How to do small business accounts

Whether you choose to hire an accountant or manage your own accounts with top accounting software, you’ll still need to keep excellent records throughout the year and keep a close eye on your cash flow forecast, and of course aim to cut down the hours your accountant bills you.

This guide will explain everything you need to know about small company accounts, including what you absolutely have to do to satisfy HMRC and Companies House, and the best way to keep records of the specific information they’ll need every year. You’ll learn exactly how to prepare for the entire process, and what to ask your accountant when it’s done.

What’s the difference between small business accounting and bookkeeping?

Small business accounting and bookkeeping are closely related but distinct financial processes that both play vital roles in managing a company’s finances.

Bookkeeping involves recording your daily financial transactions, maintaining accurate records, categorising the transactions, and ensuring that all financial data is organised.

Accounting encompasses the full interpretation and analysis of financial data to provide insights into a company’s financial health.

Accountants use the information prepared by bookkeepers to generate statements, such as profit and loss statements and balance sheets. They also offer strategic financial advice, help with tax planning, and can provide a deeper understanding of a company’s overall financial performance.

In summary:

• Bookkeeping: primarily concerned with recording financial data accurately
• Accounting: using that data to make informed financial decisions and meet regulatory requirements

The best small business accounting software

Quality accounting software can digitally create and store purchase orders, invoices, quotes, and anything else produced by the business. Some of the top-end plans have even added extra features like cash flow forecasts and tax bill estimates.

If you’re concerned you might not be able to budget for the cost of accounting software, it’s worth knowing that there is a range of free accounting software available to use. Just note that these options can be very limited and won’t be as sophisticated as their paid counterparts.

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		Rating	Price From	BEST FOR	Free Trial
FEATURED PROVIDER	BEST OVERALL
Xero	Zoho Books	QuickBooks	FreeAgent	Sage	FreshBooks	Clear Books
4.3	4.8	4.5	4.5	4.2	4.1	4.0
£16 per month (excl. VAT)	Free	£10 per month (excl. VAT) £5 per month (excl. VAT) for the first six months	£10 per month (excl. VAT) £5 per month for the first six months (excl. VAT)	£18 per month (excl. VAT) 50% off the first three months	£15 per month 50% off for three months	Free
Best for more experienced accountants and established businesses that need more than just the basics	Best for managing your inventory and sales, and for those who need an on-the-go software for real-time financial management	Best if you need sophisticated financial insights and advanced customisation	Best choice for budget-conscious businesses seeking simple yet effective tax forecasting and scenario prediction tools	Best for businesses seeking tailored financial solutions and strong brand representation	Best for new businesses that need affordable software with the reassurance of all-hours support	Best if you need MTD-compliant tax support for VAT returns, including a wide range of tax types
Try Xero	Compare Deals	Try QuickBooks	Compare Deals	Try Sage	Compare Deals	Compare Deals

Can I prepare my own limited company accounts?

Yes, you can prepare and file your own accounts using accounting software.

You need to make sure you’re following all the correct requirements, though. From a legal perspective, you’ll need to make sure that the accounting software you’re using is Making Tax Digital (MTD) compliant.

Making Tax Digital for value-added tax (VAT), which was introduced back in April 2019, requires all VAT-registered businesses, including those that are voluntarily registered, to store their VAT accounting records digitally, using HMRC-recognised accounting software. QuickBooks and FreshBooks, for example, are both MTD-compliant.

MTD if you’re self-employed

If you’re self-employed, you need to be aware of the MTD for Income Tax scheme instead, which is set to be introduced in phases from April 2026.

It requires self-employed people with a gross income of more than £30,000 per year to use compatible accounting software that can submit quarterly income and expense reports to HMRC, and also submit ‘end of period statements’ at the end of the financial year to replace Self Assessment tax returns.

How do I plan my annual accounts?

To effectively plan your annual accounts, follow these best practices (remember, fail to plan, and you plan to fail. It’s a cliché, but it’s definitely how you should approach accounts season!):

1. Keep track of your records

It’s critical to keep proper records during the year to avoid tearing your hair out at crunch time. You’ll need to be able to easily get hold of your sales receipts, payment invoices, and tax returns.

This doesn’t just make a big difference when you’re putting together your end-of-year accounts, either — keeping on top of your records while you run your business will mean having a much better grasp on what money is coming in and going out.

2. Utilise accounting software

Using accounting software means you’ll be able to create invoices, quotes, estimates, and almost all the other business documents that you might need on the go. Everything is stored in the cloud, meaning that you can access this important data from whichever device you’re working on. Some of the more comprehensive plans will even estimate your tax bill as you progress through the year.

3. Decide on a plan of action

When it comes to actually putting together your end-of-year accounts, you first need to decide just how much work you’re willing to do yourself. You will almost certainly have to use an accountant at some point, but keeping accurate records (as discussed above) will reduce their workload (and billable hours).

4. Get expert insight

Once you’ve hired an accountant, you should see them as a useful resource. Make sure to ask how you could reduce your tax bill before the end of your financial year.

For example, you can sometimes make significant tax savings by bringing forward certain expenditures to reduce your company’s profit in that financial year.

5. Prepare for the next year

Just as importantly, once the end-of-year accounts have been submitted, it’s a great idea to book a closing meeting with your accountant to identify areas for improvement over the coming year.

You could ask their opinion on whether you should upgrade your accounting software (or how it could help your business if you’re not using it), or how you can manage your creditors more effectively. You can also get expert insight into controlling costs, making tax savings, and managing your business’s cash flow more effectively.

What accounting records do I need to keep (and for how long)?

It’s important to keep a record of almost everything that happens in your small business. But the key accounting records you are legally required to keep include:

• Income and expenditure records – These record when and how your business spends and makes money. Keep records of all sales and purchase receipts, cheque books, and up-to-date bank statements.
• Unsold stock and uncompleted work at year-end – These are known as ‘floating assets’ and are really important for service businesses that often have work in progress that cannot be counted as fixed assets (see below).
• A register of fixed assets – A list of the equipment and property your company owns, including the value of each piece and other important information. It does not include stock, which would come under ‘floating assets’.
• A record of company liabilities – Things your company owes. In other words, this should be an accurate and complete record of any debt or investment your company has taken on.
• Staff payroll information – HMRC keeps a particularly close eye on payroll and expenses matters, so make sure you keep accurate records of who’s been paid what and who’s claimed expenses for what.

If you don’t keep accurate records, you can run the risk of being fined £3,000 by HMRC or even being disqualified as a company director.

You should always carefully check all government guidelines on running a limited company to ensure you are fully compliant with the law.

How should I keep payroll and expenses records?

As a business owner and employer, it’s your legal responsibility to ensure things like the correct National Insurance Contributions (NICs) — AKA payments that go towards funding state benefits, such as the State Pension, statutory sick pay, and maternity leave — are paid by everyone working in your business.

As for expenses, the key is to have a universal system in place for all claims and keep a record for each claim. The simplest way to do so is to draft a standard expenses form and require employees to attach receipts.

Expenses are another area where taxes can be complicated:

• Most expenses incurred personally by company employees are exempt from tax and don’t need to be reported as long as certain criteria are met.
• However, other expenses, like company cars or private healthcare, do need to be specifically accounted for using the (notoriously tricky) form P11D.

For more information, you should consult your accountant and refer to the gov.uk page on expenses and benefits for employers.

How do I keep records of my business’s sales and purchases?

Keeping an accurate record of sales and purchases can cause a lot of stress. Here are a few handy tips to make this quicker and easier:

Use unique invoice numbers for different products/services

Make sure that you mark all sales or purchases of a particular product or service with a specific invoice number, so you can easily pull up all the sales/purchases of that product or service.

For example, someone running a clothing business might use 1234 for sales of white t-shirts, and 4321 for sales of black t-shirts, allowing them to easily access records of each.

List your outstanding debtors at year-end

An “outstanding debtor” is a person or company that owes your business money, most often customers who have bought a good or service but have not yet paid for it. It’s really important to keep an up-to-date, accurate list of these by date, so the oldest debts are listed first. It should include:

• the unique invoice numbers for each transaction
• the payment due date
• the amount owed
• the name of the customer

If you are reasonably certain that a particular invoice won’t be paid (if the company that bought from you has since gone out of business, for example), then mark it as a potential bad debt and explain why. Doing this means your accountant may write it off as a ‘bad’ or ‘doubtful’ debt, which means it could count as an allowable business expense.

List your outstanding creditors at year-end

An “outstanding creditor” is a person or company to whom your business owes money, and it’s important to keep track of these, too. The process is the same as for outstanding debtors – organised by date with the oldest debt first, make a list that includes:

• the unique invoice numbers for each transaction
• the payment due date
• the name of the supplier
• the amount you owe

If you don’t expect to actually pay for a particular purchase (if you received damaged goods, for example), then make a note of this and explain why.

Statutory year-end accounts: what are they, and how are they different?

Statutory year-end accounts – often known as ‘financial statements’, to differentiate them from the normal accounts you use to run your business – are a mandatory set of financial reports that limited companies must submit at the end of the year. Sole traders and freelancers are not required to submit them.

Statutory year-end accounts are not the same as corporation tax returns. While the latter is a report to HMRC showing how much tax your company owes on its profits, statutory year-end accounts differ in two main ways:

1. They are submitted (electronically) to Companies House. Their purpose is to give an overview of your company to anyone searching the Companies House register. In other words, they demonstrate the reliability and solvency of your company. You also must give a copy to any shareholders in your business.
2. Financial statements also have a different deadline from accounts sent to HMRC. They must be submitted within nine months of the end of your company’s financial year.

Any company that satisfies the small company criteria set out by HMRC only has to submit an abridged financial statement in the form of a balance sheet signed by a named director (but they must still send full accounts to HMRC). Additionally, all your company members must agree to this.

Everyone else, though, will need to submit full accounts. This brings us nicely onto:

What do I need to include in my statutory year-end accounts?

To start, you’ll need a director’s report, which is a statement written by the company directors that gives an overview of how the business is doing. It should include:

• A summary of how the business performed throughout the year
• The directors’ view of its current state
• How they expect it to perform in the future

Two other vital documents that must be included:

• A balance sheet – This is a record of the total sum (i.e. the financial value) of the company’s assets (the things it owns) and liabilities (the things it owes) at the end of the accounting period (your financial year). It gives a snapshot of your business at a particular time.
• A profit and loss sheet – This should give a summary of your income and expenses over the previous accounting period, including records of your sales, expenses, tax calculations, and the total amount of profit or loss over the period. It explains how your company performed over the entire financial year.

It’s a good idea to include explanatory notes that add further detail so that the figures are given proper context.

How do I keep records of stock and uncompleted work?

Keeping accurate records of stock and unfinished work is an essential part of preparing your year-end accounts. To do so, follow a three-stage process:

1. Perform a stocktake

A stocktake means literally counting all the stock your business holds so you can then value it.

To minimise disruption, you should plan for this process in advance. Making sure no new stock comes in on stocktake day, for example, will make things much easier, and you can speed up the process by setting aside stock of the same type so it’s easier to count.

If you have employees, it’s crucial to have a standard stocktaking procedure in writing so that everyone is on the same page.

2. Calculate the total value of your stock

The next step is to work out how much your stock is worth. For tax purposes, you want this value to be as low as possible, so either use the cost you paid for the goods or the price you expect to sell them for – whichever is lower.

From there, match the descriptions and names of your goods to the ones used in suppliers’ brochures or price lists, so everything tallies up and there’s no confusion.

3. Use the percentage of completion method to calculate the value of unfinished projects

Old, damaged, or unfinished goods should have a corresponding depreciation in recorded value.

To work out the value of unfinished projects, you work out how much of the project has been completed, and then use that as a percentage of the total completed value.

So, if you’ve completed 50% of the project, then the value would be 50% of the finished value in your year-end accounts.

To work out your percentage completion, use time records, costs, or diaries (so make sure these are kept up to date as you work).

How do I keep records of fixed assets?

A fixed asset is something your business will have for a long period of time (as opposed to stock), such as property (e.g., your business premises), vehicles (a company car or van), and IT equipment (computers, laptops, etc.).

Supplying accurate records of these assets is a crucial part of the year-end accounts process.

To get started, make a list of all your fixed assets, making sure to record the following information on each:

• Type of asset – property, vehicles, IT equipment, etc.
• Purchase date
• Purchase price
• Asset description
• Asset location
• Other information (such as vendor contact details for IT equipment)

You should also keep a record of assets disposed of or sold during the previous year.

Needless to say, holding on to proofs of purchase is really important when you’re running a business, so make sure you file invoices and receipts in a safe place.

Accounting for depreciation

Depreciation refers to the way things you buy (assets) lose value as you use them. A common example is the way a new car loses some of its value as soon as you drive it off the forecourt.

This also applies to any fixed assets owned by your business, and you’ll need to account for this in your year-end accounts. Make sure to ask your accountant what they think the best strategy would be for your company.

How this affects your tax bill is another complex area. Because different companies use different assets for different periods of time, it wouldn’t be fair to simply allow companies to apply set rates of depreciation to offset their tax bill.

Instead, fixed assets are governed by capital allowances, which essentially means that you can subtract some or all of the asset’s value from your profits before you pay tax. This works differently for different types of assets. For more information, please see the gov.uk page on claiming capital allowances.

Final thoughts

As you can tell, a lot goes into preparing and submitting your company’s end-of-year accounts. But to narrow it down, there are three golden rules you should follow so that your year-end accounts are fully accurate:

1. Use accounting software
2. Hire an accountant
3. Keep up-to-date records

There’s no doubt that year-end accounts are intimidating, especially for small businesses with little experience in this area. However, a bit of planning and research now will make things go much more smoothly and save you stress at the culmination of your financial year.