Not ready to commit to accounting software yet, then it makes sense to know how to do your own accounts!
As a Xero teacher and Xero user since 2012, it comes as no surprise that I regularly recommend Xero for any small business. However, I do understand that when you first set up in business you may have concerns because …
- You’re not sure it’s going to work out.
- You don’t expect to make a lot of money.
- You’re only going to be working part-time.
- You’re only doing this as a stop gap before moving on to something different.
Why I recommend Xero
So why would you want to go to the expense of signing up to Xero and the effort of learning new software? My response would inevitably be:
- Xero is not expensive. The standard plan costs £22 plus VAT in the UK. In the US it’s $30 and in Australia it’s A$50.
- You can get a free 30-day trial by signing up here.
- Xero is easy to learn, especially if you already understand accounting and are willing to invest some time getting to grips with it. And obviously, Xero becomes your best friend if you spend some time and money on training, whether that be face-to-face or online, whichever style works best for you.
Why Xero might not be suitable for your business
But I do also understand the caution that you might have, setting up on a shoestring budget and trying to spend as little as possible. There are times when you can manage without accounting software – some organised filing and either pen and paper or a spreadsheet will get you there.
In fact sometimes Xero (or any other online software) might not be suitable for your business. In this video I mention 5 valid reasons:
- You have no budget
- You have very few transactions
- Your business is temporary
- Xero is not suitable/available for your location
- At the very beginning
If this sounds like your business, then before heading down the d-i-y accounting route you need to make sure that you have a straightforward business that can be handled by spreadsheets.
Things to consider before doing your own accounts
Here’s when I think it can work for you:
- Your business set up is simple, i.e you are a sole trader rather than a limited company
- You have no employees, so no need for payroll software
- You do not have to account for any sales taxes such as VAT or GST
- You are entitled to submit your accounts to your local tax authority on a cash basis
What is cash basis?
When using the cash basis for your accounts it means that you report income when you receive it and costs when you pay them, rather than the dates when the work was done or the expenses were incurred.
How to do your own accounts – read this before you start!
- You need to be organised and committed. Even though you may not be a naturally organised person and you find admin boring, you need to be prepared to spend time on your accounting.
- I strongly recommend that you use a separate bank account for all your business transactions. It doesn’t have to be a business account, a personal account will do.
- You need to decide if you want to do your accounting manually (pen and paper) or electronically (spreadsheet).
- You need to do your research and have a pretty good idea of the allowable expenses for your business. In the UK you can check the HMRC website here.
- You can decide this later, but will you submit your own accounts or will you get help from an accountant or bookkeeper?
How to do your own accounts – using pen and paper
You can do your own accounts manually rather than electronically if that is easier for you. First of all, here’s what I suggest you put on your shopping list:
- Analysis notepad – from any good stationery supplier. If you can’t find an analysis notepad then you can create your own using a large lined notebook, a ruler and pen.
- Plastic wallet (A4 or A5 size is good)
- Highlighter pens (my favourite)
- Ring binder
- Hole punch
Now to get started …
Using Pen and Paper – Page 1
Take the analysis notepad and add a title on your first page – “Paid into Bank Account”
Then add these columns headings:
- Sales Reference
- Received from
- Amount received
Then add further columns headings for any different categories of income you might have …
- Interest received
- Other income
Finish off with a final column heading – Personal funds
Using Pen and Paper – Page 2
On the second page of your analysis notepad add the title – “Paid from Bank Account”
Then add these column headings:
- Purchases Reference
- Paid to
- Amount paid
Decide on the different categories of business expenditure you expect to have and add these as column headings e.g.
Add two final columns headings to your Expenditure Page:
- Drawings from the business (personal items)
- Big Spends on Assets (e.g. desk)
Using Pen and Paper – Page 3
The third page of your analysis notepad will be used to track any business items paid personally. It can simply be titled – “Paid Personally”
Think about the different types of expenditure you are likely to pay personally. It’s a good idea to keep these to a bare minimum, but I know that sometimes it’s unavoidable e.g. Parking and Stationery.
The column headings on your Personal Page will be very similar to the columns on your Expenditure Page
- Personal Reference
- Paid to
- Amount paid
Then add column headings for your expenditure types e.g Parking and Stationery
Using Pen and Paper – recording your transactions
For every business transaction you make you will want to complete a line in your analysis pad. The column heading should be self explanatory; enter as much or as little detail as you feel necessary. The value will be entered twice, once in the ‘Amount’ column and then again under the column corresponding to the type of expenditure.
Here’s some completed examples:
Here’s some further tips:
- Continue entering all your transactions for a complete year in your business.
- Add totals to the value columns at the bottom of each page.
- Depending on the number of your transactions, you may have to create further pages for Income, Expenditure and Personal Items.
- If you have a high number of transactions you may prefer to create subtotals at the end of each calendar month.
Doing your own accounts – keeping backup
As part of doing your own accounts, you need to keep backup for all your transactions.
Do you create sales invoices in your business? If you do, then enter the Sales Invoice number as your Sales Reference. If you have hard copies of your invoices, highlight the invoice numbers, punch them and pop them in your ring binder. If you have electronic copies, then I would suggest there is no need to print them. Just ensure that they can easily be retrieved at a later date.
Purchases and Personal Expenditure
The backup for your purchases is likely to be purchase invoices or receipts. Again, because I believe in keeping the amount of paper to a minimum, if your backup is online, just leave it there. For any paper receipts, give them a reference number – write it in bold using a highlighter pen and circle. Then file all your purchase invoices and receipts in your ring binder.
Here’s another tip – keep a plastic wallet in your car or your handbag, and every time you get a paper receipt pop it in there right away. Don’t have receipts in 6 different places!!!
Make sure that you update your analysis notepad regularly, recording all your allowable business expenses.
How to do your own accounts – using a spreadsheet
Instead of doing your own accounts manually with pen and paper, you may choose to do them electronically. For your shopping list you will no longer need the analysis notepad. Instead you will want to use software to create a spreadsheet and your options include:
- Google Sheets
- Microsoft Excel
- Numbers (if you are a Mac user)
Any of these do! My suggestion is to use what you already have and what you are familiar with.
For your filing system you could still use a ring binder with dividers or you can decide to have everything kept electronically. If you are using your laptop or PC for storage make sure that you have a backup system in place. Alternatively, you can purchase online storage such as Google Drive, Dropbox, Box or iCloud.
If you are familiar with spreadsheets, then great, you can go ahead and recreate a spreadsheet resembling what I have suggested above when using pen and paper.
Do you need help with your spreadsheet skills?
What if you want to use a spreadsheet but your skills are not quite at that level? Then don’t worry I’ve got you covered. I’ve got an online course on Udemy showing you step by step how you can do this using Google Sheets and Google Drive.
Online Course now available (and at a special price!!)
How to do your own accounts – what happens at year end?
Whether using pen and paper or a spreadsheet, you have recorded all your business transactions for a year.
Here’s what you will have achieved:
- You have an organised system in place.
- You have a separate bank account, where the majority of your business transactions will take place.
- You have backup to all your transactions kept, referenced and filed in a logical manner.
- You have an understanding of what you are allowed to claim for business expenses.
- You have totals for both your income and all your expenses (including items paid personally) for the year.
You are now in the position to submit your figures to your local tax authority. If you are based in the UK you can do your own submission using your Government Gateway login to the HMRC website.
If you are not confident to do this, then alternatively you can get help from a bookkeeper or accountant. Because you have prepared your own accounts, the task will be much more straightforward for them to do, and much less expensive than if they had done all the work for you.
And finally …
I hope you now agree, when you have a simple business it is possible for you to do your own accounts. You may still want them finalised and checked by an accountant or bookkeeper, but you can do the initial preparation by yourself.
Hopefully as your business grows you will progress to an alternative such as Xero. But in the meantime, why not get yourself organised to do your own?
Over to you …
Are you now happy to go ahead and do your own accounts? Or do you already do your own? Either way I would love to hear about your experiences in the comments below.
Good luck and enjoy!!