How to keep accounting records correctly?

Organisations and individual entrepreneurs in the UK are required to report to HM Revenue & Customs (HMRC). Accounting helps systematise information about a company’s activities and prepare the necessary documents. This article outlines what to consider, which reports to submit, and how to manage without an accountant.

What is accounting?

Accounting involves the continuous collection of information about a business’s economic or commercial activities and the state of its assets and liabilities. The process begins when a legal entity (e.g., a limited company) or sole trader is registered and continues until the business ceases operations, such as during restructuring or liquidation.

The basic principles of UK accounting include:

• Double-entry bookkeeping: Recording each transaction as a debit and a credit in separate accounts with matching amounts.

• Recording of assets: Documenting all assets owned by the business, such as property, plant, and equipment.

• Supporting documentation: Registering business transactions with appropriate records, such as invoices or receipts.

• Prudence: Ensuring financial statements are prepared cautiously to avoid overstating profits or assets.

• Timely recording: Logging transactions when they occur to maintain accurate records.

• Confidentiality: Treating internal accounting documents as commercially sensitive.

• Monetary measurement: Recording transactions in pounds sterling, the UK’s currency.

• Regular reporting: Preparing monthly or quarterly records to support forecasting and compliance with HMRC requirements.

Note: Accounting is typically managed by a qualified accountant. If no accountant is employed, the responsibility falls to the company director or sole trader. Alternatively, bookkeeping can be outsourced to a third-party provider under a contract.

Why keep accounting records?

Maintaining accurate accounting records enables you to:

• Assess the current financial health of the business.

• Monitor revenue and expense trends and identify deviations from budgets or forecasts.

• Optimise finances by identifying unprofitable activities or unnecessary expenditures.

• Prevent fraudulent activities through regular oversight.

• Prepare and submit reports to HMRC and, if applicable, Companies House on time.

Accounting provides reliable data about the business’s activities and financial position. This information guides decisions by business owners or shareholders regarding company development and helps investors assess financial risks. It is also critical for managing assets and tracking the movement of funds or inventory.

What are the objects of accounting?

Under UK law, the following must be accounted for:

• Income and expenses of the business.

• Assets and liabilities, including amounts owed to or by suppliers, customers, or lenders.

• Transactions that affect the business’s financial position, known as economic events.

• Sources of funds, such as loans, investments, or revenue, necessary for operations.

• Additional information required by UK accounting standards, such as those set by the Financial Reporting Council (FRC), depending on the business type.

Assets are typically divided into current and non-current. Current assets include cash, accounts receivable, and inventories of raw materials or goods. Non-current assets include buildings, land, equipment, and other fixed assets.

Note: Transactions related to business liabilities, such as paying supplier invoices, employee salaries, or taxes to HMRC, must be recorded.

After registering a legal entity, such as a limited company, the owner must establish and approve the company’s accounting policy within a reasonable timeframe. This document, required during HMRC or external audits, outlines how accounting is conducted and may be updated to reflect new business activities or changes in UK legislation, such as updates to the Companies Act 2006 or UK GAAP (Generally Accepted Accounting Practice). The policy includes the chart of accounts, an explanatory note to the balance sheet, and profit and loss statements. It should also specify the threshold for material errors in financial reporting.

If you are a new entrepreneur, this article highlights the complexity of setting up bookkeeping after registering a business. Errors in calculations can lead to penalties from HMRC. Foundry Accounting can help you save time, reduce stress, and avoid costly mistakes.