Six basic sets of financial records should help you run a tight business:

• the cash sales book
• the cash purchases book
• the cash book summary
• the sales ledger
• the purchase ledger
• the wages book (if you employ staff)

What should my record-keeping include?

Although the level of record keeping required may vary from business to business, it should include:

• all sales and income
• all business expenses
• VAT records if you're registered for VAT
• PAYE records if you employ people
• records about your personal income

How long do you need to keep your records?

The law requires all business owners to maintain financial records and, as a general rule, retain them for a minimum of six years. However, if you are:

• self-employed, you must keep records about your business income and costs for at least five years after 31 January submission deadline for Self Assessment of the relevant tax year
• an employer, you need to keep Pay As You Earn (PAYE) records for three years (in addition to your current year)
• a contractor in the Construction Industry Scheme (CIS), you need to keep your CIS records for three years (in addition to your current year)
• keeping records to complete a personal (non-business) tax return, you only need to keep them for 22 months from the end of the tax year to which they relate

See how long to keep your records.

Keep proof

You must maintain accurate, relevant financial records and update them regularly. You may incur a penalty if you're unable to back up the statements made in your income tax or VAT (if it applies to your business) returns.

To help you prove and keep track of income and expenditure, you should keep:

• all receipts for goods and stock
• bank statements and chequebook stubs
• sales invoices, till rolls, and bank slips

There are no rules about the format you must use to record your figures - those kept on paper are just as valid as those stored in digital format. However, you must keep some VAT records digitally, unless you're exempt from following Making Tax Digital for VAT rules. Find out more about keeping VAT records.

The cash book is the central record of all the money that comes into and goes out of your business - often referred to as cashflow.

What records do I need to keep for the cash book?

To complete your cash book, you'll need to collect and hold on to:

• cheque book stubs
• cancelled cheques
• bank paying-in books
• bank statements
• copies of your own invoices
• receipts and delivery notes
• your suppliers' invoices
• receipts for all cash purchases, till rolls, etc
• remittance advice slips from customers
• copies of payments made or received using online banking systems
• credit or debit card statements
• credit and debit card transaction slips/vouchers

A separate record for sales and purchases (receipts and payments) is sensible. Once you have a turnover of more than £90,000, the VAT registration threshold, it will help you calculate your VAT liability - the difference between the VAT you reclaim and your total VAT on sales.

Cash book templates

See the example spreadsheets below:

Cash book for sales

Download the cash book spreadsheet for sales (XLS, 19K).

Cash book for purchases and expenses

Download the cash book spreadsheet for purchases and expenses (XLS, 19K).

Recording the type of expense - business-related or personal - will help when filling in your annual Self Assessment tax return and also your VAT return (if registered for VAT). You will need to be able to distinguish between 'allowable' expenses and 'non-allowable' expenses.

Check the individual entries in your cash book with the bank statement to pick up items paid directly into your bank account. If you pay by cheque, you should also check that these have been properly credited by your suppliers.

Cash book summary

The cash book summary reconciles the totals from the cash book sales, cash book purchases, and expenses. It helps you check what your opening and closing balances are and helps you monitor how your business is performing.

Cash book summary (reconciliation)

Download our cash book summary spreadsheet (XLS, 19K).

Closing cash balance

To reach the closing cash balance (E), the calculation is (A + B) - (C + D) = E.

Closing cheque account balance

To reach the closing cheque account balance (I), the calculation is (F + G) - H = I.

The closing cash balance (E) should always equal the cash in hand. If it does not, the discrepancy should be investigated. It may be because of an unentered receipt or payment.

The closing cheque account balance (I) should always equal the balance on the bank statement at the close of business on the same day as the cheque account is made up to, after allowing for unpresented cheques or bankings.

Small, simply structured businesses may find the cash book above sufficient. However, keeping a sales ledger and a purchase ledger, as shown elsewhere in this guide, will enable you to record sales, purchases on credit and keep track of amounts owed to you from sales and by you for purchases. This will make it easier for cashflow management.

Digital records and accounting software

Many businesses choose to use accounting software to help them manage accounts more efficiently. It can make the process quicker and more straightforward, but for some taxes, such as VAT, you must keep some of your records digitally, following Making Tax Digital for VAT rules. Using accounting software can also make the process of e-filing (submitting records electronically) very simple. See computerising financial records.

A sales ledger normally records:

• the sales your business has made
• the amount of money received for your goods or services
• money owed (debtors) at the end of each month

It's a useful business-planning tool, enabling you to monitor and chase slow payers and see which customers are most profitable. Also, if you are VAT-registered, it can help you with calculating your VAT liability and submitting your VAT Return. See our VAT section for further guidance.

Sales ledger

Download the sales ledger spreadsheet (XLS, 19K).

How do I use my sales ledger?

Every time you invoice a customer, record it in the sales ledger - do this regularly, at least once a week. Each week or month, you can add up the total amount of sales invoiced by you, also called turnover (an important business statistic). By recording the amounts paid by customers in the sales ledger, you will also be able to identify the money owed to your business. Any customers who have exceeded your payment terms can then be chased.

If you choose to use accounting software, the process of identifying overdue payments will be quicker and easier. See digital financial records.

If you are not VAT-registered, then you do not need the 'Net' and 'VAT' columns.

Keeping records of invoices

To support your sales ledger, you need to keep copies of your invoices. These must be kept on file or in digital format for six years. It will assist in tracing sales invoices if you give each sales invoice a number and record this number against an entry in the ledger.

If any of your customers have both cash and invoiced sales, the sales ledger can be used to record both. In these cases, the cash sales are normally recorded in the sales ledger on a daily basis and should be supported by till receipts or any other record issued to the customer. The entry in the sales ledger can just say 'cash sales' in the customer column.

A purchase ledger records all purchases made by your business.

It helps you to monitor:

• your business's outgoings
• how much money you owe (creditors) at any one time

In addition, it gives you a record of your most regular suppliers and how much you have spent with each.

If you are VAT-registered, it can also help you with calculating your VAT liability and submitting your VAT Return. See our section on VAT for further guidance.

Purchase ledger

Download the purchase ledger spreadsheet (XLS, 20K).

To support your purchase ledger for reconciliation purposes, you may wish to make reference to bank account or credit card statements.

How do I use my purchase ledger?

By recording in the purchase ledger payments for purchases you have made, you will be able to identify the amount that is currently unpaid. Each time a payment is made, note it in the "Date paid" column. You can add up the totals on a regular basis to see how much you owe at any one time.

It is a good idea to number each bill when you receive it and record this number against an entry in the ledger. It is also advisable to file the bills in numerical order. That way, you will be able to easily find the bill if a query arises later.

Unless your business is VAT-registered, you will not need to use the 'Net' and 'VAT' columns.

If you employ staff, you will need to keep a record of how much you pay each of them and the deductions made from their wages.

For each employee, you must keep a record of:

• their gross pay (the main things that count are wages, salary, overtime payments, and statutory payments)
• any tax deducted or refunded
• any National Insurance contributions (NICs) deducted or refunded
• any Student Loan deductions

Why do I need to keep wage records?

• You will have a single, detailed record of one of the highest costs for most small businesses.
• You will be able to easily answer any staff questions you may receive when they come to do their own Self Assessment income tax returns.
• You will be able to prove that you pay the National Minimum Wage or National Living Wage and equal pay for work of equal value, should you need to.

Payroll software

For PAYE, you must report employee information online in real time. Payroll software will help you with the key tasks for completing wages records. See running payroll and find payroll software.

A digitised record-keeping system can save you a great deal of time. It will allow you to add, delete, amend, and share your data easily and will recalculate your running totals for you.

Computerising your accounts can also have wider business benefits. It will allow you to file government returns, such as VAT and Self Assessment tax returns, online, as well as potentially enhancing your business's ability to communicate online with customers for applications such as e-invoicing.

You may also need to keep digital financial records as a legal requirement, for example, if your business is VAT-registered, you must keep digital records as part of Making Tax Digital for VAT. See keeping VAT records.

Choosing a software package

You can either use your computer's standard spreadsheet package or you can buy an accounting software package. Accounting software packages have been developed to meet the needs of most small businesses. Most software will require payment, but there may be some free versions available. Find commercial software developers.

More advanced accounting packages are sold in 'modules', with each one handling an aspect of financial management. Most businesses buy at least three modules (sales, purchase, and nominal ledger).

Remember, if you are using an accountant, your software packages should be compatible.

To keep good control of your financial record-keeping, you should work towards making the following regular updates to your business records.

Hints and tips for record-keeping

4 S's of record-keeping

System

Spend time setting up a system that is consistent and reliable. Allocate a regular time every week/month to deal with your financial administration, or make it a key task for a trusted employee. File your records logically - put receipts in date-marked envelopes or folders and file bank statements in chronological order.

Separate

One of the biggest mistakes business owners make is to mix their personal and professional finances. It is best to treat the business as a separate person, from which you only take income in the form of wages, dividends, and by claiming back business expenses against receipts. So keep your personal and business records separate.

Security

The fewer people involved in your record-keeping, the fewer the errors that are likely to creep in. Make it very clear whose responsibility it is to maintain records. It is a good idea to password-protect your computer records, and only divulge the password to a small number of people. See IT security and risks.

Safe storage

Even if you choose to keep all your records on a computer, it is vital that you keep a regular (weekly, if not nightly) electronic backup, and a paper copy elsewhere. Store records that cannot be copied, such as chequebook stubs and paying-in books, in a fireproof box.

Whatever kind of business you run, you are required by law to keep financial records. There are also a number of business benefits to be gained from keeping accurate records, such as saving you time and money whenever you need to produce financial reports. It ensures you only pay the tax you owe and helps you keep an eye on financial activities.

Record-keeping tips

1. What should my record-keeping system include?

There are six basic sets of financial records:

• the cash sales book (XLS, 19K)
• the cash purchases book (XLS, 19K)
• the cash book summary (XLS, 19K)
• the sales ledger (XLS, 19K)
• the purchase ledger (XLS, 20K)
• the wages book

2. Get a system in place

Spend time setting up a system that you stick to. Allocate a regular time every week or month to deal with your financial administration or make it a key responsibility for a trusted employee or manager. It is also advisable to file all receipts logically.

3. Separate your professional from your personal finances

It is best to treat the business as a separate person, from which you only take income in the form of wages, dividends, and by claiming back business expenses against receipts.

4. Make security a priority

The fewer people involved in your record-keeping, the fewer errors that are likely to creep in. It is a good idea to password-protect your company records and only divulge the password to those who need it.

5. Safely store hard copies of your records

Even if you choose to keep all your records digitally, it is vital that you keep a regular backup and a paper copy elsewhere. Store records that cannot be copied, such as cheque book stubs and paying-in books, in a fireproof box.