What Is Bookkeeping? A Plain-English Guide for UK Small Businesses
What Is Bookkeeping? A Plain-English Guide for UK Small Businesses
Bookkeeping is the process of recording and organising a business’s financial transactions, from sales and expenses to payments and money owed.
If you’ve recently started a business, or you’ve been trading for a while and want to understand your finances better, you may be wondering what bookkeeping is and what it actually involves.
This guide explains why businesses need bookkeeping, how it differs from accounting and what a bookkeeper does in practice. It draws on over 30 years of bookkeeping experience and explains everything in plain English.
At a Glance
- Bookkeeping records the financial transactions of a business.
- Every business needs financial records, including sole traders, landlords and limited companies.
- Bookkeeping and accounting are different: bookkeeping records transactions, while accounting uses those records to prepare and analyse financial information.
- Typical bookkeeping tasks include recording income and expenses, managing money owed by customers and to suppliers, and reconciling the bank.
- You can do bookkeeping using a spreadsheet or accounting software.
- Accurate records provide the information needed for accounts and tax returns.
What Is Bookkeeping?
Bookkeeping is the process of recording and organising the financial transactions of a business. When a customer pays you, you buy supplies or you pay a business bill, you record the transaction in your bookkeeping records.
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These records show the money coming into and going out of the business, along with amounts customers owe and money you owe suppliers. They provide the financial information needed to prepare accounts and tax returns.
The word bookkeeping comes from the days when businesses recorded their transactions in physical books and ledgers. Today, most businesses use spreadsheets or accounting software, but the basic principle remains the same: record your business transactions and keep the records up to date.
📌 Example: You’re a self-employed plumber. You invoice a customer for £500, buy £40 of fittings from a supplier, and pay £60 in fuel costs. Record each of those three transactions. That’s bookkeeping.
Why Does Bookkeeping Matter?
Businesses need bookkeeping to maintain the financial records required for accounts and tax returns. Accurate records also help you track what the business earns, spends, owes, and is owed.
It helps you meet your legal obligations. UK businesses must keep records of their income and expenses. How long you need to keep them depends on your business and the taxes involved. You can check the current record-keeping requirements on GOV.UK.
It helps with tax returns. Complete records provide the figures needed to prepare your tax return and support the business expenses you claim.
It shows where the business stands. Your bookkeeping records show income, expenses, unpaid customer invoices and amounts owed to suppliers. They also provide the figures used to prepare financial reports.
⚠️ Warning: Leaving bookkeeping until the last minute increases the risk of missing expenses, losing receipts and making mistakes.
Bookkeeping vs Accounting: What’s the Difference?
Bookkeeping and accounting are closely related, but they have different roles. Bookkeeping records and organises financial transactions, while accounting uses those records to prepare and analyse financial information.
a | Bookkeeping | Accounting |
|---|---|---|
Main purpose | records financial transactions | uses and analyses financial information |
Typical tasks | records sales, purchases, expenses and payments | prepares accounts, tax returns and financial reports |
Who does it | business owner, bookkeeper or accountant | business owner or accountant, depending on the work involved |
When | carried out regularly throughout the year | uses the records when reports, accounts or tax information are needed |
In simple terms, bookkeeping provides the records that accounting uses.
For example, a bookkeeper might record your sales invoices, expenses and bank transactions and reconcile the bank account. An accountant can then use those records to prepare year-end accounts, calculate tax and provide financial or tax advice.
Tip: If you keep your own books, keeping them accurate and organised can reduce the time your accountant spends finding missing information and correcting errors.
For a more detailed comparison, see our guide to Bookkeeping vs Accounting
Basic Bookkeeping Tasks: What Does Bookkeeping Involve?
Bookkeeping involves several regular tasks, although exactly what you need to do depends on the type and size of your business. Typical bookkeeping tasks include:
1. Recording Income and Expenses
Record the money your business earns and spends, including sales, purchases and other business expenses. Your records should include details such as the date, amount and type of transaction.
Keeping these records up to date provides the basis for the rest of your bookkeeping.
2. Accounts Receivable – Managing What Customers Owe You
Accounts receivable is the money customers owe your business for credit sales.
Record sales invoices when you issue them and match payments to the correct invoices when customers pay. Tracking outstanding invoices shows who owes you money and which payments are overdue.
Tip: Most accounting software lets you send automatic payment reminders for overdue accounts.
3. Accounts Payable – What You Owe Suppliers
Accounts payable is the money your business owes suppliers for goods and services bought on credit.
Recording supplier invoices and payments allows you to see how much you owe and when bills need to be paid.
4. Bank Reconciliation
A bank reconciliation compares the transactions in your bookkeeping records with your bank statement. It helps identify missing transactions, duplicate entries and other differences.
Accounting software can import transactions through a bank feed and help match them against your bookkeeping records, reducing the amount of manual work involved.
From experience: Bank feeds can save a considerable amount of bookkeeping time, particularly for businesses with a large number of transactions.
5. Managing VAT (if you’re VAT registered)
If your business is VAT registered, your bookkeeping must also record the VAT on relevant sales and purchases. These records provide the figures needed to prepare your VAT return.
VAT-registered businesses must follow the relevant Making Tax Digital for VAT record-keeping and submission requirements.
6. Keeping Supporting Documents
Bookkeeping also involves keeping the documents that support your transactions, including:
- sales invoices
- purchase invoices
- receipts
- bank statements
- other relevant business records
These documents support the figures in your bookkeeping records and may be needed when preparing accounts and tax returns or if HMRC asks to see them.
7. Providing Information to Your Accountant
If you use an accountant, your bookkeeping records provide the information they need to prepare your accounts and tax returns.
Keeping your records complete and up to date means your accountant can work from accurate figures without spending time finding missing transactions, invoices or other information.
Single-Entry vs Double-Entry Bookkeeping
There are two main methods of recording bookkeeping transactions: single entry and double entry.
Single-entry bookkeeping records transactions in a simple cash book or spreadsheet, usually as money received or money paid out. It can suit sole traders and small businesses with straightforward bookkeeping needs.
Double-entry bookkeeping records each transaction in at least two accounts, with a debit and a corresponding credit. It forms the basis of most accounting software, including Xero, QuickBooks and Sage, which handle much of the double entry automatically.
You can learn more about both methods in our guides to Single-Entry Bookkeeping and Double-Entry Bookkeeping.
For a broader introduction to how the different bookkeeping methods fit together, see our Bookkeeping Basics guide.
The timing of when income and expenses are recorded can also differ depending on whether a business uses the cash basis or accrual accounting. Our Cash Basis vs Accrual Accounting guide explains the difference.
Who Can Do Your Bookkeeping?
You can keep your own bookkeeping records or ask a bookkeeper to manage them. If you do the bookkeeping yourself, you can use a spreadsheet or accounting software.
Use a Spreadsheet
A spreadsheet can suit sole traders and small businesses with straightforward transactions. Our free Excel cash book template records income and expenses and automatically calculates the running balance and totals.
Download the free cash book template →
Use Accounting Software
Accounting software can automate parts of the bookkeeping process. Depending on the software and plan, features may include bank feeds, invoicing, expense recording, bank reconciliation, VAT returns and financial reports.
Popular options for UK small businesses include Xero, QuickBooks and Sage.
If you need software, our accounting software guide compares the main options for UK small businesses.
Hire a Bookkeeper
A bookkeeper can maintain some or all of your financial records for you. Depending on the service you need, this may include recording transactions, reconciling the bank, maintaining customer and supplier accounts and preparing VAT returns.
You can find qualified bookkeepers through organisations such as the AAT and ICB.
Who Needs to Do Bookkeeping in the UK?
Anyone running a business needs to keep appropriate financial records. This includes:
| Business type | Needs financial records? |
|---|---|
| sole trader | Yes |
| partnership | Yes |
| limited company | Yes |
| landlord | Yes |
| freelancer/self-employed | Yes |
The records you need to keep depend on your business structure, income and the taxes that apply to you. They provide the information needed to prepare accounts and complete tax returns.
What Records Do You Need to Keep?
The records you need depend on your business and the taxes that apply, but typical bookkeeping records include:
- sales invoices and receipts
- purchase invoices and receipts
- bank and credit card statements
- records of cash transactions
- VAT records, if VAT registered
- payroll records, if you employ staff
- mileage and other business expense records
Keep the documents that support the transactions recorded in your bookkeeping system so you can use them when preparing accounts and tax returns or provide them if HMRC asks to see them.
How long you need to keep your records depends on your business structure and the type of tax involved. Check the current record-keeping requirements on GOV.UK.
Making Tax Digital (MTD): What It Means for Your Bookkeeping
Making Tax Digital (MTD) requires businesses within its scope to keep certain records digitally and use compatible software to send information to HMRC.
MTD already applies to VAT-registered businesses, and MTD for Income Tax is being introduced for qualifying sole traders and landlords. This makes digital bookkeeping increasingly important for many small businesses.
If MTD applies to you, check that your bookkeeping system meets the relevant digital record-keeping and submission requirements.
Read our Making Tax Digital guide for the current rules, thresholds and dates.
Accounting Software Best Deals
XERO – 90% Discount for 6 Months – Cloud accounting, unlimited users, bank feeds, MTD compatible
QuickBooks – 90% off for 7 Months – Sole traders, easy to use, MTD-compatible
Tide – Free with Tide Bank Account – All your banking and accounts in one place, MTD compatible
What is Bookkeeping? – FAQ
Do I need to do bookkeeping if I’m a sole trader?
Yes. Sole traders need to keep records of business income and expenses so they can calculate taxable profit and complete their tax return. The records you need depend on your business and circumstances.
Can I do my own bookkeeping without any qualifications?
Yes. You don’t need a bookkeeping qualification to keep the records for your own business. Many sole traders and small business owners manage their bookkeeping using a spreadsheet or accounting software.
You can use a bookkeeper or accountant if you prefer someone else to maintain or check your records.
What happens if I don’t keep proper records?
HMRC can charge a penalty if you don’t keep adequate records. Poor records can also make it difficult to complete an accurate tax return and provide evidence for the figures you report.
Keeping your bookkeeping records and supporting documents organised helps you provide the information HMRC needs if they ask to see it.
How long do I need to keep my bookkeeping records?
How long you need to keep records depends on your business structure and the taxes involved. Different rules apply to Self Assessment, limited companies, VAT and payroll records.
Check the current requirements on GOV.UK
Is bookkeeping the same as accounting?
No. Bookkeeping records and organises the financial transactions of a business. Accounting uses those records to prepare accounts, tax returns and financial reports and to analyse financial information.
For more detail, see our Bookkeeping vs Accounting guide.
Summary
Bookkeeping is the process of recording and organising the financial transactions of a business. It covers everyday tasks such as recording income and expenses, keeping invoices and receipts, tracking money owed by customers and to suppliers, and reconciling the bank account.
You can manage your own bookkeeping using a spreadsheet or accounting software, or ask a bookkeeper to maintain the records for you. Whichever method you use, your records must be complete, accurate, and up to date.
These records provide the figures needed for accounts and tax returns and help you meet your record-keeping obligations. If you want to learn more about how the process works, continue with our Bookkeeping Basics guide.
Related Pages on Business Accounting Basics
Bookkeeping Basics: The Complete Guide
How to Start Bookkeeping for a Small Business
