What records do I need to keep as a sole trader?

What records do I need to keep as a sole trader?

As a sole trader, careful financial management is paramount to creating a successful business. This means organising and maintaining your business records. While it may sound like a mundane task, there are many benefits to keeping accurate business records. With proper record keeping, you’ll stay on the right side of HMRC, and you can make significant tax savings by deducting relevant expenses.

Sole traders are required to keep track of all the money going in and out of their business – also known as income and expenses. To comply, you should keep accurate records of bank statements, invoices, receipts and any relevant tax documents or contracts.

This blog explores what business records are, why they are important and how you can ensure they are up-to-date and organised for an efficient accounting process.

If you are searching for a dedicated accountant to help manage your accounts and prepare financial statements for the tax year, then Ascott Blake can help.

We are a dynamic accountancy firm focused on delivering a quality service tailored to our clients’ needs.To find out how we can help you, please fill out our contact form, and we will be in touch soon.

What are business records?

A business record is a document that details the day-to-day activities that occur within your business, such as business transactions, meetings or legal processes. In an accounting sense, business records are financial-related documents that focus on the income and expenses within your business.

Sole traders and self-employed people are required to keep important financial business records to prove certain transactions within the trade. This includes records of any income or outgoings within your business.

Examples of income can include product or service sales, investments and any money you add from your own personal funds, whereas outgoings include the relevant costs associated with running the business.

Keeping accurate and up-to-date records helps you calculate income tax liability and file timely tax returns while staying HMRC-compliant.

Here are the main records you should be keeping as a sole trader:

Business income

Your business income is essentially any money you make through selling products or services to customers. You must keep records of these specific transactions for tax purposes so you can accurately and efficiently submit your tax returns.

As a sole trader, you can use various documents to show business income, including:

  • Invoices
  • Bank statements
  • Contractual agreements

Business expenses

A business expense is any cost involved in maintaining and running your business, whether that’s buying stationary for the office or paying rent for the office itself. To track your expenses, you should keep records of any purchases you make towards the business.

Sole traders can provide proof of relevant business expenses through:

  • Receipts
  • Bank statements
  • Petty cash book

Should I have a separate bank account for my sole trader business?

While it isn’t a legal requirement, keeping your personal and business records separate can make things less confusing when it comes to understanding your cash flow or tax liabilities.

Having a separate bank account for your sole trader business should help you do this.

There are many benefits to having a separate bank account for your sole trader business, including a better understanding of your business’s cash flow, better financial protection, easier tax filing and a more professional brand image.

What is the difference between business income and personal income?

As businesses and individuals are taxed differently depending on how they make money, it is vital to know the difference in where your income comes from.

Business income is the money you earn through your business, including sales, profits and dividends, whereas personal income is any money you make outside of the business, such as employment or investments.

How long do I need to keep business records for?

As a sole trader, keeping records is a legal requirement and comes with certain rules. You can be expected to hold onto records for at least 5 years after the submission deadline (31st January) for the relevant tax year – just in case HMRC need to see them.

Need help looking after your accounts? Get in touch with Ascott Blake today

At Ascott Blake, we are a team of professional chartered accountants who help sole traders and self-employed individuals stay on top of their finances. We understand the importance of maintaining records and work alongside you to ensure you avoid the harsh penalties associated with inadequate business records.

Our dedicated team will assist you if you need advice on managing your business accounts, support with a confusing tax return, or any other accounting-related matter. Contact us today to find out how we can help.

Conclusion

Whether you’re at the start of your self-employed journey or want to refine your record-keeping practices, having the correct knowledge and understanding of which records you should keep will help you be prepared when it comes to submitting your Self-assessment tax return.

Keeping records as a sole trader is not only essential for compliance and tax reasons, but it also helps you understand your finances and make important business decisions.

When working out your taxable profits, it is helpful to know exactly where your money is coming from and going to so you (or your accountant) can determine how much tax you’ll need to pay. To do so, you should keep track of receipts, invoices, statements, and any other relevant documents that prove income and expenditure.

Frequently asked questions about sole trader business and accounting records

For more information about what records you should keep as a sole trader, please take a look at the frequently asked questions below.

What is cash basis accounting vs. traditional accounting?

How you store income and expenditure records can vary depending on the type of accounting method you choose.

Cash basis accounting records transactions only after the money has been exchanged (whether that’s paid out or into the business). It can be seen as a more simplified accounting method for sole traders as it has fewer record-keeping obligations.

Traditional accounting records income and expenditure from when they are incurred – even if that is before money is received or paid out of the business. This type of accounting method is often less favourable for sole traders as it can impact cash flow and require more meticulous record-keeping.

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