Running a small business is an exciting journey, but managing your finances can feel overwhelming. Whether you’re handling your accounts yourself or working with an accountant, understanding the basics of small business accounting is essential.
This guide will walk you through everything you need to know, from bookkeeping and record-keeping to filing statutory accounts and managing cash flow. Let’s dive in and make accounting work for your business.
- Do I need to have an accountant for my small business?
- How to plan your annual accounts
- What do I need to record for my small business accounts?
- How to keep records of sales, purchases, and fixed assets
- Statutory year-end accounts: what are they?
- Managing payroll and expenses
- Best small business accounting software
Small business accounting vs bookkeeping
While often used interchangeably, accounting and bookkeeping serve different purposes in managing your finances.
Accounting:
- Interprets and analyses financial data
- Prepares financial statements (e.g., profit and loss, balance sheets)
- Provides strategic advice on tax planning and cash flow management
Bookkeeping:
- Focuses on recording daily financial transactions
- Involves categorising income and expenses
- Ensures accurate and organised financial records
In short, bookkeeping is about recording data, while accounting uses that data to make informed decisions.
Do I need to have an accountant for my small business?
No you don’t need an accountant for your small business. You can prepare and file your own accounts using MTD-compliant software. However, this requires a solid understanding of accounting principles and HMRC regulations.
Key considerations:
- Ensure your software is MTD-compliant for VAT and income tax (if applicable).
- Keep accurate records of income, expenses, and assets.
- Be aware of deadlines for filing with HMRC and Companies House.
While it’s possible to DIY, hiring an accountant can save you time and ensure compliance.
How to plan your annual accounts
Preparation is key to stress-free account filing. Here’s how to stay on top of things:
- Keep accurate records: Track sales, purchases, and expenses throughout the year.
- Use accounting software: Automate invoicing, expense tracking, and bank reconciliation.
- Work with an accountant: They can provide valuable insights and help reduce your tax bill.
- Review and improve: After filing, identify areas for improvement to streamline the process next year.
What do I need to record for my small business accounts?
HMRC requires you to record the following:
- Income and expenditure records: Sales invoices, purchase receipts, and bank statements.
- Stock and uncompleted work: Details of unsold stock and work in progress at year-end.
- Fixed assets: A register of equipment, property, and other long-term assets.
- Payroll and expenses: Records of employee payments and expense claims.
Failing to keep accurate records can result in fines or even disqualification as a company director.
How long do I need to keep accounting records for?
Limited companies must keep records for six years from the end of the last financial year they relate to. If you are a sole trader, you must keep your records for at least five years after the 31st January submission deadline of the relevant tax year.
What are the legal requirements for end-of-year accounts?
- Submit accounts to HMRC within 12 months of your financial year-end.
- File statutory accounts with Companies House within nine months.
- Ensure compliance with MTD regulations for VAT and income tax.
How to keep records of sales, purchases, and fixed assets
Sales and purchases:
- Use unique invoice numbers for each transaction.
- Maintain a list of outstanding debtors (customers who owe you money) and creditors (suppliers you owe).
- Order records by date to track overdue payments.
Fixed assets:
- Create a register detailing the type, purchase date, value, and location of each asset.
- Account for depreciation to reflect the asset’s reduced value over time.
Statutory year-end accounts: what are they?
If you run a limited company, you must file statutory end of year accounts. Statutory accounts are financial statements submitted to Companies House. They differ from the accounts you send to HMRC and include:
- Director’s report: An overview of the company’s performance and future outlook.
- Balance sheet: A snapshot of assets, liabilities, and equity at year-end.
- Profit and loss statement: A summary of income, expenses, and profit/loss over the year.
Small companies can submit abridged accounts, but full accounts must still be sent to HMRC.
Managing payroll and expenses
Payroll:
- Use payroll software to calculate salaries, deductions, and National Insurance contributions.
- Stay updated on changes to National Insurance rates and thresholds.
Expenses:
- Implement a standardised system for employee expense claims.
- Keep detailed records of all claims, including receipts and invoices.
Best small business accounting software
Using accounting software can save you time, reduce errors, and streamline your financial processes. It’s also essential to have MTD-compliant software for filing your VAT return, even if you already have an accountant. Here are some top options:
Sage
Sage offers scalable accounting solutions for businesses of all sizes, from freelancers to mid-sized enterprises. Its cloud and desktop software automate financial tasks, improve cash flow visibility, and ensure compliance. With real-time insights and collaboration features, Sage helps businesses streamline financial management.
Tide
Tide Accounting integrates banking and bookkeeping into one platform for small businesses. It automates financial admin, provides real-time profitability insights, and supports VAT and Self Assessment filing. With flexible plans and a three-month free trial, it simplifies financial management.
Xero
Xero is a cloud-based accounting software for UK small businesses, offering automated bookkeeping, invoicing, and real-time financial insights. With extensive app integrations and HMRC compliance, it helps businesses stay on top of their finances while reducing admin work.
Moss
Moss is an AI-powered spend management and accounting automation platform that simplifies pre-accounting, automates workflows, and integrates seamlessly with accounting software. It enhances financial control with real-time insights and customisable approval processes.
Quickbooks
QuickBooks is a user-friendly online accounting solution for small businesses and freelancers. It automates income tracking, invoicing, VAT management, and tax compliance, with seamless bank integrations and scalable plans for growing businesses.
Read more: The best accounting software for small businesses.
Mastering small business accounting
Accounting doesn’t have to be a headache. By following these steps, you can stay on top of your finances and focus on growing your business:
- Invest in accounting software: Automate record-keeping and stay compliant.
- Hire an accountant: Their expertise can save you time and money.
- Maintain accurate records: Organised records make tax season much easier.
With the right tools and knowledge, you can turn accounting from a chore into a powerful tool for business success.
