Bookkeeping for freelancers: 8 Mistakes to Avoid for sole traders
Most bookkeeping for freelancers is relatively straightforward compared to limited or public liability companies. Depending on your turnover you might have VAT to deal with but sole trader freelancers who are using the cash method of accounting don’t have to worry about accruals, prepayments and other more complicated aspects of accounting. So, what can go wrong?
General errors in bookkeeping
There are a few general problems that can happen even before you get into the detail of how to enter the transaction correctly.
Not using software
Using bookkeeping software can revolutionise your sole trader freelancer business, especially if you send recurring invoices to your clients. Software such as QuickBooks, FreeAgent or Xero can be set up with a small chart of accounts which can help you to categorise your sales and purchases easily as well as send out and chase invoices automatically.
Bank account not exclusively for business
When you first set up your sole trader business, it’s tempting to collect payments into your personal current account rather than set up a business bank account which will likely incur a monthly cost to run. At Adams Accountancy, we encourage all businesses, however small, to resist the urge to mix your business and personal transactions as it can make bookkeeping and your tax return much more difficult. Keep your business transactions completely separate from your personal ones.
Not organising your receipts
Dumping a shoebox of muddled, crumpled receipts on your bookkeepers’ desk a week before the self-assessment deadline is a surefire way to cause stress to all. At bare minimum, file your receipts in date order in a ring binder or better still, use receipt capture software such as Dext to transform the way you manage your finance admin. Dext and other similar tools allow you to take a photo of your receipt and upload it directly into the software or across to other accounting software such as Xero. You won’t need to keep track of paper receipts any longer – how good does that sound?
Failing to do credit control
One of the biggest bookkeeping mistakes we find with small sole traders and freelancers is not managing their cashflow well. If you aren’t getting the money in your bank account as soon as possible after the invoice due date then you are creating a headache down the line with potential bad debts or worse, your business becoming insolvent. Implement a rigorous credit control process or consider invoicing your client upfront for work to be done.
Specific errors in bookkeeping
Even if you are organised using software, regularly invoicing and doing your bank reconciliation, if you aren’t recording your transactions accurately, you can get into a bit of a mess when you come to complete your tax return.
Incorrect coding of expenses
It’s easy to miscode expenses if you aren’t paying close attention to how you are categorising your business spend. This could have impacts on what you are claiming as tax deductible and could lead to over- or under-payments of tax.
Failing to add VAT to invoices
If your turnover exceeds £85,000 in a rolling twelve-month period, you will need to add VAT to your sales invoices. VAT is collected by businesses and paid over to the government on any VATable sale. You can find out more about the VAT rules on the government’s website. You can choose to register for VAT voluntarily if you are below the £85K threshold which might make sense if you have a lot of purchases that have VAT added to them.
Using the wrong VAT rate on sales or purchases
Entering the wrong VAT rate can lead to incorrect payments or VAT refunds. Make sure you categorise your sales correctly and account for any VAT on purchases so that you can reclaim amounts paid out on business expenses.
Transpositions, omissions or duplications
Inputting errors in bookkeeping can create problems at bank reconciliation time. Let’s say you purchased something for £369 on your business debit but you entered the purchase invoice into your software as £396, a transposition error. When the payment of £369 hits your bank account, you won’t have a matching amount on your system, as you’ve input £396 instead so the bank account won’t reconcile properly. Other inputting errors include accidentally failing to add a transaction or conversely, entering a transaction twice, adding the transaction without VAT or the wrong rate or entering a debit as a credit and vice versa.
Consequences of inaccurate bookkeeping
Inaccurate bookkeeping for freelancers can give you a headache you can do without. If you aren’t sure how to enter transactions onto your finance software, but you go ahead and guess at the correct process, chances are you could end up with a bit of a mess. Then your bookkeeper will not only have to undo what you’ve done incorrectly, but also re-input the transactions again. That takes time and costs you extra, so it’s best not to attempt your own bookkeeping unless you are certain you know what you’re doing. Ultimately, if you make errors in your bookkeeping, your self assessment tax return will also be wrong, leading to tax payment errors which could result in penalties and/or fines.
Advantages of having a bookkeeper in your local area
Even if you’re bookkeeping is generally straightforward, having an accountant or bookkeeper in your local area means you can iron out any issues in your accounting at a face-to-face meeting which could be time-saving. Of course, these days, we can all deliver and receive many services online so if you find a bookkeeper you gel with, the relationship can operate perfectly well remotely.
Finding the right bookkeeper for freelances
If you’re considering finding bookkeeping services, here are some tips to help you find the right provider:
Qualified bookkeepers who have taken the Institute of Chartered Bookkeepers exams have the initials AICB, MICB or FICB after their names. You can also look for AAT qualified or even ACA, ACCA or ACMA designations which show that the individual has recognised accounting qualifications.
Many bookkeepers are qualified by experience rather than by professional qualification so when you are looking for a service provider, do you due diligence and ask for evidence of good quality work, happy clients and glowing testimonials.
It’s vital for your to receive clear advice and instructions that you can readily understand from your bookkeeper so that you can make any changes you need to quickly and easily and your accounts don’t get into a mess. It helps to find a friendly bookkeeper who is patient and good at explaining bookkeeping and accounting rules and techniques so you fully understand what’s happening in your business.
Bookkeeping for freelancers in Kent
We support many small businesses and offer bookkeeping for freelancers in Kent, London and surrounding counties, as well as clients who are further afield in the UK. We also offer tax advice as well as helping business manage all their compliance. Let’s chat about how we can support you too. Call us on 01322 250001 for a no-obligation chat today.