How to do small business accounts

Whether you choose to hire an accountant or manage your own accounts with the best accounting software, you’ll still need to keep excellent records throughout the year, keep a close eye on your cash flow forecast, and 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 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?

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.

Best practice for a  limited company is to make sure your chosen software can ‘add bills’, as unpaid bills at a company’s year end need to be accounted for in the company accounts. This usually means selecting a mid-tier plan like Xero Grow or QuickBooks Essentials.

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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4.3	4.8	4.5	4.5	4.2	4.1
£7/month (+ VAT) Get 90% off for 6 months	Free	£10/month (+ VAT) Get 90% off  QuickBooks for a year	£10/month (+ VAT) £5/month for 6 months (+ VAT)	£18/month (+ VAT) 90% off the first three months	£15 per month 50% off for three months
Expanding businesses that need a software that can grow alongside them	Best overall accounting software	Managing your finances on the move, thanks to an excellent mobile app	If you bank with NatWest, Royal Bank of Scotland, Ulster Bank or Mettle	If you prefer a more traditional bookkeeping software experience	Service based business that need affordable time tracking tools
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Can I prepare my own limited company accounts?

The answer to this question is slightly complicated in 2026, but, ultimately, yes you can prepare your own limited company accounts. You don’t legally need an accountant to prepare and file these accounts as a small business owner.

Just be aware, the only free tool that allowed business owners to do this is CATO HMRC (Company Accounts and Tax Online) which is being discontinued very soon in March 2026.

The Annual Accounts you send to HMRC and Companies House need to be prepared to very specific accounting standards before they are filed. This is why it’s fairly rare that a small business limited company would prepare its own company accounts – as you will need at least some accounting expertise (though this doesn’t apply to the self-employed or sole traders).

What about VAT?

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.

VAT filing is different to filing your annual accounts, and you’ll need to make sure you’re following all the correct requirements. From a legal perspective, you’ll need to make sure that the accounting software you’re using is Making Tax Digital (MTD) compliant.

The standard timeframe for these submissions is every quarter, though some businesses do opt for monthly or annual submissions.

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 £50,000 per year (based on your 24/25 tax return) 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.

The gross income limit will then reduce to £30,000 per year in 2027 (based on your 25/26 return), and then £20,000 per year in 2028 (based on your 26/27).

How do I plan my annual accounts?

To effectively plan your annual accounts, you should follow these best practices:

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 (unless you’re a sole trader, in which case you can use the free HMRC tool), but keeping accurate records 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.

Just make sure to check with your chosen accountant if they’re able to help with these duties, as not all will include this type of work in their service.

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 more effectively keep on top of who you owe money to.

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 – this is important for working out the ‘true’ accounting profit you’ve made in your business.
• 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.
• 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.

Just remember, you must keep accounting records that include:

• All money received and spent by the company
• Details of assets owned by the company
• Debts the company owes or is owed
• Stock the company owns at the end of the financial year
• The stocktaking’s you used to work out the stock figure
• All goods bought and sold
• Who you bought and sold them to and from (unless you run a retail business)
• All money spent by the company, for example receipts, petty cash books, orders and delivery notes
• All money received by the company, for example invoices, contracts, sales books and till rolls
• Any other relevant documents, for example bank statements and correspondence

You should also keep in mind that there are some documents that are not traditionally ‘accounting records’, but as a limited company you may still be required to keep, such as:

• Meeting minutes
• Company ‘resolutions’

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) are being paid.  You’ll have to make sure you keep your relevant payroll records, including:

• What you pay your employees, and the deductions you make
• The reports you make to HMRC
• The payments you make to HMRC
• Employee absences due to leave or sickness
• Tax code notices
• Taxable expenses or benefits

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 highly complex. You should undertake your own research, and seek out professional tax advice if required. 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 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.

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?

The contents and structure of a set of limited company accounts are determined by a set of accounting rules known as ‘FRS’ (The Financial Reporting Standards).

They usually include a director’s report, which is a statement written by the company directors that gives an overview of how the business is doing, which includes:

• 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, use the cost you paid for the goods or, if lower, what you expect to sell them for.

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

When a business produces it’s statutory accounts, it needs to account for any work completed but not yet invoiced. For example you might have delivered 50% of a service contract, but not yet billed for it (you might have arranged to bill when it was all complete).

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 vehicles (a company car or van), or 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.

Just keep in mind that sole traders using the cash basis to prepare their tax returns deal with this differently.

Expert opinion: Dan Heelan's advice on keeping records

For any small business owner, dealing with tax returns and the filing requirements for your business can be daunting. With a tax code and case law in excess of 22,000 pages, it’s not a surprise that it can feel overwhelming and hard to get right. The key to getting off to the right start with this is simple – Keep. Good. Records. Use accounting software to keep digital records. Not only are there proven benefits to using technology in terms of getting paid quicker by customers, but the simplest way to reduce your tax bill is to ensure you capture all of your expenses!

Dan Heelan Accountant and Business Services Director at Heelan Associates Ltd

Final thoughts

There’s a lot that goes into preparing and submitting your company’s year-end accounts, or personal tax return, but there are three golden rules you should follow:

1. Use accounting software
2. Hire an accountant if you need help
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.