Where a lot of self-employed people struggle is in keeping their accounting records in good shape. Without a doubt, this process can feel overwhelming and confusing but this does not make this essential task any less important.
This guide explains what records you should keep, how you should store them, how long to keep them, and why. Among many other things, this level of organisation will save you from inaccurate taxes, insurance claims, and stock levels.
What Accounting Records Should I Keep?
- Sales: Any sales or other forms of income, whether this is invoices, bank statements, or third-party transfer apps, ought to be recorded.
- Purchases and Expenses: From office equipment to water bills, make sure you make a note of anything you buy. You never know when you will need this information for insurance or tax purposes!
- Assets: Anything of significant value that you buy for your business, like computers and other electrical equipment or machinery, should be recorded as they can contribute to tax payments.
- Amounts Added and Withdrawn: If you are adding or withdrawing funds from your business account then they must be recorded as these are the kinds of financial payments that can look suspicious to the tax person.
- Mileage: If fuel is part of your expenses then it is important to prove when you made the journey, how far you went, how long it took, the destination, and the purpose of the trip.
How Should I Store and Record My Accounting Records?
Without a doubt, the most important thing to do when storing and recording your accounting records is to consistently be organised. A good method is to put all of your records, whatever these may be, into one folder each month so that by the end of the tax year you have 12 chronological sets of records. If you do this then it is important to file these records immediately and it is advised to find a way to make a duplicate of the records of more substantial financial transactions, whether this is an asset purchase, a withdrawal of money, or a particularly large scale. You may want to opt to have both physical and digital copies of accounting records sent to you.
How Long Should I Keep Them?
HMRC states that ‘you must keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year.’ In simpler terms, you need to keep these important records for 5 years starting from the following 31st January date. If you submit your 2020/21 tax returns in January of 2021, the next 31st January is in 2022 so you need to keep your records for five years from this point, until 31st January 2027.
So when you Google ‘how long should I keep my accounting records?’ and the internet tells you five years, just bear in mind that this is from the following 31st January. This could mean that you end up keeping your records for seven years rather than five if a record is from early in the previous tax year. It is also worth noting that this time frame is advised, not capped. There is definitely no harm in keeping your records after this time span.
For very late returns, where you submit your tax returns more than 4 years after their deadline, you need to keep these accounting records for at least 15 months.
Why is it Important to Keep Accounting Records?
Stock: If you are a company that deals in goods then keeping accounting records is a good way to confirm your stock levels at the end of the year for tax purposes.
Insurance: If you find yourself in a situation where you are claiming insurance, having the correct accounting records could save or gain you huge sums of money as you can prove that certain damaged or stolen assets and equipment were definitely bought by the company.
Taxes: The last thing you would want is to be accused of fudging your taxes. Unless you keep an organised system of accounting records, it can be very difficult to source the correct records to prove that you have paid the right taxes.
As overwhelming as it can be for those who are self-employed, it is so important that you properly organise your accounting records. This includes knowing what records to keep, keeping your records for over five years, and setting up an effective organisation schedule.
If you have any further questions about how those who are self-employed can better organise their accounting records, then do not hesitate to get in touch