How accounting works - Bokio beginner's guide
Are you new to accounting? Then this guide is for you! Here we’ll go through the basics that are great to know, whether you are doing your own accounting or letting someone else do it for you.
1. Who needs to do accounting and why?
Anyone who runs a business must keep accounts. Limited companies, small businesses and sole traders are all included.
Accounting can help you get a good overview of your company’s finances, and help you keep an eye on how your business is doing. With more detailed accounting, you can see which goods or services are more and less profitable. This is a great reason to track your company’s finances! Recording transactions regularly allows you to plan and predict things, so you can calculate how much tax you will need to pay.
Along with HMRC, there are other stakeholders who may want to know about your business’s financial position. For example, if you want to take out a loan, the bank may want to see if the company is in a strong financial position. Investors, suppliers and customers are other examples of stakeholders. So, accounting is a great tool to use!
2. Double entry accounting - What are debit and credit?
It’s always a good idea to understand the logic behind double entry bookkeeping, even though it might seem difficult at first. Debit and credit specify which page your record should end up on, either on the left (debit) or right (credit) page. Depending on which account you use, we either receive an increase or decrease when we place it on the debit and credit side respectively.
To give everything structure, ask yourself two questions:
- Where are the resources coming from?
- Where are the resources going?
| Account | Debit | Credit |
|---|---|---|
| Permanent Accounts | ||
| Assets | Increase | Decrease |
| Liabilities | Decrease | Increase |
| Equity | Decrease | Increase |
| Temporary Accounts | ||
| Income | Decrease | Increase |
| Expenses | Increase | Decrease |
In Bokio, we have created smart accounting templates where - instead of choosing your own account, debit and credit - you can search for what you want to record. You’ll instantly get a template where all the accounts are already set, and recorded on either the debit or credit page depending on what you’re recording.
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3. Which accounting method should I use?
Accounting can be done according to two different methods; the accrual (invoice) method or the cash method. It's up to you which one you want to use.
The cash method is a little simpler as it involves fewer steps as you don’t need to record transactions or invoices until the payment is made. However, if your business becomes large enough, you will need to use the accrual (invoice) method, where you record transactions or invoices both when they happen, and then when the payment is made.
If you use the cash method, you can always change to the accrual (invoice) method.
#1 Accrual (invoice) accounting
If this way is used, your accounting should be done on an ongoing basis. This means that both outgoing and incoming invoices are recorded when you send or receive them. The invoice is first recorded as accounts receivable or accounts payable, and you will also report the VAT at the same time. When you later receive your payment, or have made your payment, it should be recorded as a separate event.
Unlike the cash method, the accrual method makes it easier to get a clear picture of your business finances and lets you make informed long term decisions for your company.
#2 Cash accounting
When you use the cash method, you do not record the invoice when it is sent to the customer, or when you receive a supplier invoice. Instead, you record it only on the day when the payment is actually made. So, no accounts receivable or accounts payable are created.
Sole traders with a turnover under £150,000 are able to use the cash method. One benefit of the cash method is that it allows you to have a better picture of current cash flow.
However, if you are a limited company or a sole trader with a turnover of £1.35 million or less you have the option to use cash VAT.
Cash VAT is effectively means that although your accounting has to be done on an accrual basis for the purposes income tax, your VAT Return can be prepared using the cash accounting method. This can help your cash flow as it means you do not need to pay VAT on your sales invoices that haven’t been paid yet.
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4. What is the chart of accounts and how does it work in accounting?
There are many different bookkeeping accounts, which are known as the chart of accounts. The chart of accounts can help you get a better understanding of your bookkeeping and your company’s finances
What is a chart of accounts?
The chart of accounts is a list of the accounts used in bookkeeping. In Bokio we use a predefined chart of accounts, which you can find under Settings → Chart of accounts. It consists of four main groups that are the basis of your company's accounting:
- Assets
- Liabilities
- Income
- Expenses
You can find out more about the chart of accounts in our guide.
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5. Paying your taxes
There are lots of different taxes that could affect your business. The most common are:
- Income tax
- Corporation tax
- Capital Gains tax
- VAT
You can read more about the taxes, what their current rates are, and when you need to pay them in our complete guide to UK taxes.
6. Keep track of important dates and keep your records current
It’s a common mistake to put off doing your accounting, and ending up with a lot of things to report. By doing your bookkeeping regularly you not only avoid a lot of work to get your accounts in order for tax submissions, but you also get a clearer picture of your business finances throughout the year.
You also need to keep track of important dates. Everything from when an invoice is due to when income tax and VAT must be submitted. In Bokio there’s a To do list where you can manage most of your accounting. If you have created a customer invoice in Bokio, you can see if it’s been paid from here, and on a saved supplier invoice you can see how long you have until it’s due.
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7. Record transactions online
There are lots of online services like Bokio where you can manage your own accounting. Keeping everyone online has lots of benefits, like working on the go, reducing the need for paper records, easily collaborating with your accountant, and complying with new regulations like Making Tax Digital.
If you need any help getting started with bookkeeping in Bokio, you can contact our support team at support@bokio.co.uk
