Look, we’ve been there. You’re focused on delivering a project. Then another. Then something enormous comes along and takes up your time. Before you know it, the year’s up. And then it suddenly hits you that you’ve got a self-assessment return to file, and you’ve got absolutely no idea where to start.
Only two things can help you ensure you don’t get into this pickle again – accounting, and bookkeeping. These are important financial processes that’ll assist you with financial control and end-of-year tax affairs. But they’re not the same thing, and it’s important you understand the difference moving forward.
Here Inna Kaushan, co-founder of Solna, explains what bookkeeping and accounting are and what role they play in your business.
What is bookkeeping?
Bookkeeping is the process of keeping accurate records of business transactions. All financial transactions are recorded and stored in your ‘books’. Additional activities include verifying and recording invoices, paying suppliers and keeping receipts.
What is a bookkeeper?
A bookkeeper is a data entry professional. A bookkeeper’s role is to maintain accurate business records. The ‘books’ a bookkeeper maintains are then used by an accountant to prepare financial reports and file tax returns. Some accounting practices offer bookkeeping as part of their service, so everything’s under one roof.
Do I need a bookkeeper?
You can practice good bookkeeping yourself with software as there are countless tools available. If you’re already on top of your books but are struggling to keep tabs on your invoices, you can also use software to track invoices.
If you don’t want a hand in maintaining your books, outsourcing to a bookkeeper is the only way. Bookkeepers typically charge around £50 an hour. Most freelancers will need three to four hours a month, so the outlay could be approximately £200 per month. If you earn way more than this then it makes sense to outsource to free up your time.
Don’t forget that many day-to-day tasks you might assume are covered by bookkeeping aren’t. Bookkeeping doesn’t send out invoices for you nor does it automate payment reminders if they become past due. And, while bookkeeping will help you make informed business decisions, it won’t track your customer credit scores so that you stay in the loop about their risk profile. For these tasks, you will need to use an automated system that can generate invoices, chase them automatically and will allow you to check credit scores of your current and potential customers – so you know which customers are likely to be the riskiest when it comes to getting paid on time.
What is accounting?
Accounting is the process of presenting financial information in various reports. A relevant example is the end of year self-assessment. Simply put, accounting is the art of presenting information in different forms, such as balance sheets and income statements.
What is an accountant?
An accountant is a finance expert who manages your tax affairs on your behalf. Your accountant exists to provide up to date monetary business advice and help you run a tax-efficient operation. Bookkeepers, by comparison, crunch data. They don’t provide advice or assist with the creation of financial reports or tax returns.
Do I need an accountant?
You don’t need an accountant to file your self-assessment tax return. You can do this yourself online in a matter of minutes. However, in doing so you run the risk of paying more income tax than you should. For example, you might not make proper use of your allowable expenses or set up a tax-efficient payment structure.
Accountants are worth their weight in gold because they can advise you on the most tax efficient structure for your business. For instance, they might set up a PAYE scheme for you and note some payments as dividends. This is all complicated stuff if you’re not familiar with accounting – which is why you need an accountant. Alternatively, you can invest in your own education and become a certified accountant yourself (check this step by step guide to see if it’s worth a shot).
Bringing both worlds together
Whether you choose to take on a bookkeeper or do it yourself, it’s important you bring bookkeeping and accounting together. Both jobs are separate but the relationship between them should be close. Good bookkeeping makes an accountant’s life easier (and reduces your bill in the process) and good accounting ensures all your hard work is put to proper use when any financial reports or returns are created.
More on sole trader accounts and bookkeeping and limited company accountants.
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