Self-employment: how to keep proper accounts

When you're self-employed, the most important thing you need to do is prepare accounts correctly and there are many business benefits to be gained from keeping records.

It saves you money, and time, whenever you need your accounting figures to back you up. Keeping records ensures that you only pay the tax you have to pay and it helps you to keep up to date with how much you owe and how much you're owed.

If you're slapdash at keeping records and fail to pay the right amount of tax, then you'll face huge fines from HM Revenue & Customs and you'll lose financial control of your business.

Here's an outline of what records you must keep, and give to your accountant, to make sure that you don't fall foul of the taxman and so you can evaluate your profit and loss effectively.

You must keep a record for every single transaction - whether it's income or expenditure. If you don't keep records, then how will you remember, or your accountant even know, that the transaction took place?

Some people who are self-employed hope to dodge tax by failing, on purpose, to keep a proper and complete record of their income, but this kind of behaviour is wrong, dishonest and illegal. HM Revenue & Customs nearly always find out that it's been going on and in revenge (as it were) collect all the unpaid tax going back for as many years as necessary. They will also charge interest on the late payment and you’ll have to pay penalties (i.e. fines), as well, by way of punishment.

Here's a list of what records your accountant needs to prepare accounts properly and to comply with the law:

  • Cheque book counterfoils
  • Invoices for expenses paid by cheque
  • Invoices for expenses paid in cash
  • Paying-in books
  • Copy sales invoices or other vouchers giving evidence to all monies received by cheque and cash
  • Bank statements
  • Wages records
  • Any other books in which you have recorded your transactions

At the end of the accounting period, they'll also need:

  • A statement of money owed by you – the 'creditors'
  • A statement of money owed to you – the 'debtors'
  • A list of unsold stocks on hand at the end of your accounting period

As long as you've methodically kept all of these items, then you'll have prepared accounts correctly.

Remember, also, to keep records of your business transactions for six years.

Six steps to financial control

  1. Work out your anticipated income from sales (including VAT) for the year.

  2. Add up your cost of sales, i.e. the cost of purchasing goods for processing or resale (including VAT) for the year.

  3. Calculate your overheads and outgoings, etc. (and don't forget VAT payments, loan repayments, capital purchases, contingencies, taxation and drawings, all including VAT) for the year.

  4. Make sure that number 1 is greater than 2 + 3.

  5. Divide the total of 2 + 3 by 12. This is the maximum amount you can spend in any month. Don't ever exceed it and don't pay any bills that will push you over this limit until the following month.

  6. Divide your total sales by 12 and make sure that the total of your sales invoices reaches this figure, at least, each month; then work on your customers to keep the cash coming in.

Result: the finances will then look after themselves.

More expert guidance on the day-to-day practicalities of self-employment, as well as advice on how to prepare accounts and put together cash flows, can be found in Lawpack's Self-Employment Kit. Written by award-winning accountants, the Self-Employment Kit tells you how to get started in working for yourself, how to put together budgets, and how to offset costs and expenses against your tax bill.

Published on: September 3, 2012

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