Digital Tax Returns


Bookkeeping - what is it and why is it important?

What is bookkeeping, why is it useful and how do you do it? 'Garbage in, garbage out', is the adage that applies to bookkeeping. Good quality bookkeeping is vital to ensuring you have accurate and reliable financial information about how your business is performing and makes compliance so much easier.
The Principles - Double Entry Bookkeeping

Bookkeeping refers to the process of entering the financial transactions of the business into the accounting system. The expression originated in a time when the accounting system was maintained in physical books or ledgers. Today most accounting systems are computerised in the form of either a local PC based or online/cloud based system. Most accounting systems are organised around a separate but integrated set of ledgers for the various different types of accounting transactions. The ‘cashbook’ ledger is fundamental to most businesses and records all of the cash based transactions for the business. Ledgers are also used to record sales and purchase transactions, fixed assets, payroll and, if appropriate, stock.

The fundamental importance of bookkeeping is that it provides the business with the financial information it needs to understand how the business is performing - what is the cash position, how much is the business spending each week, who are the largest debtors etc. As with any system the old adage of garbage-in-garbage-out applies with the accounting system and the quality of the bookkeeping directly affects the quality of the financial reports on which the financial decisions are made. The quality of the bookkeeping also needs to be checked as part of the regular accounting process by ‘reconciling’ the balances in the accounting system to external sources - such as reconciling the bank balance reported in the accounting system to that reported in the bank statements.

Accounting systems are fundamentally based on the double entry bookkeeping system, even if this is not apparent to the user. This system creates two accounting entries for each accounting transaction and ensures that the accounts balance.

Simple Example - Double Entry Bookkeeping

A business makes a cash sale of £100 to a customer and will record the sale in the accounting system by increasing sales by £100 and increasing the cash balance by £100. The accounting system records transactions as either debits or credits to existing balances. In the profit & loss account, sales are credits and expenses are debits. In the balance sheet, assets are debits and liabilities are credits. So, in the above example, the actual accounting entries made will be:
  • Debit Cash £100
  • Credit Sales £100
In this way, for each transaction the debits always equal the credits and, when the accounts are totalled, this will be true for all entries that have been processed.

The Accruals Concept and Why It's Important

Whilst cash-flow is one of the most important elements of managing a small business, the businesses accounts are often prepared using the accruals basis of accounting. In fact, the financial statements for a company are required to be prepared using the accruals basis rather than the cash basis. The fundamental difference between the accruals basis and the cash basis is that the accruals basis includes costs and revenues on the basis of the period to which they relate as opposed to the period in which the cash transaction actually took place. This may mean that if you maintain your records primarily by recording cash transactions then certain adjustments will be required for the preparation of formal business accounts or financial statements.
Worked Example - Cash vs Accrual Basis of Accounting
Your business pays the rent for its property 3 monthly in advance and has paid £3,000 on 1 January 2014 for the period 1 January to 31 March 2014. The cash basis of accounting will show a £3,000 payment in January and zero payment in February and March. Under the accruals basis of accounting, the P&L for each of the 3 months from January to March will show a £1,000 charge for rent on the basis of the amount of rent due for that period, regardless of when the rent was actually paid. Under the accruals basis, in this example, the rent paid in advance is treated as a prepayment. So the transactions during January will show a credit to cash of £3,000, a debit to profit and loss rent expense of £1,000 and a £2,000 debit to balance sheet prepayments.

Had the rent been paid in arrears on 31 March for the same period the cash basis of accounting would change to show a £3,000 payment in March as opposed to January. Under the accruals basis, the profit and loss account would remain the same. The difference, though, would be that in January and February an accrual would be made to record the £1,000 cost in the P&L - Debit P&L Rent Expense, Credit Balance Sheet Accruals. The accrual representing the amount owed by your business for rent at the end of each month.

How to do bookkeeping with Accquant Online Software

Entering Bank Transactions

One of the simplest, and most secure, ways of entering your accounting transactions into your accounting system is by using your internet banking to download your bank statements into a CSV format. If your bank does not allow you to download them into a CSV format then simply download them into any Excel compatable form, open the file in Excel and either save it as a CSV file or copy the data into a new Excel workbook and save that into the CSV format.

Uploading your bank statements and posting the transactions is a simple process using our software:
1. Press the '+ Add Bank Account' button on the dashboard to create a bank account;
2. Press the 'Upload Statement' button next to the bank account you are uploading the statement for - either on the 'Dashboard' or within the 'Banking' section;
3. Use the file selector to choose the CSV file bank statement that you have downloaded from your bank and press 'Upload';
4. Verify the transactions to be uploaded, post them to the appropriate account and ensure, if your business is registered for VAT, that the VAT rate is accurately set;
5. Alternatively, for a fast upload, the transactions can be posted temporarily to the 'Suspense' account and altered later;
6. Press 'Upload'.

The transactions will now be uploaded and posted to the account you have selected and the VAT, if appropriate, calculated and posted as well.

The Bank Reconciliation

The bank reconciliation is an overly complicated term for what is simply common sense validation when entering bank transactions into your accounting system. You will obviously want to ensure that you have entered all of the transactions accurately and you would naturally do this by checking the bank balance in your accounting system is the same as that on your bank statement. If it isn't then you will need to identify which transactions are causing the difference and, if necessary, make the relevant corrections.

There may be valid reasons why your accounting system is showing a different balance to your bank statement. For example, you may have entered a cheque payment you have made into your accounting system that has not been processed by the bank. It is OK to have these kind of timing differences. When you are comfortable that the bank balance in your accounting system is the same as that on your bank statement, or you are comfortable with the reasons why it is different, you can be confident that you banking data is complete and accurate.

Sales & Purchases

In the section above we explained the importance of keeping track of invoices you send to your customers or receive from your suppliers, particulary where these are transactions on credit terms. This will allow you to make sure your customers are paying you promptly and you are doing the same for your suppliers.

Individual transactions can be entered by using the '+' button in the top menu bar. The user guide explains in detail the different transaction types but, put simply, all transactions are separated into cash and non-cash transactions. So, for example, cash sales or non-cash (credit/invoiced) sales. As explained above, cash sales are posted to the relevant bank account and sales whereas credit sales are posted to accounts receivable (debtors) and sales. That is why most accounting systems separate cash from non-cash transactions to ensure the double entry posting is accurate.

Creating an Invoice

Digital Tax Returns Invoice Settings

To create a PDF invoice to send to your customers you will need to ensure your invoice settings are accurate by accessing the settings section. You can ensure you have the correct contact details for your business, load a business logo, enter bank details for payment and specify any legal notices that you wish to include on your invoice. You should also ensure that your business is correctly assigned as either VAT registered or not and provide the VAT registration number if it is VAT registered. This will ensure that the invoice contains the right legal disclosures particularly for VAT purposes. Also, using the 'Customer Contacts' section ensure that the contact details of the customer are correct because the details from this section will be added to the invoice as is standard.

Invoice Data

Using the '+' button select the type of invoice you wish to create. The invoice template allows you to enter all of the information that will be posted into the accounting system and, for sales invoices, entered onto the PDF invoice. The format of the sales and purchases invoices are obviously slightly different mainly to allow purchase invoices to be allocated to an account specified by you. For each invoice you can enter the customer/supplier, transaction date, payment terms (credit transactions), bank account (cash transactions), the invoice number (or use the one automatically calculated) and then three line items specifying the details of the products or services. The Amount column and VAT rate (for VAT registered businesses) are used to automatically calculate the appropriate gross, VAT and net amounts for posting and inclusion in the invoice


If your business is VAT registered you will obviously need to ensure you accurately account for the VAT on each of your transactions and assign the correct rate when posting the transaction. Hopefully most transactions will be straightforward but, unfortunately, some transactions can be a bit complicated, particularly those involving non-UK companies. Our Learning Centre contains an overview guide on VAT to help get you started.

If your business is registered for VAT but using the flat rate scheme you will obviously need to ensure the 'Settings' are set to VAT registered. Sales transactions should show the VAT rate that is appropriate for the goods or service, in line with what is shown on your sales invoices. Purchases, however, should simply record the gross amount with 'no VAT'. This is because, under the Flat Rate Scheme, the VAT on individual purchases is not reclaimed from HMRC.

Create PDF

The 'Create PDF' button above the main invoice form can be used to view a copy of the PDF invoice. When the PDF is viewed the invoice details will be posted to save the data but can be edited separately. The PDF invoice can either be downloaded for sending to your customer or changes can be made by returning to the invoice template and editing.

The Chart of Accounts

Digital Tax Returns As we mentioned in the section above on the fundamentals of double entry bookkeeping, each transaction is posted to two separate accounts. For certain transactions, such as purchases or when uploading bank statements, you will be asked to specify which account the transaction should be posted to. For example, when creating a credit purchase the transaction type is automatically set to post the credit transaction to Accounts Payable (creditors) but you will need to specify the account that will receive the debit entry. The drop down list will provide all of the available account codes to choose from - for example profit and loss expenses or balance sheet fixed assets. The settings section also contains a complete list of the standard chart of accounts that are available and the account type. The account type describes where the account will be posted in the financial reports of the company - revenue, costs and overheads in the profit and loss account and assets, liabilities and equity in the balance sheet.

Transfers and Adjustments

The '+' button in the top menu contains an option to enter transfers. This can be used to make adjustments to accounts or post transfers between accounts. The entry form is relatively simple and simply requires the entry of the 2 accounts to be adjusted and the amount of the transfer or adjustment.

Using this simple process will allow you to enter all of your accounting transactions into the accounting system and use the powerful reporting capability to manage your business. The 'Dashboard' contains summary reports for all of the major financial elements of your business and provides links to further detail.

Next Steps
Why not get in touch to discuss how we can help you deal with the accounting, tax and finance for your small business. Request a call back to arrange a free consultation: Request A Callback

Written by Accquant Chartered Accountants
Chartered Accountants for the small business. Providing free accounting and business planning software for the small business as well as a full range of accounting, tax and Finance Director services. About Us

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