What is Required for Financial Record Keeping / Book Keeping?

Man Stressed over Book Keeping

Book Keeping

Book keeping is a system of financial record keeping for your business, it doesn’t have to be in a formal Accounting package and it doesn’t have to be managed by an Accountant or Book keeper.  If your business is small and the number of records are manageable you could keep records on an Excel file.

The advent of Making Tax Digital (MTD) has mandated electronic records.  This regulation currently applies only to businesses above the VAT threshold albeit it is set to be extended to further businesses in the coming year, therefore if you are just starting out it would be wise to start off with a form of electronic book keeping.

Imagine you never recorded that you posted a cheque to a supplier last week and they call up looking for payment – do you send another cheque to them?  What will stop them cashing both cheques and keeping your money?  Similarly if you are not recording when your customers pay you then how will you know when they don’t pay?

Additionally, record keeping is a legal requirement, the minimum time to keep your financial business records is 6 years.  HMRC can fine you if your records are inaccurate, illegible, incomplete or unavailable.  Therefore it’s worth taking time to set up a good book keeping system regardless of your business size or area.  It may only take a little time to set up a system now and could save you a substantial amount of time (and money) when it comes time to complete your tax returns.

Book keeping is essential for every business of every size – poor or no book keeping can mean bad records and information resulting in bad management decisions and HMRC fines and penalties.

Requirements for a Basic Book Keeping System

So what is involved in good book keeping system?  Well as a bare minimum the following records must be maintained:

  • Sales Book – this is a record of all your sales and if you offer credit to customers you must also record when payments are made against these invoices.  The basic information to record would be the Date of Sale, Total Price, VAT element, Customer Name, Date of Payment and amount paid.
  • Purchases Book – this is all of your purchases, if your suppliers offer you credit you must also record when you settle your outstanding balances.  If you are VAT registered and you are reclaiming VAT then you must ensure you obtain and retain VAT receipts/invoices for all of your purchases on which you plan to reclaim the VAT element.  The same basic information as the Sales Book is required here.
  • Cash Book – this records all the cash at it enters and leaves your business.  This could be a business bank statement (if all your transactions are carried out through a separate bank account) or a notebook (Cash Book) and every time you receive or spend business funds a line is entered detailing the transaction or even an Excel worksheet.  Again here the basic information required is similar to the two above but you may also want to record the method of payment/receipt (i.e. Credit Card/Bank Transfer/Cash)
  • Wages Book – if you employ staff in addition to the above you will need to keep a record of what you have paid your staff each period and what the relevant deductions were.

Having this information is not only a legal requirement but it can also help you to run your business more effectively and efficiently.  For example: If you quote for new work at a certain price and you record all the purchase invoices and employee time logged against this particular work then you can determine whether or not you have made a profit or loss. This information is then available when you are quoting for any future work so you can adjust your quotes accordingly.

Options for a Book Keeping System

Paper Records

Initially your business may be small with relatively few transactions and you don’t offer credit to customers nor receive it from suppliers. If this is the case it could be sufficient for you to keep paper records.  BEWARE though as MTD is already live for businesses above the VAT threshold and will become live very soon for most businesses.  If you opt for paper records you will need to upgrade to an electronic system in the near future.

A paper records system would entail purchasing a notebook (remember to keep the receipt and enter it as a transaction) and add a new line for every purchase or sale that was for business purposes.  In addition to a line in the note book (Cash Book) you would need to keep a copy of each receipt for purchases and a copy of the receipt or invoice that you prepared for your customer for each sale.

To better organise your paperwork it is advisable that you number each line in the Cash Book and mark the receipts with the same number.  These receipts can then be stored in a box or file in number order ready to be used for your annual tax return. Collating your paperwork in this way makes it easier for your Accountant (should you hire one) and will keep your Accounting fees lower.

As your business expands you may start to request credit from your suppliers (i.e. receive goods today but not pay for them for say 14 days), once this happens you will have to open a Purchase book to allow you to easily record when you pay suppliers. This book will run alongside your Cash Book which should already be established. Every purchase should be a new line in this Purchase Book with a column allowing you to mark when the item has been paid.  Only when making the payment (and marking this final column in your Purchase Book) do you record the transaction as an item in your Cash Book.  Again transactions in your Purchase book should be numbered and stored in numerical order.  You may want to maintain 2 separate boxes/folders now – one for your Cash Book and one for your Purchase Book.

Moving on again you may start to offer your Customers credit.  The same applies as to when you started taking credit from your suppliers – you will need to start a new notebook (Sales Book) and record all your sales in here.  Only transferring them to your Cash Book when they have been paid.  And again this requires a new box or folder to keep all your customer invoices or receipts in numerical order.

If you employ staff you will also have a 4th notebook (Wages Book) as explained above this will be used for recording your employees Gross and Net pay along with any deductions made.  It may be worthwhile involving an Accountant or Payroll Bureau once you start to employ staff as you are legally obliged to collect Tax and National Insurance from them as specific rates and report this to HMRC on a regular basis.  You will also have auto enrolment pension responsibilities.

Excel (or similar spreadsheet software)

After some time with paper records and as your business grows you may find the need to upgrade to a computer package to help you record and manage your financial transactions better.

The basis of a spreadsheet package will be the same 4 books as discussed above with the same reporting requirement and the same 4 boxes of actual paper files to back up your figures.

The main advantages of having the records on a spreadsheet as opposed to in a notepad is that you can quickly search and filter your transactions to give you added management information.

For example if a supplier calls requesting payment for an invoice you would have to move through every individual line on your paper records until you find the transaction in question to check if 1) you have a copy of the invoice being chased for payment and 2) you have already paid it or not. Whereas if you had your records on a spreadsheet you could do a search for the invoice number and the transaction line would be returned to you in seconds.

Additionally you could use a spreadsheet to filter your Puchase or Cash Book to show how much you have spent with a particular supplier in the past 6 months – you could then use this information to negotiate better credit terms or a discount.  Conversely you could filter your Sales book to show all the current outstanding amounts for a particular customer and use this information to decide whether or not to allow them more credit.  Obtaining this same information from paper files would mean trailing through all the transaction lines in the past 6 months and manually adding up the values with a calculator.

Excel (or similar spreadsheet software) can provide a vast improvement from paper files, but it still does have a number of limitations:

  • Cells can easily be written over or deleted – losing valuable information
  • Whole files can easily be lost or written over – this could result in you losing your full Cash, Purchase or Sales book or everything!
  • Supplier invoices may be entered more than once in error (this could happen in paper records too)
  • Typing errors are possible rendering the use of filters unreliable
  • Only one person can be working in the file at a time
  • Changes are untraceable and often unnoticeable

Computerised Accounting Software

There are a great number of accounting packages available.  These packages make light work of recording and managing your financial transactions.  Each package may look a little different and ask you slightly different questions but in essence they will all be keeping a record of the above 4 books that we have discussed.

The benefits of specific Accounting packages will vary but generally the benefits include:

  • the ability for more than one user to work on the records at the same time
  • customisable access for the users allowing you to set up access for only certain areas – keeping confidential information confidential.
  • it is much harder to change and delete transactions once they are in an accounting package so its less likely to make changes in error
  • you can set most packages up to email you regular file back-ups so if something happens and you lose your current data you can restore it from your last back-up
  • most accounting systems have checks in place to warn you when you are entering a duplicate supplier invoice so its less likely supplier invoices will be entered twice in error
  • most accounting systems maintain an Audit log which means you can trace back when changes were made and by who
  • most software will produce standard reports such as Profit and Loss and Balance Sheets, VAT returns can even be produced relatively easy.  Caution is advised though as it is still a case of ‘garbage in garbage out’ if you are not familiar with these reports it is always beneficial enlisting help from an Accountant.

It is not the function of this article to recommend accounting packages currently available but I will nonetheless list a few of the packages that you may find useful (DISCLAIMER:  NONE OF THE FOLLOWING PACKAGES ARE ENDORSED OR RECOMMENDED BY TW ACCOUNTING SERVICES)

These are just a few of the available packages and the cost varies.  The available functionality with each provider also greatly varies and regardless of which software you opt for there will be an element of set-up required to ensure it is working correctly for your particular business.  If you are not familiar with Accounting requirements it’s highly advisable that you contact an Accountant for assistance with setting up your new system.


Regardless of the method of Book Keeping you choose you will always still have to retain the paper records of the original transactions so you will still have your 4+ boxes or files of invoices and receipts.

The choice of system or process is great and whatever you choose to start your business doesn’t have to be the last system you work with.

Similarly just because you are just starting out doesnt mean you have to work with paper records. Starting out initially with a computerised Accounting system could mean you have all the benefits from the start and it could save a costly implementation exercise in the future when you decide you need to go electronic.

Whichever method you choose to record your Financial Transactions, planning will be your friend.  Getting it right from the start will save you both a lot of time and money.

If you have any questions on this article or comments please feel free to contact me on 01236 723731.

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