Bookkeeping for small business owners: what information you need to track, how to record and check your small business revenues, expenses, bank reconciliation and petty cash. Our bookkeeping guide also includes considerations regarding the use of spreadsheets vs. bookkeeping software, double entries and other accounting technicalities. Get in touch if you want to benefit from cost-effective bookkeeping services for your small business.

1. ESSENTIAL BOOKKEEPING
FOR SMALL BUSINESSES
SEPTEMBER 2013

2. Agenda
What information do you need to record?
• Legal obligations
• Sales cycle
• Purchase cycle
How do you go about recording and checking this information?
• Recording revenue and expenses
• Spreadsheet vs software?
• Bank reconciliation
• Petty Cash
Accounting technicalities
• What is double entry
• Glossary

3. Record Keeping
According to the Companies Act all companies
must keep “true and fair” financial and accounting records
• All money received and spent by the company
• Details of assets owned by the company
• Debts the company owes or is owed
• Stock the company owns at the end of the
financial year
• The stocktakings you used to work out the stock
figure
• All goods bought and sold
• Who you bought and sold them to and from
(unless you run a retail business)
• You must also keep any other financial records,
information and calculations you need to
complete your Company Tax Return
• You must normally keep records for at least 6
years from the end of the last company
financial year they relate to.
• You may need to keep records longer if:
• they show a transaction that covers more
than 1 of the company’s accounting
period
• the company has bought something that it
expects to last more than 6 years, like
equipment or machinery
• you sent your Company Tax Return late
• HMRC have started a compliance check
into your Company Tax Return
Accounting records you must keep How long to keep records
If you don’t keep accounting records, you can be fined £3,000
by HM Revenue & Customs (HMRC) or disqualified as a company director

4. Record Keeping
Where bookkeeping meetings accounting
Sales cycle
(controlled by a
customer ledger)
Purchase cycle
(controlled by a
supplier ledger)
VAT Wages Journals
Trial
Balance
Bank & Cash Reconciliation
Final year end
accounts
Book-keeping Accounting
+
corporation
tax
Client
A good book-keeper should be able to post sales and purchase transactions to the
appropriate ledger and reconcile this with the bank statement

5. Record Keeping
Sales Cycle: Invoices are added to
and tracked through the Customer Ledger
Added to
customer
ledger
Amend
customer
ledger
Invoice created
and sent to
customer
Customer
pays the
invoice
The cash or bank
balance will
increase
Classified to a
specific
nominal code
But they may
not always pay
the full amount
Outstanding
payments
identified and
tracked here
Need to
reconcile vs
ledger
regularly

6. Record Keeping
Purchase Cycle: Expenses are added to
and tracked through the Purchase Ledger
Added to
purchase
ledger
Amend
purchase
ledger
Invoice received
by company
Company
pays the
invoice
The cash or bank
balance will
decrease
Classified to a
specific
nominal code
But possibly
not in full or on
time!
Outstanding
payments
identified and
tracked here
Need to
reconcile vs
ledger
regularly

7. Agenda
What information do you need to record?
• Legal obligations
• Sales cycle
• Purchase cycle
How do you go about recording and checking this information?
• Recording revenue and expenses
• Spreadsheet vs software?
• Bank reconciliation
• Petty Cash
Accounting technicalities
• What is double entry
• Glossary

8. Bookkeeping processes
Classifying expenses to the
correct nominal code can be tricky
Principle
• Sage and similar software package have a pre-defined list of nominal codes under
which you can classify transactions
• By correctly classifying the transaction, the software is generally able to treat it
correctly in terms of tax and depreciation
Common
mistakes
• Using too many nominals (or creating new ones) can make the reports difficult to read
• Try to limit yourself to the 15 or so most relevant expense nominal codes
• If you need to use more, then consider grouping them when it comes to
preparing a P+L for management accounts
• Selecting the wrong nominal leading to incorrect tax treatment e.g. including staff
entertainment in client entertainment code could see any allowable cost disallowed.
Example
• Examples of expenses: Direct costs, Wages, Marketing, Telephone, Accountancy &
Insurance.
• Example of grouping: A company may have a separate nominal for PR, online
advertising, brochures & TV advertising but this will then all be grouped as ‘Marketing’
in P&L of the management accounts.

9. Bookkeeping processes
Invoices and
expenses
• Spreadsheets/word is cheap.
• Accountant has flexibility over data i.e. will
classify expenses appropriately.
• Inputting errors & formula breaks on dates &
amounts are more common and can come
across as amateur.
SPREADSHEETS SOFTWARE (e.g Sage)
• Software can be expensive.
• Time consuming to customise invoices but
once in place invoices can be replicated
quickly.
• Software has extra functions like the ability to
automatically raise (recurrent) invoices & email
on to clients.
Reconciling
bank balance
• Incorrect postings can be easily edited.
• Old posting can be overtyped meaning a very
time consuming historic reconciliation.
• Once mastered makes the process very
simple.
• The system locks the data so any edit to old
data will show up on the new reconciliation.
Discrepancies become easy to spot.
Cash flow
forecasting
• Flexible and easy to factor in variances. • Not a common function.
VAT
returns
• Formula breaks can create incorrect VAT
calculations plus manually input errors onto final
VAT return expose the business to VAT checks
and fines.
• An automatic feature, but errors can exist if
wrong VAT tax codes are used.
• Often include the function of VAT return being
automatically submitted to HMRC
Inventory
control
• Can be easily customised.
• Manually tracking can be very time consuming.
• Time consuming to set up & input all the stock
lines but gives enhanced stock control.
The main bookkeeping alternatives are spreadsheets and accounting software:
The pros & cons of both methods
Using dedicated accounting software like Sage requires some technical knowledge,
so keeping good spreadsheet records is sometimes best for small businesses

10. Bookkeeping processes
What is a bank reconciliation
and why should I care?
What is a bank
reconciliation?
Why is it
important?
How often should it
be done?
• A method of checking your sales and purchase ledgers against what has gone
through the bank
• Each item on the Sales Ledger should become a credit on your bank statement
• Each item on the Purchase Ledger should be a debit on your bank statement
• It can be performed manually, by literally ticking off transaction on the bank statement
• Or you can upload the bank statement to your software and reconcile automatically
• Because it enables you to detect financial errors and problems, e.g.
• Clients who have not paid
• Clients who have paid the wrong amount
• Double payments to suppliers
• Bounced cheques or refused payments from clients
• It depends on the volume of transactions, but once per month is usually fine for
small businesses
• The longer you leave it, the more your trade debtor figure will increase
• And the more overdue an invoice is, the harder it is to collect
The bank reconciliation process is essential to making sure that the company
has collected all cash owed and paid outstanding invoices

11. Bookkeeping processes
Bank Reconciliation:
Illustrated Example
Date Item Amounts Balance Type
30/08/13 Sale £1,000 £3,050 Bacs
31/08/13 Telephone (£250) £2,800 Chq
27/08/13 Wages (£900) £1,900 Bacs
31/08/13 Sale £4,600 £6,500 Chq
26/08/13 Rent (4,000) £2,500 Chq
31/08/13 Sale £5,700 £8,200 Bacs
30/08/13 Accountant (£6,500) £1,700 Chq
Date Item Amounts Balance Type
26/08/13 Rent (4,000) £7,750 Chq
27/08/13 Wages (£900) £3,750 Bacs
30/08/13 Sale £1,000 £2,850 Bacs
31/08/13 Sale £5,700 £3,850 Bacs
Bank StatementSystem
Balance per system £1,700
Less: Uncleared receipts
Sale (£4,600)
Add: Unpresented Cheques
Telephone £250
Accountant £6,500
Expected Balance £3,850
Bank statement balance at 31/08/2013 £3,850
Difference nil
Effectively
adjusting the
sales and
purchase ledger
for trade debtors
and creditors

12. Bookkeeping processes
Petty Cash
What is Petty
Cash?
How do you
account for it?
What are the tax
implications?
• Petty cash is the use of a relatively low amount of cash to pay for smaller business
expenses like milk, pens & minor repairs.
• The most common method is to start with an amount, say £500, and when that
reduces to nil the company withdraws a further £500.
• Receipts should be kept.
• This should be accounted for just like any other business account.
• The cash balance should be reconciled on a timely basis.
• The balance you reconcile to is the amount of cash you physically count at a certain
date.
• If petty cash items are spent from cash taking (i.e. sales) a very good accounting
record must be kept as this is often a key area for investigation for HMRC.
• If a receipt is kept and the item contains VAT then for VAT registered enterprises this
can be reclaimed on your VAT return.
• The company profits will be reduced by the business expenses spent through petty
cash. This can be quite a substantial tax saving over the course of a year.
Petty cash is considered “high risk” by HMRC
and needs careful accounting records

13. Agenda
What information do you need to record?
• Legal obligations
• Sales cycle
• Purchase cycle
How do you go about recording and checking this information?
• Recording revenue and expenses
• Spreadsheet vs software?
• Bank reconciliation
• Petty Cash
Accounting technicalities
• What is double entry
• Glossary

14. Accounting Technicalities
What is Double Entry?
• A business receives £1,000 into the bank account for a sale it made a few days ago.
• On the system you would post a customer receipt from the bank to the customer
ledger to clear down the £1,000 invoice.
• This is what happens behind the scenes, altering the trial balance
• Dr Bank
• Cr Debtors
Concept
• Double entry is the fundamental principle that underpins record keeping in accounting
• Every debit has an equal and opposite credit
• The P&L is made up of debits (expenses) and credits (sales)
• The balance sheet is made up of debits (assets) and credits (liabilities)
• The trial balance combines the P&L and balance sheet.
Example

15. Accounting Technicalities
Glossary
• A summary of all the invoices raised and received.
• The balance is increased as invoice are added and reduced as payments are made or
income received.
Ledgers
Journals
Accruals
Prepayments
• Journals are often used by accountants to make adjustments. For example if £2,000
worth of expenses have been classified as telephone instead of repairs then a journal
will save recoding all the incorrect invoices.
• Dr repairs (increases the expense in the P&L).
• Cr telephone (decreases the expense in the P&L).
• Wages are an example of a journal as the tax is often the paid in the following month
and wouldn’t match the month in which the cost is suffered.
• An expense invoiced after time period that is it suffered can be brought into the
correct period via an accrual.
• An example is a company with a 30th
April 2013 year end have their accounts
completed and invoiced in July 2013. The cost clearly relates to the April year end but
is not invoiced till after this period.
• Prepayments are the same as accruals but the other way around.
• The expense has already been suffered but relates to a future period.
• An is a company being invoiced for a years insurance cover on 1st
January 2013. The
year end is 30th
April 2013 so 8 months of that costs relates to a future period.

16. Bookkeeping
Summary
What information do you need to record?
• The Companies Act obliges you to keep “true and fair” financial records
• Records should generally be kept for 6 years
How should you approach book-keeping?
• A good book-keeper should be able to post sales and purchase transactions to the
appropriate ledger and reconcile this with the bank statement
• Using accounting software helps you maintain your purchase ledger and chase
trade debtors (which aids cash flow)
• However, using dedicated accounting software like Sage requires some technical
knowledge, so keeping good spreadsheet records is sometimes preferable
• The bank reconciliation process is essential to make sure that the company has
collected all cash owed and paid outstanding invoices
• Petty cash is considered high risk by HMRC and needs careful accounting records
Accounting technicalities
• Double entry underpins the bookkeeping process
• Your book-keeper should have a good understanding of ledgers, journals, accruals
and prepayments

17. Bookkeeping
Thanks
Thank you for reading!
Need further help with your bookkeeping? Our team
are happy to answer any of your questions.
Contact Us
Accounts and Legal Ltd.
20 Kentish Town Road,
London, NW1 9NX
0207 043 4000
info@accountsandlegal.co.uk
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