How to do accounting for small businesses in the UK

Running a small business means you often need to wear many hats, especially when you’re starting out.

You might be great at running your business, but knowing how to do accounting for a small business could feel new – and that’s totally normal. Still, understanding the basics is key. From paying bills to staying profitable, here’s what you need to know to meet HMRC and Companies House requirements.

In this guide, we’ll cover the essentials of how to do accounting for small businesses, including:

• Understanding legal requirements
• Preparing your accounts
• Working out your financial year
• Defining ‘small’ businesses
• Meeting limited company obligations
• Preparing statutory accounts
• How to maintain your accounts
• Selecting accounting software
• Deciding on professional accounting help

Meeting the legal requirements of small business accounting

The most important part of bookkeeping for a small business is understanding exactly what you legally need to record and submit to HMRC. It’s crucial to get this right to avoid the risk of running up potential tax debts and fines – which can be financially damaging for businesses – especially those still establishing themselves. You can find the legal requirements for the Companies House accounts guidance on the official government website.

Preparing your accounts

When it comes to how to do accounting for a small business, it all starts with organising your accounts and keeping accurate records.

Working out your financial year

A limited company's financial year, or 'accounting reference period', varies and is not always aligned with the calendar year or the UK tax year. Here's how to determine your company's financial year:

• Initial financial year: When you register a limited company, the financial year is usually set by default to end on the last day of the month in which the company's anniversary of registration falls. For example, if your company was set up on 15 March 2024, your first financial year would end on 31 March 2025.
• Subsequent financial years: After the first financial year, the company's financial year will run annually from the day after the end of the previous financial year to the anniversary of that end date. Continuing the example above, the next financial year would run from 1 April 2025 to 31 March 2026.

You can change your company's financial year by shortening it as many times as you like (with a minimum duration of one day) or by extending it once every five years (up to a maximum of 18 months). This can be done by notifying Companies House.

What is a small business according to HMRC?

According to Companies House, when preparing your accounts there are three categories of company size to consider which are small, medium and large. However, for small companies, there’s a further sub-classification which covers very small companies, a micro-entity.

The three thresholds are based on:

• turnover
• balance sheet total
• average number of employees.

You can find more information on the thresholds for different types of business sizes in the official guidance provided by the government.

If you’re unsure which classification your business fits under, it’s always worth seeking independent professional financial advice.

Limited companies

If you run a limited company, you need to submit your end-of-year accounts to HMRC and your corporation tax return within 12 months of the end of your financial year. You must also file statutory accounts with Companies House within 9 months of year-end and maintain detailed accounting records.

Company directors need to be aware of their company’s financial year to meet the filing deadlines and avoid any penalties for late submissions. Remember to keep company records for a minimum of six years.

Statutory accounts

Your statutory accounts, also known as end-of-year accounts, are a set of financial statements you must legally prepare at the end of the financial year. This usually includes:

• a balance sheet
• profit and loss account
• notes about the accounts
• cash flow statement (if applicable)
• report from the directors (if applicable).

Small companies

If you qualify as a small company under HMRC rules, you only need to submit abridged accounts to Companies House. You will still need to send over comprehensive accounts to HMRC.

So, to qualify as a small company you need to meet two of the following three criteria:

• an annual turnover of £10.2m or less
• 50 employees or less
• £5.1m or less on your balance sheet.

How to maintain your accounts

Maintaining your accounts means keeping proper records throughout the year – sales receipts, payment invoices, tax returns, etc.

Read our important dates guide to learn when businesses need to file their accounts by the accounting reference date during the year.

What accounting is needed for a small business?

Here are some of the most important aspects that you need to record:

• Register of fixed assets: all of the equipment and property you own (not including stock).
• Unsold stock and uncompleted work: at year-end, you need to record all ‘floating assets’ like stock that hasn’t been sold.
• Income and expenditure: all sales and purchase receipts need to be tracked, alongside bank statements and any chequebooks.
• Company liabilities: what you owe in terms of loans and investments.
• Payroll: all of your staff payroll and expenses need to be recorded.

Choosing your accounting software for small businesses

Handling business accounting takes up a lot of time. This is when accounting software comes in handy – helping cut down on errors, save time and make things run more efficiently.

While the right accounting software is an investment, it’ll help keep you on track with all the above – giving you easy access to all your accounting books wherever you are.

Using accounting software that works seamlessly with your electronic point of sale (EPOS) allows businesses to keep digital records of their accounts and use those records for reporting income.

5 features to look for when choosing the best accounting software for small business

• Ease of use: look for intuitive interfaces that make it hassle-free to navigate even without accounting expertise.
• Scalability: choose software that can accommodate more sales, customers and products.
• Compatibility: make sure it integrates seamlessly with your existing EPOS systems and any other business tools you might be using
• Features: look for software that can digitise store purchase orders, invoices and quotes.
• Reliable support: select a provider with well-rated customer service and availability and online support such as tutorials and troubleshooting guides.

We offer integrations with the most popular accounting software so you can make the most of integrated payments, with your Dojo card machine.

Accounting software vs accountant

Accounting software is often more budget-friendly when it comes to small business accounting, providing instant data access for quick decision-making. Although there's a learning curve, it's a scalable option.

An accountant, on the other hand, offers personalised advice and can better navigate complex tax matters and ensure you are claiming all of the costs you can.

Consider your budget, financial complexity and how hands-on you want to be with your finances before you make a decision.

Do I need an accountant for my small business in the UK?

There is no legal requirement for you to use an accountant, and as long as you can do your accounting and complete your tax returns, you can do without one. But keep in mind, having an accountant available to you on a freelance basis gives you a resource that you can use for advice and guidance and to double-check your work before submission.

When searching for an accountant, ensure they're accredited by checking with professional accountancy bodies. Visit websites like ICEW, ICAS and ACCA to browse their member lists and find a qualified accountant.