For Business Owners

Understanding The Basics Of Bookkeeping

Bookkeeping is vital even for companies that are just beginning their operations. As a small business owner, understanding the rules and basics of bookkeeping is essential for success, compliance, and scaling—read on to find out everything to know about the subject.

An Introduction To Bookkeeping

If you want your small business's finances to add up, bookkeeping is essential. Initially, you could be the bookkeeper, but as your company expands, you might discover that you no longer have the time.

This brief overview will help you comprehend the fundamentals of bookkeeping and why it's crucial for a successful organization, whether you want to manage the position alone or hire someone to assist.

What Distinguishes Accounting vs. Bookkeeping?

Accounting and bookkeeping are frequently mistaken terms. In reality, the accounting function includes a tiny but crucial component called bookkeeping.

While accounting uses financial data to determine the company's financial situation and make management choices, bookkeeping is the act of logging and reporting financial data.

In Summary:

The recording and reporting of financial data are known as bookkeeping. Accounting is the analysis of data and financial planning.

What Steps Does Bookkeeping Contain?

Keeping track of a company's daily finances is called bookkeeping. It contains:

  • Making remittances (e.g., bills)
  • Pursuing clients' and customers' payments
  • Ensuring that your company pays the appropriate amount of tax
  • Requesting back taxes for your company (e.g., expenses)
  • Managing payroll to pay your employees and HMRC properly

Three financial records are used by bookkeeping to monitor payments into and out of the company:

  • Cashbook: This keeps track of all transactions that come into and go out of your business's account.
  • Sales invoices —which include both paid and unpaid invoices—record what you have sold.
  • Purchase invoices record your purchases, including services, and how you paid for them.

You'll definitely maintain additional records (or "books"), but these are often the absolute least. Keeping the correct books is crucial for financial reporting and in case of an audit.

7 Bookkeeping Tips for Small Business Owners

You may start maintaining books for your small business by using the following advice.

1. Maintain Records Of All Payments

Keep track of every payment in your records and note the date it was paid or received so you can quickly locate it if you need to go back to it later.

2. Select An Accounting Technique

Decide which approach you will employ immediately because your bookkeeping will be the foundation for your accounting. At the time of the invoice, traditional accounting tracks income and costs. When you actually receive or pay the money, cash accounting records that date.

Cash accounting lowers your chance of being required to pay tax on the money you haven't yet received, but it's only an option if your turnover is £83,000 or less.

Read in detail about Accrual vs. Cash Basis Accounting.

3. Set Deadlines

Give your clients a payment deadline so you may successfully pursue them, and never make late payments (particularly to HMRC). Keep track of any late payers, and if they persist in skipping payments, you should stop business with them. The goal of credit control is to maintain a healthy cash flow.

4. Monitor Your Spending

Many company costs qualify for tax reimbursements, which can help you lower your overhead. Receipts are required to support your claims to HMRC.

Therefore keep them organized in various business categories and safely preserved. Make careful to keep business and personal costs apart so you can quickly determine which ones may be deducted from profits to lower taxes.

5. Arrange Your Bank Statements And Invoices Properly

Verify that all bank statements and invoices (both sales and purchases) are accurate, present, and chronologically arranged. If not, you'll have to compensate your bookkeeper for the time spent looking for and organizing these records when you could easily do it yourself. Even worse, if records are lost, you can be penalized for submitting them late.

Keep separate files for paid and unpaid invoices for purchase invoices (i.e., the money you owe), and arrange both sets of documents alphabetically by supplier name. Remember to transfer invoices once you've paid them. In order to effectively pursue unpaid sales invoices (i.e., money owing to you), number them consecutively in the order that they are due.

6. Select The Appropriate Software

You might require specialized bookkeeping software, such as Wafeq, that helps you keep your finances in order at all times. Wafeq is easy to use and covers all the aspects a small business owner needs.

If you start with such software, you’ll be able to continue using it as you scale thus saving yourself time and resources in the future.

7. Create Recurring Reports

The best approach to remain on top of your company's finances and avoid unpleasant surprises is to generate reports at least once a month.

At the very least, a balance sheet and a profit-and-loss statement should be included in your monthly reports. You can now keep track of how well your company is doing in real-time.

For more details about this topic read our article: Bookkeeping And Accounting.

Which Is The Priority For Small Businesses: A Bookkeeper Or An Accountant?

Finding a bookkeeper may be more important for a small business than hiring an accountant. It's not often an either-or choice, though. Usually, bookkeeping and payroll may be included as part of the service when you outsource your accounting function.

A thorough finance department may provide you peace of mind, save time, and allow your company to expand as quickly as you want.

The Conclusion

Overall, bookkeeping is equally important for large and small business owners alike.

Appropriate records and bookkeeping are prerequisites of compliant and efficient accounting.

Thus, small business owners should prioritize getting their bookkeeping in order by either doing it themselves using specialized software or outsourcing it to a third party.

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With Wafeq, you can do your own accounting as a small business owner—reach out now, and get your trial running today!