Bookkeeping is sometimes treated as an administrative task that simply needs to be completed before the accountant prepares the year-end accounts.
In reality, bookkeeping is the foundation of almost every piece of financial information produced by a business.
Accurate bookkeeping supports:
- VAT returns
- annual accounts
- corporation tax returns
- Self Assessment tax returns
- management accounts
- cash flow forecasts
- dividend planning
- loan applications
- business decision-making
When the bookkeeping is accurate and up to date, the business owner can make decisions using reliable information. When it is incomplete or incorrect, the accounts, tax calculations and management reports may also be wrong.
What is bookkeeping?
Bookkeeping is the process of recording the financial transactions of a business.
This includes recording money received from customers, payments made to suppliers, wages, taxes, loans, expenses and transfers between accounts.
However, good bookkeeping involves more than simply copying transactions from the bank statement into accounting software.
Each transaction must be:
- recorded
- allocated to the correct accounting category
- supported by suitable documentation
- given the correct VAT treatment
- matched against the relevant invoice or payment
- reconciled to the bank or credit card statement
The bookkeeping records should tell the complete financial story of the business.
What does bookkeeping include?
The exact work will depend on the size and structure of the business, but day-to-day bookkeeping commonly includes:
- raising sales invoices
- entering purchase invoices
- posting bank transactions
- matching customer payments to invoices
- recording supplier payments
- reconciling bank accounts
- reconciling credit cards
- applying the correct VAT codes
- recording payroll costs
- posting payroll journals
- recording loan and hire purchase payments
- recording dividends
- recording directors’ withdrawals
- dealing with missing receipts
- correcting transactions posted to the wrong category
Some businesses complete these tasks daily. Others may update their records weekly or monthly. The important point is that the records are maintained regularly rather than left until the end of the year.
Sales invoice processing
A sales invoice records the amount a customer owes the business.
A properly prepared invoice will normally include:
- the customer’s name
- the invoice date
- a unique invoice number
- a description of the goods or services supplied
- the amount before VAT
- the VAT amount, where applicable
- the total amount due
- the payment terms
Accurate invoicing helps a business monitor its income and identify customers who have not paid.
It also affects VAT reporting. In many cases, VAT becomes due based on the invoice or tax point rather than when the customer eventually pays, although different rules can apply where the business uses the VAT Cash Accounting Scheme.
Regularly reviewing unpaid invoices can therefore help protect cash flow and reduce the risk of debts being overlooked.
Purchase invoice processing
Purchase invoices record amounts owed by the business to its suppliers.
They provide evidence of:
- business expenses
- amounts owed to suppliers
- VAT that may be recoverable
- costs included in the annual accounts
- expenses claimed for tax purposes
A bank payment does not always provide enough information to support an expense or VAT claim.
For example, a bank statement may show that £240 was paid to a supplier, but it may not show:
- what was purchased
- whether the purchase was for business purposes
- how much VAT was charged
- whether part of the payment was personal
- whether the cost should be treated as an asset rather than an expense
Keeping the original invoice helps establish the correct accounting and tax treatment.
Posting bank transactions
Bank postings record money entering and leaving the business bank account.
These transactions may include:
- customer receipts
- supplier payments
- wages
- bank charges
- loan repayments
- VAT payments
- PAYE payments
- corporation tax payments
- directors’ withdrawals
- transfers between bank accounts
Each item must be posted to the correct category.
A loan repayment, for example, may include both capital and interest. The capital element reduces the loan shown on the balance sheet, while the interest element may be recorded as a finance cost in the profit and loss account.
Posting the entire payment as a general expense would distort both the profit and the outstanding loan balance.
Why bank reconciliation matters
Bank reconciliation means comparing the bookkeeping records with the actual bank statement.
The accounting system’s bank balance should agree with the statement balance, allowing for any genuine timing differences.
Regular bank reconciliation helps identify:
- missing transactions
- duplicate entries
- payments posted twice
- incorrect amounts
- transactions allocated to the wrong bank account
- bank charges that have not been recorded
- customer receipts that have not been matched
- unexplained differences
Without reconciliation, the accounting system may display a bank balance that does not exist in reality.
This can affect cash flow decisions, VAT returns, management accounts and year-end accounts.
Credit card reconciliation
Business credit cards should be reconciled in the same way as bank accounts.
Credit card statements may include:
- subscriptions
- travel costs
- fuel
- entertaining
- software costs
- client-related purchases
- interest and charges
- personal spending
Each transaction needs to be reviewed and recorded correctly.
The amount owed to the credit card provider should also be shown accurately within the balance sheet. Recording only the monthly payment, rather than the individual purchases, can result in incomplete or misleading records.
VAT Posting
VAT-registered businesses must apply the correct VAT treatment to their transactions.
This is not always as simple as choosing between “VAT” and “no VAT”.
Transactions may be:
- standard-rated
- zero-rated
- exempt
- outside the scope of VAT
- subject to reverse charge rules
- partly recoverable
- blocked from VAT recovery
Incorrect VAT posting can lead to:
- overpaid VAT
- underpaid VAT
- missed VAT claims
- inaccurate VAT returns
- HMRC enquiries
- additional work correcting previous returns
VAT should only be reclaimed where the business has suitable evidence and the cost meets the relevant conditions.
Regular, accurate bookkeeping makes VAT return preparation much more reliable.
Missing receipts and incomplete records
Missing receipts are one of the most common bookkeeping problems.
Without a receipt or invoice, it may be difficult to establish:
- whether the cost was genuinely for the business
- whether VAT can be reclaimed
- what was purchased
- whether the payment included personal expenditure
- whether the item was an expense or a fixed asset
Cloud accounting software and receipt-capture applications can make record keeping easier, but documents still need to be reviewed and matched correctly.
A digital photograph of a receipt is only useful when it is readable and connected to the correct transaction.
The effect of poor bookkeeping
Poor bookkeeping can create problems throughout the business.
It may lead to:
- incorrect VAT returns
- unexpected tax liabilities
- unreliable management accounts
- missed customer debts
- inaccurate supplier balances
- incorrect dividend decisions
- confusion over money owed by directors
- additional accountancy costs
- delays in preparing annual accounts
- difficulties obtaining finance
Where the records are incomplete, the accountant may need to spend considerable time investigating transactions, requesting missing information and correcting errors.
That additional work can increase the cost of preparing the accounts.
How accurate bookkeeping improves business decisions
Bookkeeping is not only about meeting tax and reporting obligations.
Up-to-date records help answer important business questions, such as:
- Is the business profitable?
- Which customers owe money?
- How much is owed to suppliers?
- Can the business afford to take on another employee?
- Is there enough cash available to pay the VAT bill?
- Are costs increasing?
- Can the company afford to pay a dividend?
- Is the director’s loan account overdrawn?
- Does the business need additional finance?
A set of accounts prepared several months after the year end may explain what happened in the past. Regular bookkeeping and management reporting can help the owner decide what to do next.
How often should bookkeeping be completed?
The appropriate frequency depends on the volume of transactions and the needs of the business.
As a general guide:
- high-volume businesses may need daily bookkeeping
- growing businesses may benefit from weekly updates
- smaller businesses may be able to update monthly
- VAT-registered businesses should not wait until the VAT deadline
- businesses using management accounts need records completed before each reporting date
The longer bookkeeping is delayed, the harder it can become to remember what transactions relate to and locate missing paperwork.
Key takeaway
Bookkeeping is much more than posting bank transactions.
It is the process of maintaining complete, accurate and reliable financial records so that the business owner, accountant and tax authorities can rely on the figures.
Good bookkeeping:
- saves time
- reduces errors
- supports accurate tax returns
- improves cash flow control
- provides better management information
- helps identify problems earlier
- creates opportunities for forward tax planning
At GMS Accountants, we help businesses maintain reliable records, understand their figures and plan ahead rather than waiting until the year end.
For help with bookkeeping, VAT returns, management accounts or business tax planning, contact GMS Accountants or visit www.gms-accountants.co.uk.
This article provides general guidance only and does not constitute personalised accounting or tax advice. The correct treatment will depend on the circumstances of the business and the nature of each transaction.
