All you need to know about bookkeeping in business
With this free guide for entrepreneurs and their staff, written by business finance experts, new and part-time bookkeepers will soon learn the basics of business financial conventions. From accounting terminology through to keeping manual or computerised ledgers and what a trial balance is, these practical tips will help you organise record keeping every day within a small or medium-sized enterprise (SME). Whether you are self-employed as a sole trader or firm, or a part-time bookkeeper in a small company, this advice covers how to keep books in business.
What is bookkeeping?
A long-standing remit of accounts clerks and assistants, bookkeeping refers to the recording of transactions. It includes maintaining accurate day-to-day records of business finances: sales, receipts, purchases and payments.
If you are self-employed, a contractor, a business partner or just want to know more about how to keep accurate financial accounting records in your business, then learning about the role of bookkeeping is vital.
The double-entry system
Most common in the world of commerce, the double-entry accounting system records debits and credits. Under this general convention, all financial records balance with a corresponding opposite entry. A cash sale to a customer of £150 in value, for instance, requires two entries:
- A debit of £150 in the cash account; and
- A corresponding credit entry for the same amount in the organisation’s revenue account.
Accounting rules stipulate in which ledger to record each type of entry.
Recording transactions
Nowadays, bookkeeping usually involves using accounting software applications to record and process income and expenditure. With just a few mouse clicks, these computer programs produce daily and weekly journal summaries of financial transactions. In the same way, credit control staff might monitor accounts payable regularly, too.
During every month of trading, accounts staff run payroll tasks and calculate a trial balance from the sales and purchase ledgers. Each nominal ledger account holds a debit or a credit balance. Trial balances list the general ledger accounts, including revenue and capital, with a total.
Supporting accounting reports
In business, proper bookkeeping is essential to meet legal requirements and deal with tax enquiries. Cumulatively, the information in the books or digital records enables accountants to prepare annual profit and loss accounts as well as balance sheets.
In bookkeeping and accounting conventions, the term accruals means the recording of interest or other costs in financial reporting. Bookkeepers use this concept to record liabilities and non-cash assets. Typically, such reports show accrued interest receivable on investments – or payable on liabilities. Similarly, there might be accrued future interest costs and deferred tax liabilities. Accounts receivable (i.e. unpaid sales invoices) or subjective valuations of goodwill are other examples.
For legal reasons, it is necessary to retain business records and accounting reports for six years. In case there are tax questions or requests for further information, it is always reassuring to have an organised filing system.
Automating business bookkeeping
Nowadays, one can computerise double-entry bookkeeping with ease. A variety of bookkeeping software packages boasts all the basic features, while some offer options such as recurring invoices, receipt tracking and payroll runs for salary and wage payments with PAYE income tax processing.
In the UK, VAT (value added tax) registration is mandatory when annual turnover reaches £85,000. To simplify tax, this fixed threshold is to apply until at least the year 2020*. Usefully, for VAT-registered businesses, bookkeeping software makes completing VAT returns much easier for the necessary quarterly payments to HM Customs & Excise (HMRC).
Though computerised accounting is popular, some small businesses and solo entrepreneurs opt to use a part-time bookkeeper. This choice frees up working time for core sales activities. Conversely, for many SMEs, off-the-shelf bookkeeping and accounting software packages are appropriate to keep track of income streams, sales expenses and other outgoings. Often, such applications come with employer PAYE income tax, salary and wage slip modules too.
Typically, bookkeeping software supports:
- Cash, bank and credit card transactions;
- Account transaction reconciliations;
- Petty cash management and analysis;
- Invoices and payment advice slips;
- Receipts and statements for clients
- Analysis of days sales outstanding (i.e. client invoices overdue, 30+ days etc.)
As companies grow, they may sometimes call in or employ software experts to modify existing applications or to develop bespoke in-house programs.
Finally, if you are changing to a computerised bookkeeping system, you may want to run a pilot period in parallel with any existing manual arrangements. Subsequently, once proven, you can switch over and reap the time savings.