Back in the day the world of accounting was shrouded in secrecy with grey suited accountants weaving some Harry Potter type magic over your invoices, receipts and bank statements after you’d dropped them off at shiny offices, with the aroma of freshly ground coffee percolating through the air covering up the stink of the expensive fees.
Then the shocker of a tax bill arrived along with the realisation that you had been spending beyond your means for ages.
But all that is in the past now – times have moved on and accounting is no longer difficult nor is it done months and months after the fact.
Accounting is easy if you’ve been shown how
Accounting merely records the monetary value attached to your business transactions.
What does that actually mean?
In reality accounting is easy because it’s just made up of a few types of transactions.
When you start your business you may put some money into it for your start up costs – this is known as capital introduced or a loan to the business. Hopefully it will be repaid at some point.
You’ll buy some things for your business paid for from the business bank account or from your personal funds, bank or credit cards. These are known as costs.
Hopefully you’ll sell either products or services – this is known as turnover, sales or business income.
Your turnover less your business costs = profit which you’ll pay tax on leaving the profit after you’ve deducted tax as the amount that you can take out of the business for yourself (drawings for a sole trader or dividend & salary if you operate via a limited company).
OK there may be a couple more rules to follow but in essence this is as hard as it gets for straight forward businesses which is exactly what freelancers, creatives, contractors and self employed one person businesses are.
The right tools for the job
And if you get the right tools for the job (such as my personal favourite FreeAgent because it’s FREE if you have a NatWest business bank account or even better a very simple to open Mettle account) with a tiny bit of set up your accounting will literally take just moments.
The trick is to pay for all costs out of the business bank account (Mettle) and get your customers to pay you into that account too using your business trading name so the name on the invoice exactly matches to that on the business bank account (so passing the inbuilt fraud check on all bank payments which is applied by banks these days).
Then simply link your bank account (Mettle) to your accounting system (FreeAgent) through what is called a Bank Feed. The transactions will pop into your accounting system daily.
You just have to approve or explain them which isn’t hard as the system even gives you sensible suggestions for that!
Take a look at your (automatically generated important figures) dashboard on a regular (monthly) basis and you’ll see your key business stats.
Most importantly you’ll see the amount of tax due on your current figures and how much you can take out of the business by way of drawings (sole trader) or dividends (Limited Company – you may already be taking a small salary).
Being in complete control of your finances as you go reduces the stress and worry about money and ensures that your spending is within your means.
Dispelling the myths
- You DON’T have to be good at maths to do accounting – all of the sums are done by your tools
- There’s no need to know double entry bookkeeping – again your tools take care of the technical entries
- Tools, systems and Apps make accounting part of your usual business routines being done on the go rather then once a year in the offices of accountants
- Your tax bill isn’t something you think about once a year – you set aside money for it as you go
- Not all of the cash in your bank account belongs to you
- Profit after allowing for tax is the most important figure you need to know – this is what you can take out of the business. Anything else is “borrowing from the tax man” and spending money that isn’t yours!