A simple bookkeeping system

The simple bookkeeping system I describe here is a single entry system that revolves around your bank statement and the requirements of the self assessment tax system. It is not suitable for a business with lots of transactions and multiple bank accounts. Double entry bookkeeping is required for this but is much more complex and not the sort of thing you’ll be able to pick up in a weekend. For many sole traders this single entry system should suffice and provide the sort of analysis and totals you need to fill out the self assessment form.
At the core of this system is the analysed cashbook. Cashbook is a bit of a misnomer in that you’ll be using it to enter all your transactions, few of which are likely to have been made with physical cash. It’s analysed in the sense that you break down your income and expenditure into useful categories.
If you use the same categories as those on the self assessment form then, at year end, you can simply total these in your cashbook to arrive at suitable figures for your tax return.
You can do this system on paper eg buy a ledger book with an appropriate number of columns or on a computer with a spreadsheet application like Microsoft Excel. I strongly recommend using a spreadsheet over paper as it massively simplifies arithmetic and therefore minimises errors. That said if you don’t know what you’re doing it too can degenerate into a mess that bears little relation to your bank statements. So every month you need to go through a process called bank reconciliation to bring the cashbook and bank statement into alignment: for detailed instructions, see Bank reconciliation.
There are two sides to the cashbook. Money In, which doesn’t require many analysis columns and Money Out, which does.
Here’s a sample layout for Money In:

DATE

DESCRIPTION

REF

DATE PAID

BANK REF

TOTAL

and the analysis (or breakdown):

VAT

INCOME

CAPITAL
INTRODUCED

Here’s a sample layout for Money Out:

DATE

DESCRIPTION

REF

DATE PAID

BANK REF

TOTAL

and the analysis:

VAT

COST OF
SALES

CONSTRUCTION 
SUBCONTRACTORS

EMPLOYEE
COSTS

MOTOR/TRAVEL 
EXPENSES

PREMISES
COSTS

continued:

REPAIRS

GENERAL
ADMIN
EXPENSES

ADVERTISING/
PROMOTION

INTEREST

OTHER 
FINANCE 
CHARGES

LEGAL &
PROF 
FEES

continued:

OTHER 
EXPENSES

DRAWINGS

EQUIPMENT
PURCHASED

Notice the columns for Date (ie transaction date) and Date Paid. These might be the same eg if you buy something in a shop or different eg if you offer credit and have to wait say 30 days to get paid after sending out your invoice.
The Description column should be used to clearly explain what the transaction was for.
The first Ref column you can use for your sales invoice number or purchase order number (ie some means of identifying the cashbook entry with the physical piece of paper that is the invoice). You should number all sales invoices you send out and keep a copy for your records. You probably don’t have a formal purchasing system set up so purchase order can simply be a petty cash voucher number or a numbered receipt for what you’ve bought for the business. Use pencil to number receipts as HMRC don’t like these being tampered with in any way especially if you are VAT registered.
The Bank Ref column is used for cheque or paying in slip number. It’s very useful for tracking things. Also you should always clearly fill out your cheque and paying in book stubs as you can then just copy this to the Description column. Keep these stubs as part of the paperwork you need to keep for approximately six years.
Enter the total amount of a transaction including VAT in the Total column. If you are VAT registered then enter the VAT amount in the VAT column otherwise leave blank.
Now, finally, we come to the analysis. Decide what category your money in or money out transaction falls under and enter the amount in the appropriate column. If you are not VAT registered this should be the VAT inclusive amount. If you are VAT registered then this should be the VAT exclusive amount because you should’ve already analysed out the VAT into the VAT column.
In the case of money out you might have multiple purchases on one till receipt. If so put these in their appropriate columns and ensure that the subtotal of these columns equals what you put in the Total column (or the Total + VAT if you’re VAT registered).
If some purchases on the till receipt are for personal use only then add them up and put the subtotal in the Drawings column. Similarly if you withdraw cash from the bank for personal use put that under Drawings.
If you purchase equipment for the company be sure to put the amount under Equipment Purchased. This is capital expenditure rather than an expense per se and is handled differently both in the accounts and in the tax system.
If you put money into the business, other than income from sales, put it under Capital Introduced. This is the opposite of Drawings.
At year end, total each column to get an analysed summary of your income and expenditure for the year. This then becomes the basis for calculating your tax liability on the self assessment form. However you may need to make some adjustments first: see the notes accompanying the self assessment form for more information.

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