What is Bookkeeping and Why Do I Need to Do it?

Bookkeeping is an age-old accounting practice. Whilst the former physical ‘book’ has been largely usurped by spreadsheets and accounting software, the process of bookkeeping is still more or less the same as it ever was.

The bookkeeping definition hasn’t changed much since Luca Pacioli, the ‘father of accounting’, introduced financial bookkeeping into the mathematics curriculum in the 15th and 16th centuries.

In its simplest form, bookkeeping involves the upkeep of account balances, incoming and outgoing payments, expenses and other financial records.

In the UK, keeping accurate books for a business is required by law, but hefty fines shouldn’t be the only reason businesses take bookkeeping seriously. Robust and thorough business accounting provides insight into the past, present and future - it’s essential for any business that wants to take control of its finances.

Is Bookkeeping Required?

In the UK, HMRC requires the self-employed, business owners, company partnerships and landlords to maintain certain financial records relevant to their business.

Records need to be kept for a minimum of 6 years or longer in the case of expenses intended to last longer than that period, like factory machinery.

HMRC requires businesses to keep at least the following records:

• All outgoing and incoming payments and cash. This includes payments from all invoices, contracts, tills and other petty cash.
• Any stocks and shares owned by the company
• Business expenses
• Company assets.
• Debts and loans held by the company.
• Grants and/or loans claimed throughout the coronavirus pandemic, e.g. SEISS
• Outgoing and incoming goods

The more detail you can keep of the business’s accounts and finances, the better. HMRC are at liberty to request specific documents that prove your tax calculations and tax returns are correct. Being able to promptly supply them with the requested information will expedite any investigations.

According to the Financial Times, HMRC has access to a vast quantity of personal and business data -  their omniscience shouldn’t be underestimated and the number of fines issued and investigations launched in coming years is set to grow.

A full breakdown can be found on the HMRC website. If you’re unsure whether a business you own/are in partnership with is collecting the correct financial records then consult an accountant. 

Accurate Bookkeeping is a Legal Requirement for Businesses in the UK

Keeping and maintaining accurate books is not an option, but a requirement by law that carries a fine of at least £3000 for those found to not be keeping accurate financial records that meet expected standards.

Failure to maintain accurate books and financial records may also trigger HMRC to launch a tax investigation or compliance check. This is a lengthy process that is best avoided at all costs.

Take accounting seriously - that is some of the best startup business accounting advice or small business accounting advice there is. Start now and ensure that the business’s financial records are straight and completed in detail.

Types of Bookkeeping Systems

Bookkeeping systems and practices can be broken down into the following:

• Single-entry bookkeeping, where just one entry is recorded per transaction (e.g. cash in or out)
• Double-entry bookkeeping, where both a debit and credit is recorded per transaction

And:

• Cash bookkeeping (or cash basis), that records transactions when the cash actually changes hands (e.g. is given or received)
• Accrual accounting (or traditional accounting), that records transactions when they are initiated or earned (e.g. if a company earns income one month but this isn’t received until the next month).

For small businesses, the most likely combination is a single-entry cash bookkeeping system, also known as cash basis in the UK (which is what most imagine bookkeeping to be). Most start-up business accounting advice involves starting with a cash basis system, then scale up when necessary. A double-entry traditional or accrual system is more complex and has 5 accounts to keep and maintain; assets, liabilities, equities, revenue and expenses.

Single-entry cash bookkeeping involves just revenue and expenses. The UK government recommends cash basis for smaller businesses with low transaction volume and few other assets to account for (e.g. stock).

Why is Bookkeeping Useful for Businesses?

Small businesses are put off by bookkeeping because:

1. It’s time-consuming
2. It doesn't necessarily appeal to their skillset

Many startups and small businesses consider accounting ‘surplus to requirements’, but establishing robust accounting practices from the start is by far the more sensible option. Bookkeeping is an excellent way to accelerate business growth by maintaining cash flow, forecasting future finances and reporting growth.

Without knowing a business’s finances with some objective certainty, it’s impossible to tell how well a business is doing. There’s no visibility or awareness of financial performance, cash flow issues and potential areas for improvement.

Bookkeeping provides businesses with the following useful information:

• Where the business is right now; the state of current accounts, debt, scheduled payments, stock and other predictable ongoing revenue and expenses
• How business changes throughout time; profit and loss, changes in incoming and outgoing payments throughout the year (e.g. Christmas)
• Where the business is heading in the future; projections for the future, cash flow and forecasted growth, providing insights on where money should be invested and into what

Whilst many businesses hire an accountant, either via the traditional brick-and-mortar avenue or by outsourcing an accountant online, there still needs to be some input from the business itself.

Namely, the correct records need to be maintained and forwarded to the accountant who can check and send them to HMRC. A fundamental culture of accounting should be instilled in a business from the start.

Business accounting management is a simple way to maintain business expectations and regulate investment and growth.

Summary: What is Bookkeeping and Why Do I Need to Do it?

Bookkeeping is legally required by HMRC for businesses in the UK, including small businesses and sole traders. Failure to keep compliant and accurate books can result in fines or tax investigations.

Besides implications from HMRC, robust and accurate accounting is excellent business practice. It ensures the visibility of a business’s finances, helping businesses plan for the future and learn from the past. Once solid accounting practices have been installed in a business, they’re relatively easy to maintain from then on.