What is Bookkeeping, and Why does it Matter?

Bookkeeping is the common word we all have heard of, but not all of us know what it means.

Even in the world of small businesses and startups, you might not be completely clear about what is bookkeeping and how it affects your business.

Bookkeeping can affect everything from small businesses or startup’s cash flow, VAT returns, tax returns, and financial reporting.

Every size of business needs to keep track of their income and expenses, and if you don’t keep on top of the cash flow, sooner or later will get tricky.

So it is worth knowing what is bookkeeping and why does it matter.


What is Bookkeeping?
Why is bookkeeping important?
What are good bookkeeping practices?
Hire A Bookkeeper
Final thought

What is Bookkeeping?

Bookkeeping is the art of recording financial data so that it’s easy to know how much money you’re actually spending and how much money is coming in.


What happens to that record? After a bookkeeper has made the record, it’s passed onto an accountant to prepare VAT returns, financial accounts, tax returns and then file the financial reports required by HMRC and other government agencies for tax returns and VAT. 

Management accounts are also dependent upon bookkeeping.

To make the business successful, you should be balancing the books at a fixed frequency, like weekly, fortnightly or monthly; else, you might struggle with paying for things such as supplies, stocks and your taxes.

It’s the best habit you really want to be getting into from the very beginning of running your own business.

Doube entry system in bookkeeping

The double entry system bookkeeping suggests that every transaction has two aspects, affecting two general ledger accounts.

Each transaction involves a debit entry in one account and a credit entry in another account. The sum of debits should always be equal. So, if at any point, the sum of debits does not equal the corresponding sum of credits, then an error has occurred.

Thankfully, cloud-based accounting systems like Xero, makes this process much more comfortable.

Why is bookkeeping important?

You cannot run your business for very long without sound knowledge of your finances.

Here are the 7 reasons why bookkeeping is essential for your business.

  • Performance tracking: Timely and accurate bookkeeping helps monitor business performance. Compare actual numbers against the budgets and analyse resulting variances.
  • Accurate taxes: There are numerous taxes small businesses need to pay throughout the year, and bookkeeping means you can correctly calculate how much is due. VAT is the best example of such taxes.
  • Credit control: Accurate bookkeeping tells you which of your customers have paid, which haven’t.
  • Supplier payments: It also tells you which of your suppliers you owe money and which you already paid. Which will help you determine your business’s cash cycle and better manage cash flow.
  • Management accounts: Good bookkeeping is the foundation and building blocks for a quality set of management accounts. These management accounts provide you financial intelligence needed to make critical business decisions like which product is selling more, which is selling fast, which one you are running low on stock, which product or service trades seasonally. 
  • Forward-looking: Bookkeeping helps you prepare for the financial year ahead and allow you to think about what your next move should be, whether that’s about setting up a limited company or growing your business.
  • Investor reporting: It’s also worth keeping in mind that if you dream of expanding your small business, you will need to be able to prove its profitability to investors, new partners, and banks. Good bookkeeping practices can help you with that.
  • Tax returns: Anyone who is a self-employed or a limited company director required to file a Self-Assessment tax return each year.

This is used to declare the earnings from your employment & other income to HMRC and calculate how much you will need to pay in NICs and income tax.

To do this efficiently, and for things like filing your tax return early, your bookkeeping must be organised.

Even if you have an accountant, they will still need you to keep on top of your bookkeeping, including recording your expenses, getting your invoices. An accountant can’t do their job without knowing your business’s incomings and outgoings.

What are good bookkeeping practices?

1.  Start your bookkeeping early

A few minutes daily, or a designated time-slot every week is represent good bookkeeping practice.

Failure to sort that out quickly could result in paying more tax than necessary or even worse, being penalised for incorrect or late return.

2.  Keep your business bank accounts separate from personal ones

Open and maintain a business bank account to save yourself from the troubles going through all the receipts, trying to work out which of your purchases were ‘wholly and exclusively’ for business purposes. 

3.  Use credit or debit card for transactions to keep it recorded

Credit and debit card transactions make it much smoother to keep track of the money spent, where and when it was spent and makes recording your expenses much easier.

Keep in mind that in some cases, it might be beneficial to use a personal card.

For instance, if you get the bus every day and pay personally for it, you can add up the total expense and claim this as a business expense once per month, whereas paying by the company card means an addition of a separate record for every payment.

4.  Use digital bookkeeping software

There are many accounting software available to make your bookkeeping process easier.

Have a look at our guide Top 7 accounting software for small business UK 2020 to know in details.

Even if you do not use a complete accounting software and service package, using a free cloud service such as Google Sheets will mean you can access your spreadsheets anytime and anywhere.

5.  Always keep your receipts

Make sure you keep evidence of all your expenses in case HMRC want to investigate your company.

HMRC can ask to see receipts, and you’ll be in seriously hot water if you do not have anything to prove, so make sure you are keeping evidence of all your business-related expenses.

Sometimes, printed receipts worn out or lost easily, so it is good to scan and back them up.

HMRC also accepts digital copies, so take a snap of the receipt and file it on your computer or online drive with the clearly labelled date.

Google Drive and Dropbox do an excellent job of scanning and converting receipts and paperwork into PDFs.

Whenever an invoice is paid, be sure to update your accounts.

Avoid chaos by separating the invoices into four date-ordered columns when filing them such as Purchase Paid, Purchase Unpaid, Sales Paid, and Sales Unpaid.

This can help you avoid desperately shuffling through an unorganised pile later on.

Hire A Bookkeeper

It makes sense to consider hiring a bookkeeper to save money and time both.

A bookkeeper can give you the overall picture of your financial health without having you to waste time scanning through the reports yourself.

By putting an expert on board, you are freeing up yourself to run your company how you imagined it would be without any complicated juggling of numbers in the way.


Final thought

Overall, as we have mentioned earlier, every business needs to be on the ball for bookkeeping, no matter how big or small they are.

If you are not sure about where your business’s bookkeeping can be improved, it is beneficial to hand it over to an expert bookkeeper and save time.

123Financials Editorial Team
The 123Financials editorial team is composed of seasoned finance and accounting experts with a combined experience of over 20 years. Specializing in UK finance, accounting, and tax-related content, our team is dedicated to delivering insightful and practical advice to startups and small businesses. With a strong background in both the theoretical and practical aspects of financial management, we ensure that our readers stay informed and empowered to make sound financial decisions. Whether it’s navigating the complexities of UK tax laws or providing strategic financial planning tips, our team is committed to excellence and accuracy in every article.