How do you manage your accounts and bookkeeping when you are sole trader

If you are a sole trader, the bookkeeping and management of your accounts are among the most important jobs you must take care of.

However, since you’re a self-employed person and handling numerous aspects of the business on your own, it could be easy to let your accounts slip as other tasks usually take precedence.

This article provides information on what you should take care of to run your bookkeeping and accounts as sole trader and sole trader accounting.

The article discusses getting your business set up, tax obligations you’ll be required to keep track of as well as what you have to complete to register for VAT (if it’s required) and also how to manage your finances.

What is bookkeeping? Why is it so important?

The bookkeeping process involves keeping precise documents of all the cash that flows into and out of your company.

It’s a difficult task since every receipt or invoice has to be recorded, yet it’s crucial to prepare the kind of business plans and tax returns.

Accounting is the general management of your accounts, and it can also involve the strategic planning of a sole trader, bookkeeping focuses on the specifics.

Every single source of expenditure or income is documented from business transactions to business expenses.

This should be a regular procedure, so that every transaction of the day is properly recorded.

As a sole trader the financial and legal liability lies with you.

The consequences of any errors that result in fines or even legal actions could affect you personally since you’re not covered by an Limited Liability Company (LLC).

It’s important to develop good habits from the beginning and establish a systematic workflow that will help you reduce and automate any portion of the process you could.

The first steps to take when handling your account as sole trader

In the beginning, you’ll need to sign up with HMRC and ensure that you know the rules for operating and naming your company.

If you’re a sole trader you are responsible for the company. You’ll be classified as self-employed, but you may nevertheless employ employees.

As a sole trader you must:

• Keep a record of your expenses and sales
• Send in your annual Self Assessment tax return and pay tax on income gains
• Pay Class 2 and Class 4 National Insurance
• You must register to be VAT registered (if your sales are over the threshold of VAT, but you’re able to register even if your turnover is below the threshold)
• Be accountable for any business financial obligations.

You’ll have to keep a log of all your invoices as well as receipts for a period of six years.

HMRC performs audits on companies to make sure that they’re in compliance with tax laws, so you’ll have to adhere to all documentation and ensure it’s current and accurate.

Everything that’s considered a business expense will help you reduce your tax bill at close each year.

This includes:

• Access to internet and computer equipment
• Rent
• Stationery
• Charges for phone bills
• Transfer to the customer’s premises
• Motor costs.

It’s important to develop good habits at the beginning in keeping records of receipts.

If you often take trains to travel and visit your clients, keep your tickets in a different part of your purse, or purchase them on the internet before you travel to ensure that you can keep an email address.

If you purchase something to support your business, like coffee “on expenses” make sure you request the VAT receipt. Some establishments don’t provide a receipt automatically.

What expenses are you able to be able to claim as sole trader?

If you are a sole trader, there are a myriad of expenses that you are able to make use of to offset your costs.

• Office supplies include desk furniture, computer and stationery
• Accommodation and travel: Transportation expenses, including fuel and hotel stays that you have to pay to perform your job.
• Certain clothing items: Uniforms or clothes that are performance-specific like
• Your staff: contractor pay or salary for staff
• Commodities you purchase and sell include stock and raw materials, for instance gold
• Costs of insurance and other financial expenses Costs incurred by banks, for instance.
• Your premises for business include costs such as lighting, heating, and business costs
• Your business’s promotion Costs of operating websites as well as marketing and advertising your business can be claimed
• Training for employees and business Training courses to improve your capabilities as well as your employees.

What taxes will you need to pay as sole trader?

As a sole trader there are various taxes that you are required to be able to pay HMRC:

Income tax

As a sole-trader the need for accurate bookkeeping is vital since you have to report your company’s profits at the close of each tax year.

A tax accounting professional (if there is one) will require a complete set of your financials that show the earnings and expenses, based on which they will calculate the tax liabilities you have.

You must pay your taxes on this income before the next 31 January (you have to file your tax return by this time also).

It’s sensible to complete this task earlier. Do not delay until the last minute, just prior to the date.

After you’ve been on the system and have filed your first tax return You must pay tax twice in the year on the 31st of January and July 31.

Each instalment equals the half of the tax due for the tax year prior.

The best tip is to practise to save 30% of the money you earn. Think about setting an account in a bank for this purpose so that you are aware the funds are available to pay taxes, National Insurance and VAT whenever you require it.

National Insurance

If you establish yourself in the sole trading business you must notify HMRC.

You must pay your Class 2 quarterly National Insurance bill, which is a minimum payment toward your state pension in the future.

Any additional Class 4 National Insurance payments will be figured with your financial advisor at the close of your tax year.

VAT

If you are a sole trader, you are required to declare VAT if the turnover of your business exceeds the threshold currently in place of  £85,000.

You are able to register for a voluntary registration even in the event that you’re below the threshold. Many sole traders choose to register since it suggests you’re an established and reliable company.

You’ll be eligible to take advantage of the VAT rebate on the purchases you make for your business. This can be beneficial in the event that your business involves buying stocks and then selling them on.

When you are charging for time such as a business coach or designer, registration for VAT on your own will not provide you with many financial benefits.

You have the option of choosing either the standard VAT scheme, or Flat Rate VAT that was created to reduce the administrative workload for smaller companies.

Under the flat Rate plan, bill your customers the VAT rate that is standard and return the cash to HMRC at a lower rate, depending on your company’s nature.

PAYE

If you are a sole trader At some point, you will need to hire on employees. As an accountant for your sole trader enterprise it is your responsibility to keep track of the PAYE as well as National Insurance details accurately and keep them for three years following the year in which they were due.

This may comprise:

• Payroll and deductions you take, including pension schemes
• Absent employees, such as leave and illness
• Costs or benefits that are that your employees incur
• Any match for charity expenses that are applied to the payroll giving scheme.

Set up a separate bank account for your business

If you’re just beginning out you should try to open an individual business bank account to ensure your personal and business finances remain separate.

The result will mean it is simpler managing your account and bookkeeping when you are a sole trader.

One of the jobs that you’ll appreciate later on as your company grows and you see ever-growing transactions in connection with the business.

It can also help you keep track of the flow of cash. You should get into the habit of tracking invoices before the due date to ensure you have enough cash to cover the business expenses.

It is also possible to request instalments and staggered payments for bigger projects, instead of having to wait until the job is finished before sending your invoice.

What documentation do I require to keep for sole traders, and for how many years?

Bookkeeping for sole traders is a must. It’s important to keep your business and financial documents up-to-date, in a continuous manner.

HMRC might request a full breakdown of receipts and other information which is why knowing what you need to track is crucial.

This includes:

• The income and sales of your business including receipts, invoices and invoices
• Your personal earnings
• The business costs you incur (and the expenses of any employees you hire)
• The relevant VAT records are available If you’re a VAT-registered business
• Employee payroll records when you have employees other than you.

There may be a need to keep records of other things such as any amount you’re owed but haven’t been paid, year-end banking balances, or any other money you’ve gotten to your own personal use.

All receipts and records should be kept for at least five years after the deadline for submission of tax returns on 31 January of the tax year in question.

Cloud accounting software aid you?

When you’re managing your bookkeeping and accounts when you are a sole trader having a streamlined, effective method in place can help a lot.

Records that are accurate

If you’re entering every transaction into cloud-based accounting software during each year, you’ll have exact records throughout the year.

Cloud accounting software for sole traders means you’ll be able to reduce paper, which can save you space and money. This could be limited in your office at home or workshop.

Since every time you add a new supplier to the system, you’ll be keeping track of their complete contact details and you won’t need to be concerned about keeping your address book that is up-to-date.

Higher chance of getting the money on time

It’s a good idea to stay in touch with your accounts.

Based on the complexity and size of your company It could be either weekly or monthly. When you are able to schedule time regularly, you can swiftly answer any questions… Which exactly was that receipt actually for?

You may also observe someone who hasn’t settled their invoice in time and gently advise them not to continue to work on the project until you’re completely square.

You can also make invoices and quotes, customised by your brand and contact information, which can be sent to customers using PDF formats.

This speeds up the entire process of obtaining the work and being paid for it.

Send VAT returns to HMRC

What matters is speed and precision. With accounting software you can fill out your VAT return within minutes, review the numbers and then submit your return directly to HMRC.

If you have set up direct debits then the money will be taken out on the 10th day of each month, following the VAT quarter. This means that there will be no missed deadlines or penalty fees. This is a great benefit to the sole trader that keeps the watchful check on their balance in the bank.