Bookkeeping has always had a reputation for being a difficult task that is tough to deal with. If you’re a sole trader, you may also feel this way. But with technology increasingly aiding us in those administrative duties we’d rather do without, sole trader bookkeeping has become a lot easier.
In this guide, we’ll explore how bookkeeping for a sole trader works, and why it is important.
What is bookkeeping?
Bookkeeping is all about tracking your business finances and keeping records that give you an overview of your business’s monetary state. It involves keeping track of transactions and business expenses and preparing the necessary documents for your annual tax return.
Most accounting experts recommend that, for sole traders, bookkeeping is done regularly (either weekly or monthly) to ensure you don’t fall behind to the point it becomes overwhelming.
How bookkeeping works for a sole trader
As a sole trader, you have a few responsibilities when running your business. The primary essential tasks for a sole trader are below:
Ensuring all business expense and sales records are up to date
To ensure all business expense and income records are kept up to date, it’s important to establish a consistent system, such as using accounting software or a spreadsheet, to record every transaction related to your business. Of course, professional accountants can also help you with this.
To start bookkeeping, organise your financial records by digitising receipts, using separate folders or binders to store paper documents, and regularly reviewing and reconciling your accounts to identify any errors or discrepancies on your business bank statements.
Making sure you send a self-assessed tax return every year
Filing a self-assessment tax return is a legal requirement if your business income exceeds £1,000 annually. Failure to comply can result in penalties, fines, and even legal action. A self-assessment tax return helps HM Revenue and Customs (HMRC) accurately calculate your tax liability, thereby ensuring you pay the correct tax amount and avoiding any potential underpayment or overpayment.
Paying the correct taxes
Again, bookkeeping is very important in calculating how much income tax you owe HMRC. You need to keep a record to prove that what you claim to be expenses are eligible through your business. Your national insurance, as a sole trader, is also relatively straightforward. As a sole trader, you must pay Class 2 National Insurance Contributions (NICs) on your business profits.
This is typically 9% of your profits between £6,475 and £50,000 and 2% of the amount above £50,000. You also will have to pay Class 4 NICs, which is also 9%, but of your profits between £9,501 and £50,000, and then the usual 2% above £50,000.
The key records you need to keep as a sole trader
The good news is that bookkeeping for sole traders is far more relaxed than for larger corporations. As a sole trader, there are only three main aspects that you need to keep on top of. These are explained below:
Income
As a sole trader, your income is determined by your invoices and any inward payments you receive into your account due to the service you provide or products sold. If you operate as a sole trader, you must keep tabs on any additional income you bring in personally. For example, income generated from property lettings or something similar must also be recorded.
Business expenses
For bookkeeping, you need to ensure that you understand how to classify your business expenses and what constitutes a business expense. Expense tracking also gives you valuable insights into your business’s financial performance, helping you make informed decisions about investments, expansion, and financial management.
In this way, sole traders can identify areas for improvement and optimise their business operations, leading to increased efficiency and profitability.
VAT records
Bookkeeping is essential when it comes to working out your VAT situation. Sole traders must register for VAT if their taxable turnover exceeds £90,000 in any consecutive 12-month period. This threshold is calculated on a 12-month basis, not a financial year. If you reach this threshold, VAT registration has to take place within 30 days of the end of the month in which it was exceeded.
You must charge VAT on service or product sales from the next month. Of course, you can also register for VAT voluntarily, even if your turnover is less than £90,000.
Accurate bookkeeping is essential for all VAT purposes, as it determines how much VAT to charge and how much you can claim back from the HMRC for certain business purchases. There are some benefits to being VAT registered, provided your sole trader bookkeeping is on point.
Bank records
Bank statements provide a detailed record of all financial transactions, including income and expenses. This helps you accurately track your business income and expenses, which is essential for calculating your taxable profit, filing your tax return, and improving your overall business financial management.
Bookkeeping involves keeping track of your bank statements and reconciling these business transactions against the relevant invoices and receipts. This helps you place transactions in the right category. Many accounting and bookkeeping software exist to help you keep track of bank records if you are a sole trader.
Why bookkeeping is important for sole traders
Bookkeeping is one of those administrative tasks that may seem tedious, but it’s vital if you want to run your sole trader business effectively. Here are the key reasons why sole trader bookkeeping is important.
Keeping track of your progress
Accurate bookkeeping records allow sole traders to track their income, expenses, and overall financial performance over time. This provides valuable insights into the profitability and growth of the business, enabling sole traders to make informed decisions about investments, expansion, and cost-cutting measures.
Provides a good financial overview of your business
By practising detailed bookkeeping, you better understand your business’s financial position in terms of assets, liabilities, and general cash flow. This financial overview helps sole traders manage their finances effectively, plan for the future, and identify areas for improvement or growth opportunities.
Ensures you remain tax-compliant
Maintaining proper records helps sole traders avoid penalties and interest charges from HMRC for non-compliance or inaccurate tax filings. It allows you to keep records of your taxable income and deductible expenses.
Allows you to work with accountants effectively
Maintaining good bookkeeping records makes the process much easier when working with accountants. Accountants can use the information to provide valuable financial advice, tax planning, and other business support. It will also save time, as your accountant can prepare financial statements, tax returns, and other reports with access to accurate and up-to-date bookkeeping records.
How Reed Accountants can help
If you need assistance with bookkeeping or want to understand more about the best ways to go about it, get in touch with Reed Accountants. We have professionals who are always available to answer any queries. Our years of experience in accounting and business finances mean we can provide the support you need when running a business as a sole trader. Contact us today and take control of your business’s books.
Sole trader Bookkeeping FAQs
What is sole trader bookkeeping?
Sole trader bookkeeping involves keeping accurate records of all financial transactions related to your business. This includes income from sales or services and all expenses incurred in running the business. Proper bookkeeping is crucial for sole traders to manage their finances effectively, monitor cash flow, and comply with tax laws.
Do I need to hire an accountant as a sole trader?
While it is not necessary to hire an accountant immediately, it is recommended to seek professional help if you are not familiar with bookkeeping or need assistance with tax compliance. An accountant can help you set up effective bookkeeping systems, provide guidance on tax obligations, and assist with filing tax returns on time.
How do I ensure compliance with tax laws as a sole trader?
To ensure compliance with tax laws, maintain accurate financial records and file tax returns on time. You must also register for VAT if your turnover exceeds the current threshold of £85,000. Additionally, you must keep records of all financial transactions for at least five years from the latest date of sending back your tax return.
How do I keep track of my expenses as a sole trader?
To keep track of expenses and maintain detailed records of all business-related transactions. This includes receipts for purchases, invoices, and bank statements. You can use bookkeeping software to ensure your records are accurate.
How do I set up sole trader bookkeeping?
Choose a bookkeeping system that suits your business needs. You can opt for manual bookkeeping using spreadsheets or accounting software. This depends on your business size, complexity, and budget. From here, you must keep track of your financial transactions in slide income, expenses, invoices and receipts, and any tax-related documents that will help you when you file your tax return.
