Napoleon one supposedly said that the English are a nation of shopkeepers, and it is certainly true that many of us desire to be our own boss, having some kind of business.
Entrepreneurs can not only make good money, but they also have a high degree of financial independence, so although running your own business is undeniably hard work, the rewards are attractive too.
When you start your first business, accounting might well be the last thing on your mind: it is time consuming, and it is boring.
It is, however, absolutely essential so that you can accurately forecast your business’ income and expenditure.
You need to keep count of your everyday transactions (your book keeping) as these are used to produce your company accounts, which you have to give to the tax man at the end of the financial year.
Whether you intend to do your books online or on paper, pick up a basic guide to get you started. Amazon has hundreds of easy to read options, but one of the best is Mastering Book-Keeping by Peter Marshall.
Business Accounting 101 – Top 5 Tips
Here are our top five book keeping tips:
1. Update Your Books Regularly
Having a huge pile of transactions to go back through is intimidating, and you might well forget what some of the receipts were for. Make “little and often” your book keeping mantra.
2. Keep it Simple
Book keeping doesn’t have to be difficult. Use readymade book keeping software, or a paper book keeping ledger, and just fill in the relevant boxes with your figures and notes.
3. Dealing with Your Expenses
It’s easy to ignore your small expenses, coffees, taxi fares, stationery costs etc. Don’t leave them out.
List all your expenses and enter everything into your accounts, however insignificant the amount, because all those little costs add up over the course of the financial year and you need to know where your money has gone.
4. Reconcile Your Bank
Lost a receipt and can’t remember how much you paid for something? Cross reference your book keeping with your online banking records to ensure that the two tally up, and whilst you are at it, reconcile your petty cash receipts too.
5. Use Double Entry Book Keeping
It may be complicated at first, but double entry book keeping helps you quickly identify any mistakes in your accounts, saving you huge amounts of time finding the right information and fixing the figures later on.
At the end of the financial year, all self-employed people and business owners need to produce accounting records, which can be checked by Her Majesty’s Revenue and Customs (HMRC) or, if it a limited company, Companies House.
In the UK, the financial year ends on 31 March, so have everything prepared well in advance. These are legal documents and, if you are a company, they are publicly accessible for a small fee, so they must be absolutely accurate.
Your end of year accounts should be comprised of three parts:
- A profit and loss account
- A balance sheet; and
- A cash-flow statement
Even if you have an accountant to produce these for you, you need to know what they include so that you can provide the right information to write them.
Profit and Loss Account (P&L)
Your profit and loss account (P&L) lists all the costs that are required to make a sale. In essence, it describes your business’ turnover in a given period.
Sales are listed under the month when they are made (not when you are paid for them), costs of sales are factored in, and so is any depreciation of assets that you might incur.
On your balance sheet you have to outline all of your assets and liabilities.
This includes money that you have in the bank, your equipment and stock, minus any debts, tax and national insurance contributions, etc.
You can think of your balance sheet as a detailed way of writing up the following equation:
Assets – Liabilities = Equity
Last but not least, your cash-flow statement explains how much cash is coming through the door, and how it is being deployed.
This includes your operating activities, any investments (including equipment and premises), financing (e.g. bank loan repayments), and supplemental information such as the amount of tax and interest payments you have to make.
With these three documents you can gain a real insight into the health of your business, and predict how it is going to fare over the next 12 months.
Recommended Reading: If you want to learn more about business accounting, check out the Mastering Book-Keeping by Peter Marshall.
Business accounting may at first seem impenetrable, but you will quickly get the hang of it. Start your entrepreneurial journey with confidence. Don’t ask yourself, “Can I manage it?” but instead, “When am I going to start?”
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