As a sole trader, it’s important to be diligent with your bookkeeping to accurately track business performance, make informed decisions, manage taxes including income tax and plan strategically.
Table of Contents
This comprehensive guide covers everything sole trader business owners need to know about good bookkeeping practices including:
Bookkeeping Basics
- Key records to maintain like incomes, expenses, assets, and liabilities
- How recording this data enables real-time financial control and later tax filing
- Tips for streamlining processes using software
Capturing Business Incomes & Expenditures
- Recording all earnings from sales, invoices, and other income
- Accurately tracking recurring expenses and one-off costs
- Categorisation for reporting in tax submissions
Year-End Accounting & Tax Filing
- Producing total annual profit and loss
- Submitting Making Tax Digital updates each quarter
- Finalising self-assessment figures with accountant sign-off
Best Practices for Hassle-free Bookkeeping
- Choosing the right online accounting software
- Automating reconciliations, invoices, reminders
- Maintaining audit quality records
Additional Advice
Preparing compliant books for your own business that will stand up to scrutiny, using visual dashboards to track financial KPIs and helpful year-end accounting checklists.
Creating and maintaining accurate sole trader bookkeeping saves time, prevents penalties and enables better-informed business decisions. Read on for everything you need to know.
Bookkeeping Basics
Bookkeeping as a sole trader involves recording all money coming into and leaving your business throughout the year.
This means keeping careful records of:
- All incomes received from sales, services, client invoices or other earnings
- Any expenses related to running the business – materials, travel, admin
- Assets like equipment, tools, vehicles, stock
- Liabilities such as loans, taxes, credit accounts
Maintaining organised records allows you to:
- Track real-time profitability
- Plan finances better
- Calculate tax owed
- Access funding more easily
Depending on how long your business has been running, some self employed sole traders like to manage their basic bookkeeping manually using spreadsheets (there are plenty of templates available online to help you get started), or if you’ve been up and running for a while, investing in bookkeeping software can be a wise decision as it reduces the admin time spent logging and tracking income and expenses.
What Records to Keep
As an absolute minimum, sole traders must keep records of:
- All sales invoices issued to clients
- Receipts/bills for items bought for the business
- Bank statements and cash book reconciling payments in and out
Additionally, you may want to track:
- Mileage logs if claiming vehicle expenses
- Stock or inventory records
- Asset purchase paperwork like receipts, contracts
- Details on any finance agreements
Keeping accurate business records is important because it helps to track business performance which can in turn aid decision-making on where to invest your time and money.
It means that you will have the relevant information at your fingertips when it comes to filling in your annual tax return which means you can properly make the calculations when it comes to pay tax that you owe to HMRC.
You need to keep your records for a minimum of 5 years after the income tax return because you may need to show them to HMRC, auditors, banks or lenders.
When starting out, you should set up a separate business bank account so that your personal and business finances are kept entirely separate. This makes it much easier for you as a sole trader to manage your accounts and bookkeeping.
Tracking Business Income
Recording all income received into your sole trader bank account or as cash payments is key. It will allow you to get an accurate figure for turnover and business profits calculations at the end of the year. Tips for doing this include:
- Issue sales invoices directly through accounting software, or manually record invoice details
- Log every client payment against invoices promptly
- Note any miscellaneous income like commissions, tips, donations
- Reconcile with bank and credit card statements
This gives you totals for your:
- Sales income – goods/services sold
- Other business income – one-off earnings
Income = Revenue = Turnover are used interchangeably.
It’s a good idea to schedule time to regularly stay on top of logging business income. This could be once a week or monthly, but if you decide to do this, it’s much easier to stay on top of it than save it all up to do at the end of the year when you will have forgotten what happened!
Recording Expenses
Just like you need to record the money coming into your business, you need to track every business expense leaving your business bank account. This includes:
- Purchases – materials, stock, equipment, assets
- Subcontractors costs
- Office supplies, utilities, rent
- Marketing, advertising spend
- Professional fees – accountants/legal
- Travel costs like fuel, transport
- Phone, internet, software costs
- Bank charges, loan interest
It’s helpful to categorise expenses into buckets for reporting purposes such as:
- Cost of sales – Integral to producing goods/delivering services sold
- Administrative costs
- Finance charges
This will help to give you a snapshot overview of where your biggest expenses are. This could be useful when trying to reduce the amount of money being spent overall or to claim business expenses or allowances available.
Making Tax Digital (MTD)
Most people will have seen the making tax digital advertisements over the last few years. It’s part of HMRC’s efforts to make digital record-keeping a requirement for all businesses.
Key requirements of the initiative include:
- Keep digital records for expenses, invoices, and bank transactions in MTD-compatible software
- Connect software to HMRC systems via secure APIs
- Submit quarterly income & expenditure updates that show money in and out of the business via connected software.
- If your business is registered for VAT, you must also submit quarterly VAT returns through MTD-compatible software.
It’s important when keeping sole trader accounts to stay compliant using digital tools to categorise and forward reports automatically. There are plenty of ready-to-go sole trader software packages available to choose from that tick all of the boxes above. If you’re in any doubt, talk to a professional bookkeeper or accountant for their recommendations on the best software for your business.
Accounting Year End & Tax
After your business accounting year finishes, typically aligned with the tax year on April 5th, your annual accounts will need finalising for filing your self-assessment tax return.
Key year-end tasks:
- Produce Profit & Loss report totalling business income less expenses
- Process accruals like unpaid customer invoices, stock counts
- Generate Balance Sheet with assets/liabilities
- Submit HMRC End-of-Year Tax Updates
- File the self-assessment return with your figures
Most sole traders can easily handle this themselves by using the guidance available online from HMRC on how to fill out their tax returns. If you need additional support, an accountant can handle this on your behalf – you need to supply them with the income and expenditure records and receipts for your business. This is where that accurate record-keeping comes into play!
Here is an enhanced section on bookkeeping software options for sole traders:
Choosing Accounting Software
Implementing the right bookkeeping software is invaluable for streamlining financial compliance under Making Tax Digital as a sole trader.
When assessing software packages, consider options offering essential features such as:
- Bank Transactions & Invoicing Seek platforms enabling easy bank feed imports, fast customer invoice creation and billing processes. Capture transactions seamlessly.
- Clear Expenses/Mileage Logging Log all costs like office bills, supplier payments, staff reimbursements, and vehicle mileage claims accurately and swiftly.
- The tool must facilitate linkage to HMRC tax systems via API for submitting digital quarterly Income & Expenditure reports required under MTD legislation.
- Reporting & Analytics Reporting engine flexibility allows crafting customised profit and loss statements, break-even analysis, sales funnels and other tailored financial reports on demand.
Levels of Accounting Sophistication
There are different levels of accounting software available. Choose the one best suited to your business and skillset:
- Spreadsheets – Handy basic DIY tracking through Excel or Google Sheets for simple finances. Easy start-up.
- Cash Basis Software – Specifically designed for cash basis accounting. Well suited to early-stage sole traders before needing accrual sophistication. QuickFile and ZipBooks are examples.
- Accrual-Hybrid Software – Allows upgrading from a cash basis to a more advanced accrual method later if business complexity arises. Examples: Xero, Sage, VT Cashbook.
Best Practices for Streamlining Bookkeeping
Bookkeeping isn’t complicated and with a little bit of basic admin, you can easily stay on top of yours.
Follow these tips to get off to a flying start:
Get Set Up Straight Away
- Choose a bookkeeping system before taking payments
- Set up easy payment links for customer invoices
- Apply for digital banking/invoicing tools from the provider
Automate Processes
- Direct transaction download from the bank
- Recurring payments for bills
- Auto-chasing overdue invoices
- Cloud backup of financial data
Do Regular Reconciliation
- Reconcile with the bank every 1-4 weeks
- Process expenses like mileage monthly
- Tie up loose ends – don’t let records build-up
Seek Expert Support
- Utilise a bookkeeper for monthly clean-up
- Get an accountant to advise on setup, software and year-end
Following sole trader bookkeeping best practices prevents emergency tax bills and penalties further down the line. Reach out for guidance in implementing the right foundations.
Getting Your Records Audit Ready
Beyond core legal requirements, having financial records that stand up to intense scrutiny can benefit sole traders in several situations like securing finance or protecting your tax position if investigated.
Follow these tips to prepare high-quality, audit-standard books:
Log Transactions in Real Time
Ideally capture income and expenses as they occur – don’t batch process weekly. If taking cash payments out and about, log in to a mobile app if offered by your accounting software provider.
Attach Supporting Documents
Whether paper or digital records include copies of:
- Full supplier invoices/receipts
- Bank statements
- Signed customer contracts
- Quotes
- Vehicle log books & lease agreements
- Factory/warehouse records
Be Diligent with Categorisation
Classify every item into relevant reporting groups like cost of goods sold, overheads, direct costs etc. Don’t just default to a miscellaneous bucket.
Perform Regular Account Reconciliations
Every 1-2 weeks, reconcile accounting system balances and transactions to bank statement line items. Adjust entries, cost codes and timings until there are no outstanding differences. It’s far easier to do this whilst transactions are fresh in your mind.
Record Fixed Asset Details
For tangible assets like equipment, thoroughly track purchase invoices, in-service dates, depreciation terms, expected lifespans and disposal values.
Seek Professional Opinions
If you’re ever unsure of how to categorise a particular expense, whether you can claim certain items or need a hand understanding the tax implications of your business transactions, you can always seek a second qualified opinion from a chartered accountant.
By taking these simple steps, you can rest assured that your business finance records are in good shape and will stand up to any external scrutiny if selected for auditing.
Automating Your Processes
Handling repetitive manual bookkeeping efficiently is virtually impossible long term which is why it makes sense to get set up with software that handles the majority of manual inputting for you. Automating processes saves you time and improves accuracy meaning that all you should need to do is check what’s been populated, rather than input it yourself.
To enjoy these benefits, consider setting up:
Bank Feeds
Platforms let you automatically download the latest bank and credit card transactions ready to match in your system. You will just need to manually code items to the right categories directly in the accounting platform.
Recurring Bills
Many software packages allow setting up suppliers paid regularly. Just enter them once, apply payment dates, approve scheduled payments and away you go!
Customer Reminders
Using auto-email template reminders that are sent to customers for overdue invoices at predefined intervals can save you a lot of time on debt-chasing tasks! Most of the time an invoice reminder is all it takes to prompt a delayed payment.
Inventory Updates
If your business sells products, you can connect your e-commerce or stock software to sync items, SKUs and stock levels with your accounting solution every time a purchase is made automatically.
Document Digitisation
Using a scanning tool like Scanner Pro to automatically render paperwork into PDF documents and name them consistently so they’re ready to attach to the matching transaction, can save you plenty of time too.
Building these automated processes into your booking will allow you to process more transactions in a shorter space of time – meaning less admin and more time to run your business!
Preparing Books To File Tax Returns
With Making Tax Digital requiring quarterly updates, much of the legwork involved in submitting income and expenditure totals to HMRC is now taken care of. There are some extra steps you can take to get your accounting records finalised ahead of calculating the total tax owed and filing your self-assessment.
Tidy Up Transaction Coding
Double check expenses and income are coded to appropriate reporting classifications for all transactions over the year. Manufacturers are very different to consultancies and dumping everything into a ‘Miscellaneous’ bucket won’t cut it for final compliance or auditing purposes either.
Perform a Year-End Stock Take
If holding physical inventory, perform a detailed count of all items in stock at year-end and update your accounting system balances to match. Log and account for obsolete items too.
Process Accruals
Recognise any invoices to customers that have been raised but not yet paid. These are called accruals and also include supplier bills received but not yet settled . This means that your year-end date captures the full picture of your business finances.
Analyse Key Performance Metrics
Review detailed profitability analytics including gross margins, net margins, and performance vs prior years. Breakdown expense contributions and identify problem spending areas for next year’s improvements. This simple step will ensure that you’re in a good position to start the next financial year running.
Seek Professional Review
Finally, discuss draft year-end figures with your accountant ahead of tax return filing for their analytical eye to spot risks, and savings opportunities and provide formal sign-off.
With clean books, streamlined financials and professional advice when needed, you can tackle self-assessment submissions confidently and efficiently.
Summary
Staying on top of sole trader bookkeeping is key to smooth self-assessment reporting, easy-to-manage accounts and making informed business decisions.
There are plenty of tools available to ensure that you comply with making tax digital legislation and investing a little bit of time each week is the best way to keep your business finances in check and ensure you don’t come in for a shock when it comes to pay income tax.
Be sure to capture all transactional data in the right categories day-to-day. Tax submissions then flow easily by linking your Making Tax Digital compatible solution directly to HMRC systems.
