“My accountant worships me because I'm so cautious with my money.” - Scott Patterson
Few people are passionate about accounting. However, for sole traders, accounting is an essential part of their job. No matter the size of the business, for it to run legitimately, they need to do their accounts.
Over 800,000 new businesses were registered in 2020, a 41% increase on 2019 and a 96% increase on the figure from 2018! That’s a lot of people who now have to do accounts.
Whether it’s a small business, sole trader, or freelancing, invoices, expenses, and tax returns all need to be done.
Are you starting a business or working as a sole trader? Are you feeling lost when it comes to accounting?
Keep in mind that there are ways to make accounting for sole traders and small businesses simpler. However, there are a few unavoidable things.
Here’s our advice on the matter.
How to Invoice Your Customers
For any sole trader or freelancer to get paid, they’ll need to issue invoices to their customers. After all, these act as both a request for payment and a record of work done.
Invoices have to include certain details and you mustn’t make any mistakes on them.
Firstly, you have to give an invoice to your customers. After all, any payment has to come with confirmation.
Secondly, these invoices need to include all the key information. This information includes:
- the date the goods or service were provided (supply date)
- your company name, address and contact information
- the amount(s) being charged
- the company name and address of the customer you’re invoicing
- a unique identification number
- a clear description of what you’re charging for
- VAT amount if applicable
Of course, for a lot of sole traders, they won’t need to charge their customers any VAT, but they will also need to include your name and any business name being used as well as an address where any legal document can be delivered to you.
Finally, it should be noted that you have to use VAT invoices if you and your customer are VAT registered.
Don’t forget that these can also be done using digital tools and accounting software. Similarly, you can use templates for your invoices and save them on the cloud.
Self-employment: Keeping Records of Business Expenses
Whether you’re a small business, sole trader, or freelancer, you need to keep some records for yourself and your business.
Whenever you buy something for your business, you'll want to keep receipts for goods and stock, bank statements, chequebook stubs, sales invoices, till rolls, and bank slips.
Before you were a sole trader, you might have always thrown away your receipts. Now that you're running your own business, you need to keep a hold of all of these things and file them according to date.
You'll need this information to work out profit or loss for your tax returns and show them to HMRC if you're asked. Everything needs to be accurate so if you don't think you're capable of managing all your records for your expenses, you may want to consider hiring an accountant to help you.
Sole-traders: Keeping a Record of Your Sales and Income
Much like with everything you buy, you also need to keep a record of every sale you make. Generally, this is done through quotes and invoices. Of course, once you've provided a product or service, you need to issue an invoice or a receipt to your customer.
Much like the receipts for your business expenses, you'll want to keep all the invoices and receipts you issue to your customers. Again, it's wise to file these according to date and if you've taken payment by card, bank transfer, or similar, you'll have a record both on your bank statement and on the receipts and invoices you issue.
If you're taking cash, you'll need to still make a record of each sale and the income your business makes as if you're asked by HMRC to provide proof as they won't just take your word for it.
Opening a Business Bank Account or Professional Bank Account
It’s always a good idea to have a dedicated account for your business or professional activity. This can also make staying on top of business’ finances much easier.
- It can be useful for:
- Receiving payments
- Maintaining a treasury
- Paying staff
- Paying for goods for your business
- Separating your business accounts from your accounts
- Arranging business loans
In short, to keep your work and personal lives separate, separate bank accounts can help.
Of course, as a sole trader, this doesn’t mean you necessarily need a business bank account, you can always operate using a separate current account or specialised accounts for sole traders, freelancers, or small businesses.
Having a dedicated bank account for your business and paying for everything using the card for the account can be useful. In addition to the invoice or receipt you'll get when buying something for your business, you'll also have a record of the transaction on your bank account statement, which can help find dates and amounts and match transactions to receipts.
Organising Your Accounts as a Freelancer
Finally, while not obligatory, it’s always useful to be organised and plan when it comes to your finances and accounting, especially when you’ll often have to do it yourself. Unforeseen costs or damages can quickly upset your business.
That’s why it’s always important to stay on top of your finances, accounts, invoicing, and tax returns.
Keep an eye on your calendar or set reminders if you don’t have one. You don’t necessarily need to be a chartered accountant, but it does help to stay on top of things. Make notes and keep records of what you earn, spend, and have to pay out in tax, too.
As you’ll have understood, sole traders need to wear a lot of hats. Now it’s over to you.
If you're interested in learning more about economics, finance, or accounting, consider getting help from one of the many talented and experienced private tutors on Superprof.
You can learn about managing your money and accounting with face-to-face tutorials, online tutoring, or group classes. Each type of tutorial comes with its pros and cons so think carefully about what you're looking for in a tutor, how much you can afford to pay, and how you like to learn.
Face-to-face tutors can offer a bespoke service and teach you whatever you'd like to learn. They tend to charge more than the other types of tutoring since they plan and tailor their lessons to their students and will sometimes have to travel to their students. However, since every minute of each tutorial is spent teaching you, this is arguably the most cost-effective way to learn.
Group tutorials are great for those on a budget. If you're the kind of person who likes learning in a social environment, this type of tutoring could be for you. Since you'll all be sharing the cost of the tutor's time and expertise, these types of lessons tend to work out cheaper per student per hour. Of course, you can't expect the tutor to tailor the lessons just to you, though.
If you can't find any suitable or available tutors in your local area, consider learning with an online tutor. You can look for tutors all over the UK and around the world to teach you via webcam. Of course, if you're learning about accounting, you might want to make sure that they're familiar with the legal requirements in the UK for accounting as you don't want to get any of it wrong.
Fortunately, a lot of the tutors on Superprof offer the first lesson for free. These free lessons are a great opportunity for students to try out several potential private tutors before deciding on which one is right for them. It's a good idea to outline what you're looking for in a tutor and how much you can afford to pay before you start shortlisting potential tutors and contacting them for private lessons.
You might be spending a lot of time with your private tutor so remember that it's important that they can teach you what you need to learn and that you get on well with them.
The platform that connects tutors and students