The Lowdown on Sole Trader Bookkeeping

When you operate as a sole trader you have to wear many hats. Amongst your key objectives are, of course, doing your day to day work and growing your business. Without that there is no business!

And while self-employment has many well-known benefits, for every up there’s a down and being self-employed means you also have the obligation of handling the administrative side of things and the financial affairs of your business, and a crucial facet of that is bookkeeping.

As a sole trader, the administrative and reporting obligations you face are less onerous than if you operated through a limited company. Sole traders are, after all, less rigorously monitored than their incorporated counterparts.

That’s not to say this can’t be a daunting prospect, but good bookkeeping practice is the foundation for accurate and timely reporting and accounting, ensuring compliance, as well as the overall successful financial management of your business, so bookkeeping is not something that you should cut corners on or neglect.

Sole traders face a bigger level of financial risk than limited companies as they are personally responsible for any business debts. This emphasises the importance of effective bookkeeping for sole traders to build an accurate picture of the financial health of their business and to help ensure accounting accuracy and avoid any fines or penalties from HMRC.

In this post we’ll examine some of the key aspects of sole trader bookkeeping, what good bookkeeping practice looks like and how Gorilla Accounting and FreeAgent can help.

What is Bookkeeping?

Essentially bookkeeping is the process of maintaining records to record and track the daily financial transactions of your business. This includes sales, expenses, invoicing, categorisation, payroll and bank reconciliation. Another component of bookkeeping is the production of basic financial reports such as cash flow statements and balance sheets to help monitor the financial health of your business.

By contrast, accounting is less concerned with the administrative side of things and is more focused on tax compliance and planning, financial analysis, forecasting and auditing. There is a degree of overlap between the two elements but bookkeeping is primarily administrative, though it is a component of accounting and the also basis of accurate and effective accounting. Any errors or omissions in bookkeeping will impact the accounting that’s based on it downstream.

Sole Trader Responsibilities

As mentioned previously, the accounting and reporting obligations of a sole trader are less than for limited companies. The key sole trader responsibilities are listed below and good bookkeeping practice makes meeting them much simpler.

  • Maintain records of all expenses and sales
  • File a Self-Assessment Tax Return annually
  • Pay the due amount of income tax on your company profit
  • Pay class 4 National Insurance Contributions
  • Register for VAT if your annual turnover exceeds (or is expected to exceed) £90,000 and submit your VAT returns

Sole Trader Bookkeeping Key Elements

Accurately Track Income and Expenses

The basis of solid and accurate sole trader bookkeeping is to record all sources of income and expenditure in your business. This includes sales, fees for contracts, commissions and any earnings generated from business activities so be sure to keep all invoices in an organised manner.

Tracking expenses is just as important to build an overall picture of financial performance as well as ensuring that you maximise any available tax deductions. Common expenses include marketing and accountant fees, rent costs if you rent office premises and travel expenses, so keep all receipts and any other document to support your deductible expenses.

Stay on Top of your Financial Monitoring and Reporting

Proactive bookkeeping enables you to stay on top of the financial position of your business and get an up-to-date view of its overall financial health. By doing this key financial statements including balance sheets, profit and loss statements and cash flow statements can be produced which enables you to assess and understand the financial health of your business and make adjustments to ensure it remains financially robust.

Ensure Tax Compliance

As a sole trader you have the ultimate responsibility of ensuring tax compliance. You must calculate and pay the appropriate amount of income tax, class 4 National Insurance Contributions and Value Added Tax (VAT) if your business is VAT registered. Without implementing thorough and accurate bookkeeping practices to calculate the taxable profits of your business and prepare and file accurate tax returns, you run the risk of incurring fines and penalties from HMRC.

Reconcile Your Bank Transactions

Regular and comprehensive reconciliation between your business banking records and your recorded business income and expenditure is essential to identify and rectify inconsistencies or errors in your numbers. As well as helping you to identify any inaccuracies in your records, you also are able to isolate any unauthorised transactions and fraudulent activity related to your business finances.

Sole Trader Bookkeeping Best Practices

Keep Your Business and Personal Finances Separate

Unlike for limited companies, having a separate business bank account isn’t a legal requirement for sole traders. But a business bank account, such as Mettle by NatWest, completely separates business and personal finances which can only be of benefit from a bookkeeping and accounting perspective. When personal and business finances are using the same bank account the financial waters become muddied, but by having dedicated separate accounts you get clarity and transparency and make your bookkeeping obligations much easier and quicker to complete.

Retain and Organise all Relevant Documentation

It’s vital that all financial documents relevant to your business bookkeeping including receipts, invoices, tax correspondence and bank statements are retained. It’s a good idea to keep things organised, categorise them and store them in chronological order which will make locating specific documents, not to mention reconciliation, much simpler.  Accounting software, which we’ll cover later in this post, facilitates the digital storage of these documents but you should still retain the paper copies for a minimum of 6 years.

Have a System and be Consistent

The key to good bookkeeping is rooted in consistency. Repetition is key so develop good habits and have a systematic approach and be consistent in your methods. It also should be timely so make an effort to not fall behind in your record-keeping.  Its sensible to set aside some time daily, weekly and monthly to validate your books and review the financial health of your business so you can stay ahead of the curve.

Work with an Expert

Accurate sole trader bookkeeping is essential for achieving long-term sustainability and financial success, as well as ensuring compliance. Good bookkeeping practice underpins the success of your business to ensure you have accurate financial data.

When you appoint Gorilla as your sole trader accountant you receive full access to industry-standard cloud accounting software FreeAgent at no extra cost, inclusive in your great value fixed monthly fee. FreeAgent is trusted by over 100,000 self-employed people and small business owners and is a game-changer in terms of sole trader bookkeeping.

FreeAgent digitises your bookkeeping and accounting to help ensure that you’re fully Making Tax Digital-compliant. As you take care of your bookkeeping and update your invoices, expenses and bank statements, FreeAgent’s powerful automation prepares your business accounts in the background in real-time, including preparing your tax returns. Key financial reports will be generated for you while you work including profit and loss statements, balance sheets and creditors and debtors reports so you get the full financial picture.

Your own dedicated accountant at Gorilla will also have access to your accounts in FreeAgent ensuring that you both have visibility of the financial health of your business. This enables your accountant to provide strategic advice and guidance in real-time.

With our sole trader accounting service all your business and personal accounting needs will be expertly handled with unlimited support and advice and a same day response guaranteed on your queries no matter how many times you contact us.

If you’d like advice on bookkeeping or have any queries about how our sole trader accounting service and FreeAgent can help you, our accountants are on hand to help. Call 0330 024 0406 or request a call back to speak to us.