished.

5.  If you are just starting out, what do you do first?

If you are just starting out and are doing your books for the first time, hopefully at the end of your first month, what do you do first?  If you need to send invoices, they are a good place to start as you want to make sure that you get paid for work that you have done.  Next, move on to the invoices you have received from your suppliers and make sure they get paid by their due dates – you want to make sure that you can use them again.  Finally, enter details of any other income/expenditure.

6.  Do a bank reconciliation

Make sure that what you think has come in/gone out of your bank account actually has come in/gone out.  Check your bank statement against your records when it comes in.  Remember to take into account any receipts/payments which may still be pending.

7.  Keep an eye on your cashflow

We don’t only keep books because the tax man says we have to.  They also help us to know how well, or bad, our business is doing from one period to the next.

8.  Finally, if you don’t like paperwork give it to someone who does

Bookkeepers love numbers and paperwork, it’s why we do what we do, so find one you like and let them take the strain for you.  We don’t bite, I promise and you may even find that with the tasks you don’t like off your back you actually grow your business!

What is a Bookkeeper?

According the my paperback Oxford English Dictionary, bookkeeping is:

the activity of keeping records of financial dealings

So, it would follow that a bookkeeper is the person who keeps the records.  However, a bookkeeper is hard to define because their duties can vary greatly within different organisations.  For example, in a large organisation there may be different departments for sales and purchases whereas, in a small company there may be only one person doing all of the bookkeeping tasks as well as the administration tasks which go along with it.

Bookkeepers don’t have to be qualified or belong to a professional body and, indeed, in many large organisations they are often called finance administrators or finance clerks.  Where bookkeepers come into their own is when they are providing record keeping support for sole traders and partnerships.  This is because once qualified, a bookkeeper can produce all the reports required for a sole trader including Profit and Loss statements, Balance Sheets and Management Accounts.  Bookkeepers can also manage payroll and prepare the Self Assessment tax return.

Self Assessment – Have You Done it Yet?

The deadline for filing Self Assessment tax returns online for the year ending 5 April 2011 is fast approaching, 31 January 2012, and if you haven’t done it yet – why not?  If you are even one day late filing it you will get a £100 penalty and it goes up by £10 per day.  For more information about the penalties for late filing of tax returns see the HMRC website.  Don’t forget that any tax you owe is due on 31 January 2012 too.  One other thing to remember, if you haven’t already you will have to register to file your tax return online and it can take up to 2 weeks for the activation/authorisation code to come through so even if you aren’t ready to file your return, REGISTER NOW!

If you haven’t done it because your records are still in a bit of a mess either get it done now or find a bookkeeper who can make some sense of it for you.  In my previous post Keeping Records Straight, I mentioned that as a sole trader you don’t need to keep formal accounts, as long as you know what has come in and what has gone out that is fine.  You do need some structure to it though as if your turnover is over £70,000 you will need to fill in the full self employment pages which include a split of your expenses.

In addition to your business income/expenditure, you will also need other information such as any interest earned and paid on your savings/current accounts, any payments you have made into a pension scheme over the year and any dividends you have received from shares.  You can get more information from the HMRC’s How to Fill in your Tax Return guide.