Bookkeeping is the habit of recording what comes in and what goes out of your business — every sale, every expense, every invoice. It sounds simple, and it is, but it is also the foundation of everything else: your tax returns, your VAT, your cash flow and even the value of your business if you ever sell it.
This guide explains bookkeeping basics: what bookkeeping involves, which records you must keep, how long to keep them, and a simple routine that takes a few minutes a week.
What Are Bookkeeping Basics?
Bookkeeping is the day-to-day recording of your business’s financial transactions. Every time money enters or leaves the business, it is written down — the date, the amount, what it was for and who it involved. That record is then used to prepare accounts, file tax returns and manage the business.
Bookkeeping is not the same as accounting, although the two go hand in hand. Bookkeeping is the record keeping; accounting is what is done with those records — preparing annual accounts, filing tax returns and advising on the business. Whether you are a sole trader, a partnership or a limited company, you need bookkeeping basics.
The Records You Must Keep
As a minimum, you should keep:
- Sales invoices and takings: every invoice you issue, and a record of cash and card sales.
- Purchase invoices and receipts: everything you buy for the business.
- Bank statements: business bank statements, including cheque and card records.
- Payroll records: wages, pension contributions and PAYE records for any employees.
- VAT records: if you are VAT-registered, you must keep digital VAT records and submit returns using MTD-compatible software. If you are not yet registered, read our guide to the VAT registration threshold to see whether you should be.
- Company records: if you have recently set up a limited company, you need to keep company records too — the same accounts and tax records, plus the company’s statutory registers and the records behind the confirmation statement.
How Long Must You Keep Records?
The retention rules depend on your business type:
- Limited company: keep company and tax records for 6 years from the end of the last company financial year they relate to.
- Self-employed (sole trader or partnership): keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year.
- VAT records: generally keep VAT records for 6 years.
HMRC can charge penalties if your records are inadequate, so bookkeeping basics mean keeping them properly rather than relying on memory or on bank statements alone.
Digital Records and Accounting Software
More and more record keeping is digital, and for VAT it is also a legal requirement. Cloud accounting software — popular packages include Xero, QuickBooks, FreeAgent and Sage — lets you connect your bank feed, photograph receipts and produce reports at the click of a button. A spreadsheet works too, especially for a small business, as long as it is kept up to date and backed up regularly.
Whatever you use, keep a copy of everything somewhere safe, and make sure someone else could understand your records — if you were ever ill or away, your business still has to file on time.
A Simple Monthly Bookkeeping Routine
Bookkeeping basics work best as a habit, not a yearly scramble. Try this routine:
- Every week: record income and expenses as they happen, and photograph or scan receipts straight away.
- Every week: chase any invoices that are overdue.
- Every month: reconcile the bank account, checking that your records match the money in and out.
- Every month: check your profit and set money aside for tax. Our cash flow forecasting guide explains how a simple 13-week forecast helps you plan for tax payments and quiet periods alike.
- Every quarter: if you are VAT-registered, prepare and file your VAT return.
- Every year: prepare for your accounts and tax return well before the deadlines, not the week they are due.
Common Bookkeeping Mistakes
- Mixing personal and business money in the same account.
- Not recording cash sales.
- Losing receipts — or keeping them in a carrier bag until the year end.
- Forgetting to reconcile the bank, so errors go unnoticed.
- Leaving everything to the year end, when it takes far longer and mistakes are more likely.
Related reading: Employing staff? Read our guide to PAYE and payroll basics for UK employers.
Frequently Asked Questions
Can I do my own bookkeeping?
Yes. Many small businesses do their own bookkeeping, and cloud software makes the bookkeeping basics much easier than they used to be. What matters is keeping the records complete, up to date and backed up.
Do I need an accountant to keep my books?
No, but an accountant prepares your accounts and tax returns from your records and can spot problems early — such as missed income, errors in VAT or deadlines coming up.
Can I keep paper records?
Yes, but digital record keeping is required for VAT and will be required for income tax under Making Tax Digital. Scanning receipts and keeping a digital copy is the safer approach.
What happens if I lose my records?
Try to reconstruct them from bank statements and supplier records. If HMRC finds your records inadequate, they can estimate your tax and charge penalties, so it is worth keeping them properly from the start.
How We Can Help
Good bookkeeping saves time, reduces tax stress and makes every other part of running a business easier. Financial Accounting Firm can look after your bookkeeping for you, or help you set up a system that works for your business. Contact us to discuss your records, or read about our accounting and bookkeeping services on our Services page.
This article is general information only and should not be taken as personal tax or financial advice. Tax rules can change, and your position will depend on your own circumstances.
