What you need to know about bookkeeping

By accurately recording all financial transactions, a bookkeeper can provide an accurate overview of your company’s financial health.

But what is bookkeeping? What does bookkeeping involve? And how do you ensure you’re doing it correctly?

What is bookkeeping?

Bookkeeping involves recording a business or sole trader’s financial transactions, including income, expenses, liabilities, and more.

A bookkeeper is responsible for keeping track of money coming in and out of the business’ accounts and making sure everything matches up; this is referred to as balancing the books.

Bookkeeping plays a significant role in business financial management. By law, limited companies in the UK must maintain an accurate record of transactions.

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What transactions does a bookkeeper record?

To fulfil their responsibilities, a bookkeeper will monitor and record transactions like:

Income (AKA revenue) earned from selling goods or services
Expenses such as rent, utilities, and salaries
Any business assets of economic value, e.g. property
Liabilities; meaning any obligations or debts that the business owes
Owner’s equity, or what the business owes to its owners.

What is double-entry bookkeeping?

Double-entry bookkeeping (or double-entry accounting) is a bookkeeping method using the two-sided accounting entry system; every transaction is recorded twice, as a debit and a credit.

For example: recording the purchase of office stationery as a debit in an ‘office supplies’ account and a credit in a ‘cash’ account.

Double-entry bookkeeping makes it easier to keep the books ‘balanced’, allowing you to better detect financial errors and fraud.

Common mistakes in bookkeeping – and how to avoid them

Even the best can slip up sometimes. Here are some common bookkeeping mistakes and how you can avoid them.

Omitting or overlooking a transaction
It’s easy to overlook small transactions, especially when a bookkeeper has so many to keep an eye on.

Scheduling a set time each month or week to enter transactions can help, but upgrading how you store and organise your client’s (or employer’s) invoices and receipts can make an even bigger difference.
- Take advantage of digital storage – Scan paper documents (e.g. a paper receipt) and store them electronically alongside existing digital copies.
- Set up an organisation system – Categorise and label files clearly, such as by date or customer name.
- Know your retention policies – Follow legal guidelines on how long you need to keep financial documents (6 years is the typical best practice).
Not categorising documents consistently
Misclassifying invoices or forgetting to label a receipt to indicate which client it belongs to can mess up your financial statements.

Let’s look at the types of transactions you’ll come across in bookkeeping and how you could categorise them:
- Sales (or revenue) – You could record each sale with details like the date, amount, and the customer.
- Purchases (or expenses) – Best practice is to keep track of what’s been purchased, from whom, and how much it cost.
- Payments (outgoing payments) – Record what’s being spent on suppliers, utilities, employee wages, and other business-related costs.
- Receipts (money your business receives that isn’t from sales) – Make sure to outline what it is (e.g. loans or investments) and how much it is.
Make sure you understand your chart of accounts (COA) and stick to consistent categories. If your bookkeeping business is expanding or you’re taking on a lot of new clients, consider revisiting your COA to ensure it’s still working efficiently as a system.
Not reconciling the accounts

Reconciling is when you compare your bookkeeping accounts with the actual money (in figures) entering and leaving your business bank account.

Account reconciliation is the vital process of ensuring accurate financial records by comparing two sets of financial information to ensure they match.

Doing this regularly helps savvy bookkeepers spot issues or inconsistencies. When the two don’t match, it could indicate an error or even illegal activity, such as theft or fraud.
Forgetting to back up your data

Losing or accidentally deleting financial data can be hugely damaging for a bookkeeping business.

If you use software or digital spreadsheets to store and record financial data, make sure there are duplicate copies stored on another server or hard drive.

If your software works in the cloud, your data and documents will be automatically backed up and protected.
Overlooking VAT
Not recording VAT can cause serious compliance issues. Keep an eye out for how VAT applies to your transactions and be diligent in your recording.

If your business is VAT registered, you have to prepare annual accounts for Companies House. This includes:
- Compiling financial data from your year-end close, including balance sheets, profit and loss accounts, cash flow statements, notes to the accounts, and the Directors’ report.
- Formatting financial documents according to Companies House requirements.
- Double-checking all figures to ensure accuracy
- Submitting annual accounts on time (typically 9 months after your company’s financial year-end).
What to include in your Annual Accounts
- Balance sheet
- Profit and loss account
- Cash flow statement
- Notes to the accounts: These provide additional context and explanations for figures in the financial statements.
- Directors’ report: This is an overview of the company’s performance, significant events, and future outlook.

Bookkeeping is the day-to-day monitoring and processing of your financial transactions; for example, logging income coming into the business against an invoice, or matching a deficit of cash against an expense invoice.

Accounting is less about maintaining financial records and more about taking that information and either reporting or analysing it. That might involve calculating and submitting your tax return, or completing a financial audit.

In the UK, keeping accurate financial records isn’t just good practice, it’s the law.

Key legislative demands concerning bookkeeping include:

Record-keeping mandates which dictate that UK businesses must maintain detailed records of all financial transactions (e.g. income, expenses, assets, etc.)
Limited companies must produce detailed financial statements.
Adhering to mandates on what records you need to keep and for how long. HMRC can request your financial records at any time.

For sole traders with an income of less than £150,000 per year, you only have to keep track of income and expenses as and when they are received or paid.

This means you do not legally have to maintain detailed financial records and therefore, you may decide that you don’t need the support of a bookkeeper.

However, it’s worth remembering that even sole traders are subject to inspections from HMRC. Maintaining high standards of bookkeeping as standard best practice can be a life-saver in the event of you being audited.

Bookkeeping is the process of keeping track of the money your business makes and spends – and crucially, ensuring that marries up with how much cash you’ve got in the bank.

Having a comprehensive overview of how your business or self-employment is faring financially can be very helpful.

Accurate and regular bookkeeping helps sole traders and micro-businesses to:

Keep track of overall profitability and manage cashflow
Budget effectively for expenses
Monitor financial ‘health’ and improve strategic business planning
Plan for tax liabilities and avoid unnecessary penalties
Calculate VAT liabilities or recognise if/when it’s time to get VAT registered.

Many bookkeepers in the UK (in-house or external) include tax returns as part of their services.

As a bookkeeper, their primary role is to manage financial records and accurately track transactions. However, some bookkeepers will also support businesses and sole traders with submitting their tax return

Depending on the scale of work or level of expertise required, a bookkeeper may work or collaborate with an accountant to complete a tax return for a client.

Bookkeepers can use one of two methods to record a business’ financial transactions. These two methods are single-entry bookkeeping and double-entry bookkeeping.

Single-entry bookkeeping is a straightforward accounting method, where each financial transaction is recorded as a single entry in a ledger. It’s basically a list of what revenue is coming in and what (if anything) is being spent.

For a comprehensive and compliant overview of your financial situation, you’re more likely to require the use of the double-entry bookkeeping system.

In bookkeeping, balancing the books involves making sure a business or sole trader’s outgoings (also known as debits) don’t exceed the money that’s coming into the business (also known as credits).

For example, a business makes roughly £20,000 in a month; a bookkeeper would record that gross income (or revenue) as credits on the business’ financial record.

This business also spends £15,000 per month on regular expenses (e.g. employee salaries); these outgoings are recorded by the bookkeeper as debits.

Even if the business purchased new office furniture for £2,000, their outgoings would not exceed their income for that month. The financial records kept by the bookkeeper would reflect this, which means the books are balanced.

A chart of accounts (COA) is a document laying out all the financial transactions that a business or sole trader has conducted over an accounting period.

A COA can be used to illustrate the structure of a company’s balance sheet and income statement. It usually includes information on how you categorise your expenditures, revenues, assets, and liabilities into different codes (referred to as nominal codes).

Alongside providing external stakeholders (e.g. potential investors) with a thorough overview of your company’s financial health, the chart of accounts is used for formally recording transactions in your general ledger.

If your business is VAT registered, you have to prepare annual accounts and submit them to Companies House every year.

Bookkeepers can be responsible for preparing annual accounts, which need to include:

The balance sheet
The profit and loss account
The cash flow statement
Notes to the accounts (which provide additional explanations for figures in the financial statements)
Directors’ report (an overview of the company’s performance, significant events, and future outlook).

In some cases, bookkeepers do need to register for anti-money laundering (AML) supervision in the UK.

Self-employed bookkeepers in the UK must register with HMRC or relevant professional bodies like the Association of Accounting Technicians (AAT) or the Institute of Certified Bookkeepers (ICB).

However, in-house bookkeepers who are employed by the organisation they’re bookkeeping for do not need to register individually. Instead, their employers are responsible for ensuring compliance with AML regulations.