Sole trader bookkeeping, one month at a time

Bookkeeping sounds larger than it is. In practice it is a cycle that repeats every month, with four stages and one awkward part that is not any of them.

What bookkeeping actually is

Bookkeeping is recording transactions so that two questions can be answered. How much the business made, and how much VAT is owed or reclaimable.

Everything else follows from those two. The financial statements are a summary of the same entries over the accounting period, and the tax return is the same thing again on the Tax Administration’s form. If the entries are sound, the rest is checking. If they are not, the rest is investigation.

The monthly cycle

The receipts are collected. Purchase receipts, sales invoices, bank statements. A receipt is the document proving a transaction existed and what it contained. Without one there is no entry to make and no deduction to claim.

The transactions are recorded. Each one goes to the right account and the right month. This is also the stage where it is settled what is deductible and what is not.

VAT is calculated and filed. VAT on sales minus VAT on purchases, filed in MyTax.

The month is closed. After that nobody touches it again unless something is missing.

The VAT period sets the rhythm

The VAT reporting period can be monthly, quarterly or annual, and it follows from turnover. That period decides how often the cycle has to be finished rather than merely begun.

A sole trader on an annual period can, in theory, do a year’s bookkeeping once a year. In practice it is the same decision as leaving the washing up for a week. The work does not shrink, it waits. And an unclear expense from a year ago is far harder to resolve than one from a fortnight ago, because by then you no longer remember what it was.

Bookkeeping and VAT returns sets out how we handle this.

What goes wrong most often

Four things recur.

Receipts are missing. Usually small ones, usually paid in cash, usually the ones where no receipt was taken in the first place. Those are deductions that went unclaimed.

Private and business money mix. In a sole trader business the boundary is conceptual rather than legal, which makes it easy to cross and laborious to untangle afterwards.

A deduction is taken wrongly. Most often on a purchase that is partly in private use.

And the most common of all: the bookkeeping falls behind. Not entirely, just by a few months, and then by a few more.

What we need from you

Receipts and a bank statement, monthly. How you send them is up to you, and the more orderly it is, the less time the recording takes. Since we bill by time, that shows up directly on the invoice.

How it works covers this in more detail, and purchases and expenses explains what is deductible.

If your bookkeeping is behind, say so plainly. It is the most common situation people arrive in, and it is not a problem. Bookkeeping that is behind is simply more work, and the earlier somebody starts, the less of it there is.