Small business accounting 101: Part 1 – Setting up your accounts

When you’re starting out as a small business, the technical ins and outs of accounting can seem slightly daunting – after all, it takes chartered accountants many years of study to become qualified. But small business accounting needn’t be confusing.

There are common accounting mistakes to avoid, of course, but with the latest in cloud accounting solutions, and the right advice and guidance, you can easily set up an effective small business accounting system that will drive the company’s success.

Part 1 of our small business accounting 101 looks at setting up your accounting system.

1. Opening a small business bank account

Most high street banks won’t let you use a personal current account for business. So you’ll need to open a business account, into which all your sales income will be paid, and from which all your overheads, expenses and running costs will be paid out.

Choosing the right bank account can be complex. Aside from the established banks, there are several UK challenger banks to choose from, including Monzo, Tide, Starling Bank and Revolut.

When choosing an account, think about:

Bank charges, costs and interest – some banks offer free accounts, some will charge you a monthly fee. Also look at whether you’re charged for things like cash withdrawals and currency conversion etc. and whether you’ll earn interest on your balance.

Flexibility of the account – if you need an overdraft facility, make sure this is offered. And look at how easy it is to withdraw and transfer money. The more flexible the account is, the less headaches you’ll have further down the line.

Mobile ease of access – if you’re working on the move a lot, check out the bank’s mobile app. The newer challenger banks generally have good mobile services, allowing you to run your account from your phone and track your finances.

2. Maintaining separate finances

Keeping your personal and business finances separate is key to good accounting. To be able to keep records and track the flow of cash in and out of the business, it’s essential that you create a clear distinction between money in the business, and your own personal cash.

How this works will depend on your legal structure:

For sole traders – if you’re a self-employed sole trader then your business and personal money are one and the same, legally speaking. But to manage your accounts, it’s still essential to have two separate bank accounts and to keep detailed financial records.

For limited companies – if you’re a director of a limited company, your business and personal money are entirely separate. Money in your company bank accountant only belongs to you once it’s been paid out as a salary or dividend payment.

Accounting for business and personal money separately allows you to have the best possible overview of how the business is faring – and is vital for tax purposes too, as we’ll see.

3. Keeping tax records

An inescapable fact of running a business is that you’ll have to pay tax. And calculating your tax liabilities correctly means keeping detailed records of all transactions in and out of the company.

It’s also a legal requirement to keep records, both for self-employed owners and for limited companies. So it’s important to have an accounting software system in place, to help you keep on top of the required bookkeeping and record-keeping (see tip number 4).

To stay in control of your tax:

Know your tax liabilities – sole traders will pay self-assessment income tax on all profits. Limited companies will pay corporation tax on profits, as well as quarterly VAT payments, if your business’s turnover exceeds the £85k threshold for VAT registration.

Keep digital recordsHMRC’s Making Tax Digital legislation has made it mandatory for VAT-registered businesses to keep digital records. So it’s essential to have a modern accounting system that can store these records and can submit digital tax returns.

Pay your taxes on time – it’s important to pay your taxes on time, or you’ll end up paying penalty charges. In most cases, it’s sensible to work with an accountant or tax adviser who can calculate your liabilities and will file these returns on your behalf.

4. Bookkeeping tips and cloud accounting

Cloud accounting software is now the norm for most small businesses – especially since the introduction of Making Tax Digital (MTD) and the need for digital record-keeping.

Good bookkeeping means entering all financial transactions into your accounting system. Platforms like XeroQuickBooks and Sage make your bookkeeping tasks as simple and straightforward as possible – reducing the financial admin workload.

Choosing the best cloud accounting platform can be complicated, but consider:

Ease of use – if you’re new to accounting, choose an accounting platform with a simple interface, that’s easy to use and that makes bookkeeping as straightforward as possible.

Functionality and apps – check that the platform can handle digital records, real-time reporting and payroll, and if the software integrates with other plug-in business apps.

Automation and time-saving – look for automation of key tasks. Some platforms offer automated bookkeeping, automated payments and smart functions using AI.

Keeping in control of the numbers

With a cloud accounting system at the heart of your business, and a proactive approach to your bookkeeping, you give yourself the best possible foundations for financial success.

In Part 2 of our Small Business Accounting 101, we’ll look at how you build on these solid accounting foundations to really get in control of managing your numbers.

The Fluidly blog has lots more tips for getting the best from your company’s finances.