Bookkeeping is a vital asset in your business. Unfortunately, bookkeeping has been unjustly brushed off many times as simple data entry. Even worse, many businesses would ignore it altogether and then close to the deadline for submitting their tax return would desperately try to pull it all together in a few sleepless nights. This is not say, of course, that bookkeeping is just a way of keeping receipts tidy so that they could be passed on to an accountant at the end of the financial year without worrying that they might turn you down for keeping sloppy records. Alas, bookkeeping is much more than that. Bookkeeping is the foundation for both financial and management accounting.
In this blog we will discuss why bookkeeping should be taken seriously and what the benefits it brings to a business are.
Why is bookkeeping necessary?
Accounting of course is not just complying with undesired and unpleasant HMRC demands. And even if it were, those demands would not be able to be met without a few essential systems in place, one of which is bookkeeping. You could say in fact that none of the other systems has a chance of success without solid bookkeeping. It’s like not being able to build a solid construction without a solid foundation.
Bookkeeping is essential to the recording and presentation of financial records and financial statements. It is important for:
- Internal control, to ensure that all financial transactions are correctly recorded so as to show the true financial position of the business (and also to help prevent fraud)
- Measuring business performance by means of financial reports and the year-end financial statements
- Obtaining credit/ financing by providing lenders with an accurate current financial position of the business
- Statutory requirements, to provide accurate information for VAT returns and income tax returns to HMRC, as well as for other financial reports
When bookkeeping is done in a timely fashion, accurately, then the owners of the business are able to get a clear understanding of how their business is performing and therefore are able to make informed decisions about the future of the business. Business owners might also find ‘10 Bookkeeping Tips for Small Businesses‘ useful.
What exactly is bookkeeping then?
In essence, bookkeeping is that part of accounting that deals with daily recording of financial information, such as:
- Recording financial transactions
- Posting debits and credits
- Producing invoices
- Maintaining and balancing current accounts, historical accounts and general ledgers
- Reconciling bank transactions
Beside these basic tasks, bookkeeping can also generate a mini-year-end account in the end of each month, so that decision makers could plan for taxes or for expenditure and investments.
How is bookkeeping carried out?
Whereas in the past everything was recorded on paper ledgers and kept filed in a complicated filing system in office cabinets, nowadays bookkeeping is done on the computer using an accounting software. In fact, HMRC is rolling out Making Tax Digital, which means that all records and all financial transactions and various activities have to be done through an HMRC approved software. LAS Accounting Ltd works with Quickbooks, on of the most prestigious and reliable accounting software that businesses use.
What advantages are there in treating bookkeeping with respect?
Bookkeeping is vital to any business because, for example, it makes it so much easier to budget whether for taxes, for investments or for various expenditures. With your income and expenses properly organised, it is simple to review your financial resources and costs. A well planned budget creates a financial roadmap for your business. With a budget in place, you can plan for future expenses to help your business prosper. If you do not keep accurate records and up to date books, it would be a lot harder to get an accurate budget because it would mostly rely on.
Then, let us not forget about taxes ! As annoying as it may sound, businesses have to file their taxes at the end of the financial year. With a proper bookkeeping process in place, you will be able to not only have financial information ready for tax season but also plan in advance for the tax amount you owe, so that it will not come as a grievous surprise in the form of a huge lump amount that you have to pay without having prepared for it. This literally means that when HMRC demands a financial statement from your business for tax reasons, having done bookkeeping regularly and properly saves you the worrying and fretting over bad or late tax returns.
Bookkeeping is also essential in drawing up management accounts. These are the lifeblood of a business because they help the business owners, managers and decision makers understand the behaviour and performance of the business, shape the business with sound advice and guidance, allow a cash flow forecast, enable sound financial decisions and so on.
Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.
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