Create a new business account, set budget aside for tax, keep your records organised and leave an audit trail. This blog will highlight even more useful bookkeeping tips and terms that you should be aware of.
Basic Bookkeeping Terms You Need to Know
Accounts Payable: Accounts payable is the account which is used to track all of the money that you owe to a third party, such as supplier companies, banks, governments or anyone you borrowed money from. An easy example to think about is a mortgage as when you take one out, you sign a contract telling the bank you’ll pay them over a period of time in instalments.
Accounts Receivable: On the flip side, accounts receivable is the account that keeps track of all the money that third parties owe to you. Again, it can be customers, banks, companies or anyone that purchased or borrowed from your business.
Assets: Assets are simply all the things you or your company owns to help you successfully run the business. It can range from cash, buildings and land right through to tools, vehicles and furniture.
Balance Sheet: A balance sheet is a detailed report which breaks down the financial situation of your business. In this report, you’ll find aspects such as assets, liabilities and the capital of your business. The point of a balance sheet helps to show what your business owns and owes.
Bookkeeping: Obviously, this is one you need to know or should already know. Bookkeeping is the recording of financial transactions on a day-to-day basis. It helps to make sure that records of individual financial transactions are accurate and up-to-date.
Capital: This is simply the money or other assets which personally belong to you as the owner and not the actual profit you generate from your business or self-employment.
Costs of Goods Sold: This is another simple one, as it’s simply all of the money you spend on products or services which you plan to sell to customers.
Depreciation: Depreciation is when an asset loses value over time which can happen through wear and tear, for example. The decreased value is what’s measured as depreciation.
Equity: Equity is all of the money you invest in the company as the owner plus all the accumulated profits. As a small business owner, your equity is shown in a capital account.
Expenses: This is all of the money that you spend to operate your business which isn't directly related to the sale of goods or services.
General Ledger: A general ledger account is an account you use to store, sort and summarise all of your transactions. These accounts are arranged in the general ledger which also features the balance sheet and the income statement.
Income Statement: This is the financial statement which presents a summary of your financial activity over a certain period of time. After working out the revenue earned, the costs of goods sold and the expenses, it works out your net profit or loss.
Journals: Journals are the place bookkeepers store their records of daily transactions. For every active account you use, such as cash, accounts payable and accounts receivable, you’ll have separate journals for each one.
Liabilities: Liabilities are basically all of the debts you owe. This can range from loans you’ve taken out to any unpaid bills you might have yet to pay.
Payroll: If you have a small business and you have employees, then payroll is the way you pay your employees. It’s a big part of bookkeeping and involves reporting a lot of payroll aspects to the government. This includes taxes that need to be paid on behalf of employees, compensation and more.
Revenue: Revenue is all of the money you collect in the process of selling your services and goods. There are even some companies that collect revenue in other ways, such as selling assets their business doesn’t need.
Trial Balance: Trial balance is how you test to be sure your books are in balance before pulling together all of the key information for the financial reports and closing the books for the accounting period.
The above terms are really the most basic bookkeeping terms you should be aware of - to begin with. To continue learning more bookkeeping phrases along with easy-to-understand definitions, than be sure to check out and bookmark our glossary blog which we regularly update so you’re never left confused.
Basic Tips on Getting Bookkeeping Right
Create a New Business Account
There’s nothing worse than having to search through too many statements to find one small yet vital piece of financial business that you need. That can often be the case if you haven’t split your personal and business funds, so they’re always combining into one account and it’s easy to lose track.
By opening a new bank account, you can keep your personal finances and your business dealings separate so there’s never any confusion between the two. When it’s time to do your books, you’ll easily know where to find the financial information you need.
Set Budget Aside for Tax Purposes
Rather than facing a major surprise when the taxman comes knocking, it’s a good idea that you budget for tax as you go along so you don’t have to pay a big chunk at once. If you have a savings account or something similar, then it can be a good idea to set a little bit of your income aside so that you can easily pay off your tax bill with the peace of mind that you have money saved.
Always Keep Your Records Organised
If it’s already a hassle searching through one account where both personal and business funds are coming in, then cluttered records are going to bring you an even bigger headache when it comes to bookkeeping.
With records in good shape and neatly organised, you know exactly what is stored where so you save a lot of valuable time. If you’re too busy and approaching tax deadlines, you’ll be thankful that you took the time to keep your records nice and tidy so that you save time by knowing exactly where to look.
Although, make sure you keep your records organised all the time and not just as a one-off.
Track Your Expenses
It can be difficult to track business expenses, but by using a business credit card, for example, you can make sure that all of your expenses are kept together and tracked. The easiest way of doing this is by categorising your bills into types of expenses to make things a lot easier.
An example can be car mileage. If you’re driving long distances for meetings, then you can keep track of your mileage and log how far you’ve travelled and the costs that go with it.
Maintain Daily Records
One of the most basic tips to follow is that you maintain daily records. If you don’t keep accurate daily records, then it’s a lot more difficult for you to track the financial condition of your business.
Implement a system and stick to it so that you can keep accurate records every day and there won’t be any mistakes when you’re filing your tax returns.
Leave an Audit Trail
If you’re doing your books manually, then it’s vital that you leave an audit trail. Your record keeping will be a lot more effective if you can quickly and retrace your financial activities - which is why software is a good option to consider as it can do this effortlessly.
An audit trail means you’ll have your invoices in order and you can retrace your steps easily if there’s one tiny error.
Stay on Top of Your Accounts Receivable
Late-paying customers is never a good thing and it can have a negative impact on your cash flow. Make sure you pay attention to when your receivables are due and don’t waste time when they’re overdue - act right away. See if you can work out a plan so you can get the money you’re owed as soon as possible but the longer you leave it, the longer it can damage your cash flow.
Keep Tax Deadlines in Mind
A tax deadline can be stressful for anyone. Take the simple step of setting yourself a reminder so that you have enough time well beforehand to fill out your tax returns without any mistakes. By keeping accurate records, you can make sure your returns are sent off by the deadline and HMRC won’t be chasing you up because of any errors either.
Plus, you avoid any unwanted penalties.
Start Using Software Now
The government has launched a new scheme - Making Tax Digital - which does exactly what it says on the tin. Tax is going to become digital and that’s a good thing, as you won’t have to store stacks of papers and receipts as year-long books can be done within minutes.
A digital app lets you keep your incomings, outgoings and everything in between properly organised which makes it simpler to manage your financial records. While it might sound like another burden that you need to get to grips with, on top of doing your books, that’s not the case as some apps have simple and easy to use features that make the entire process efficient and painless.
So, you don’t need to feel overwhelmed as a bookkeeping app will make doing your books a whole lot easier, giving you greater peace of mind.
Learn More About Making Tax Digital
Now that you know the basics of Making Tax Digital - from the terms to useful tips - and why you should use a bookkeeping app, take the first step towards getting ready for Making Tax Digital as the deadline rapidly approaches.
We've put together an easy-to-follow summary sheet, highlighting what the scheme is all about, why the government has created it, the steps you can take right now to be prepared and a lot more to make your digital bookkeeping journey an easy one. Download it below