How to Handle Your Accounting When You Are Self-Employed?
Accounting often takes a back seat for self-employed individuals. Outsourcing is fine, yet every businessperson should grasp their account-keeping responsibilities. Like companies, self-employed individuals and limited liability partnership partners hold tax and accounting duties. This article by Mooncard clarifies accounting methods and necessary records. Even if numbers aren't your strength, you'll gain insight to stay compliant with HMRC as a self-employed professional.
Choose an accounting method
The first thing that you will need to decide on is what type of accounting method you will use for your business. There are two accounting methods that are used by self-employed people to keep track of the money coming in and out of their businesses:
- The traditional accounting method
- The cash basis accounting method
The traditional accounting method
The traditional accounting method is popular amongst self-employed people who operate businesses that have large amounts of turnover.
Traditional accounting requires a businessperson to record all income generated by the business and all expenses incurred as of the date that they happened. So rather than waiting until the invoices or bills are paid, they are entered into accounting records as soon as they are issued.
For example, Bill invoices a customer at the end of March 2022. The invoice is recorded for the 2021 to 2022 tax year, even if Bill does not actually receive payment until the next tax year. The same process holds for bills that the business must pay.
The cash basis accounting method
Cash basis accounting is usually used by businesses that have annual income levels of less than £150,000. Using this method, all bills and invoices are recorded in tax accounts as of the date they are paid. Using the cash basis accounting method means that a self-employed person does not have to pay income tax on monies that they have not yet been paid.
For example, Jane invoices a customer at the end of March 2022. The invoice is paid by the customer on the 10th of April 2022. In this case, using the cash basis accounting method, the invoice would be recorded as falling within the 2022 to 2023 tax year.
What records do you need to keep?
If you are a self-employed person, you will need to keep accounting records for HMRC. These records include:
- All sales made by the business
- All income generated by the business
- Value Added Tax records (VAT) – if your business is registered for VAT
- Pay As You Earn records (PAYE) – if your business has employees
- Accounting records that detail your personal income
- Grants claimed via the Self-Employment Income Support Scheme
Proof of income and expenses will also need to be kept. This can include:
- Bank statements
- Till rolls
- Bank slips
- Sales invoices
These records do not need to be submitted with a tax return but are required to be kept as they form the basis of financial statements and information included in the journal entries in your general ledger. Upon request, accounting records must be shown to HMRC if they ask for an assessment.
For any self-employed person using traditional accounting, you will also need to retain documentation on:
- Amounts owned but not received
- Committed expenses that have not been paid
- Work in progress at the end of the accounting cycle
- Stock held at the end of the accounting cycle
- Details on investments you have made in the business
- Money that has been taken out of the business for personal use
- End of year bank balances
How long should you keep your accounting records?
Self-employed businesspeople are required to keep all accounting records for a minimum of five years after the submission deadline of the current tax year. In the case of tax returns that are done four years after the deadline, records will need to be kept for an additional 15 months minimum after the tax return has been submitted.
Where to find help with your accounting
Many self-employed people find it difficult to devote the time required to properly manage their accounting obligations. Using the services of a professional business accountant can help you to save time and will ensure accurate bookkeeping. If you prefer to maintain your own records without paying for accountants, dedicated business accounting software such as Quickbooks can be helpful.
Mooncard offers self-employed people a better way to manage their accounts. The Mooncard payment system makes it simple to keep track of all purchases made by your business. Every time a purchase is made, a digital photo is taken of the receipt. This is then used to create an automatic expense report that is forwarded directly to you, an employee, or to your accountant. If you would like to arrange a free, no-obligation demonstration of the system, just get in touch with Mooncard today!