# What is Bookkeeping?

Bookkeeping is the day to day recording of every financial transaction in a business, such as sales, purchases, expenses and payments, so the figures are accurate and ready for accounts and tax returns.

## Example

A sole trader logs each sale and each business expense as it happens. At the year end the bookkeeping gives a clean set of figures to complete the Self Assessment return.

## Key dates

Keep records for 6 years from the end of the financial year (limited companies)

## How Bookkeeping works in practice

Bookkeeping is the process of recording a business's financial transactions in an organised way. Every sale, purchase, expense, bank payment and receipt is captured, categorised and stored. It is the foundation that everything else sits on: if the bookkeeping is wrong, the accounts, the VAT return and the tax bill will all be wrong too.

Bookkeeping is not the same as accounting. A bookkeeper records and organises the data, reconciles bank accounts and keeps the ledgers up to date. Accounting takes that data and interprets it: preparing financial statements, working out tax, advising on decisions and filing returns. Many small businesses do their own bookkeeping and pass the results to an accountant for the year end.

UK businesses must keep records that show their income and expenses and support what they report to HMRC. That usually means sales invoices, purchase invoices and receipts, bank statements, payroll records and, if VAT registered, VAT records. A limited company must keep its records for 6 years from the end of the financial year they relate to. For Self Assessment, you need to keep records for at least 5 years after the 31 January submission deadline for the tax year.

Bookkeeping software has largely replaced paper ledgers. Good software connects to your bank, matches payments to invoices and categorises transactions, which cuts the time spent and the chance of error. Whatever you use, the aim is the same: records that are complete, accurate and up to date.

## Step by step

Bookkeeping works in cycles. Throughout the month you record sales and purchases, capture receipts and categorise bank transactions. Once a month you reconcile your records to your bank statements so every pound is accounted for and anything missing or duplicated is spotted.

Under the double entry method, each transaction is recorded twice: once as a debit and once as a credit. This keeps the books in balance and produces reliable reports such as the profit and loss account and balance sheet. Sole traders with simple affairs sometimes use single entry, recording income and expenses in a cash book.

At the end of each period, the bookkeeping feeds the VAT return, the year end accounts and the tax return. The cleaner the records, the faster and cheaper that work becomes.

## Practical tips

- Open a separate business bank account from day one and keep personal spending out of it
- Capture receipts as they happen by photographing them, rather than collecting a shoebox at year end
- Reconcile your bank account at least once a month
- Choose software that connects to your bank so categorising is mostly review rather than data entry

## Common mistakes to avoid

- Leaving bookkeeping until the year end, when receipts are lost and memories have faded
- Mixing personal and business spending in one bank account, which makes categorising transactions slow and error prone
- Not keeping receipts or digital copies of purchase invoices to support expense claims
- Skipping bank reconciliation, so errors and missing transactions go unnoticed for months

## Frequently asked questions

### What is the difference between bookkeeping and accounting?

Bookkeeping is recording and organising transactions. Accounting is interpreting that data, preparing financial statements, calculating tax and giving advice. Bookkeeping comes first and feeds the accounting.

### Do I need a bookkeeper or can I use bookkeeping software?

Many small businesses manage with software alone, particularly sole traders and small limited companies. A bookkeeper helps when volumes grow, when VAT or payroll is involved or when you simply do not have the time.

### How long must I keep bookkeeping records?

A limited company must keep records for 6 years from the end of the financial year. For Self Assessment you need to keep them for at least 5 years after the 31 January submission deadline for that tax year.

### What records do I need to keep?

Sales and purchase invoices, receipts, bank statements, payroll records and, if VAT registered, VAT records. They must support the figures you report to HMRC.

Source: https://www.gov.uk/self-employed-records

## Related terms

- [Profit and Loss Statement (P&L)](https://accounts-os.com/glossary/profit-and-loss)
- [VAT Return](https://accounts-os.com/glossary/vat-return)
- [AI Bookkeeping](https://accounts-os.com/glossary/ai-bookkeeping)