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What is bookkeeping?

Date: Jul 22, 2022

What is bookkeeping?

All businesses, including the Business Owners, should have a basic understanding of bookkeeping even though the process can be totally outsourced to a bookkeeper or accountant if you didn’t want to do it yourself. It’s the foundation for all the business finances and that’s why we always recommend learning the bookkeeping basics when you start running your own business.

If the business finances are wrong, then you are making all your business decisions based on incorrect information. Which is why bookkeeping is so important!!

What is bookkeeping?

Let’s start with some terminology.

Bookkeeping is the process of recording the income generated by the business and the expenses and costs paid from the business. It shows you how much money a business has left after the Income received has been used to cover the costs.

The money that is left is your business’ profit.

BUT most business owners put money into the business to initially pay for some costs and expenses before they have generated any income from their customers. As bookkeeping is primarily interested in income and expenses not the money owed to the business owner, your business could make a loss. A business loss is where the expenses and costs paid for are greater than the income received from your customers.

The business owner can be repaid any money they have invested but this is a whole other area of bookkeeping!!

Invoicing your customers

This is one area that a lot of business owners openly admit they are bad at as they either

  • don’t have time to complete the work to raise an invoice to their customer
  •  in some cases, are even embarrassed or concerned about asking for the money even though they have completed the work

It’s an integral part of the bookkeeping process for any business because it demonstrates the client’s obligation to pay for your goods or services and it is the only way your business can survive.

If you don’t invoice your customers in a timely manner, then you don’t receive any income.

You may need to raise an invoice to your customer in various circumstances, such as:

  • a deposit towards the product they are buying but isn’t ready yet
  • a deposit to book agreed dates for a service-based business
  • an interim invoice if a service-based business and part of the work has been completed
  • full payment of a product purchased
  • full payment of the services completed

There is no rule on how you decide the above or how often you raise an invoice to your customers, but we recommend at least monthly for a service-based business and full payment for any product before being shipped.

An invoice in our opinion should include:

  • Date of the invoice (this is the date you are raising the invoice on – normally today’s date)
  • Invoice number – if each invoice has its own unique number (we recommend a sequential approach) then it is easy to identify an invoice and to see if you have any missing
  • A description of the product or service purchased by your customer
  • The cost of each product and service purchased by your customer
  • The total amount due by your customer
  • The date that the customer must pay by
  • How the customer can pay, such as your bank details

If your business is VAT registered, there are other things to include as well!

Expenses and Costs

You need to record all the costs paid for that relate to your business. A mentioned above, some of these costs may have been paid for by the business owner but these still need to be included.

The one critical rule on whether an expense is allowed in a business is whether it is “wholly and exclusively for business purposes”. If there is any dual-purpose use (business and personal) then this can be a grey area for accounts and tax purposes. We recommend speaking to an Accountant or Bookkeeper who can confirm what is allowed.

When you purchase something, you need to get a receipt for the expense and that is for EVERY expense. This is your evidence for your Accountant or Bookkeeper and for HMRC.

There are a few expenses where you cannot get a receipt, such as claiming business miles for business trips in your personal car, but this is another area of bookkeeping not covered here.

A receipt from a shop, if buying stationery for example, is sufficient as long as the goods are clearly stated. It needs to be the shop receipt not a credit or debit card receipt.

Some suppliers (companies you purchase goods from) will provide a more formal piece of paper that shows what they are billing you for, how much is due to be paid and by when. They will likely be very similar to the customer invoice you raise as you are their customer this time.

If you are using a finance package, such as QuickBooks or Xero, they can refer to your business costs as an Expense or a Bill. Ultimately though they are just two different ways to record a cost on your business and end up with the same result. If you’re not sure, then it is worth investing in some proper bookkeeping training.