What is bookkeeping? A beginner's guide for UK businesses

Bookkeeping is the job of recording every sale, cost, payment and receipt in your business, accurately and as it happens. Those records are what your accounts, VAT returns and tax returns are built from. In the UK, HMRC requires every business to keep them, and Making Tax Digital is moving more of it into software.

What does bookkeeping involve?

Bookkeeping means recording each money movement and keeping the evidence behind it. A typical bookkeeper’s tasks are:

• recording sales and issuing invoices
• recording purchases and expenses, with receipts
• matching entries to the business bank account (bank reconciliation)
• chasing unpaid invoices and tracking what you owe suppliers
• running payroll, if you employ staff
• preparing figures for VAT returns, if you are VAT registered

The end product is a clean set of records your accountant can turn into a profit and loss account and balance sheet. See our profit and loss template for what that looks like.

Bookkeeping vs accounting

Bookkeeping records the transactions; accounting interprets them. A bookkeeper keeps the ledgers up to date. An accountant uses them to prepare year-end accounts and tax returns, and to advise on tax.

Many small businesses do their own bookkeeping and pay an accountant at year end. Our guide to how much a bookkeeper costs covers the other option.

What records does HMRC require?

HMRC requires you to keep records of all business income and expenses. For sole traders, GOV.UK lists:

• all sales and income
• all business expenses
• VAT records, if you are registered for VAT
• PAYE records, if you employ people
• records of your personal income

A limited company must keep more. GOV.UK says that includes all money received and spent, assets it owns, debts it owes or is owed, stock at the year end, goods bought and sold, and supporting documents such as receipts, invoices, till rolls and bank statements.

How long must you keep records?

How long you keep records depends on your business type.

For example, a sole trader’s 2025 to 2026 records, due on 31 January 2027, must be kept until at least the end of January 2032. A company should keep records longer if HMRC opens a compliance check or an asset lasts more than 6 years.

HMRC can fine a limited company £3,000 for not keeping accounting records, and directors can be disqualified.

Cash basis or traditional accounting?

The cash basis records income and costs when money actually moves; traditional (accruals) accounting records them when you invoice or are billed. GOV.UK says the cash basis is the default for sole traders from the 2024 to 2025 tax year. Limited companies use traditional accounting.

Single-entry and double-entry bookkeeping

Single-entry bookkeeping lists each transaction once, like a cash book. It suits a simple sole trader. Double-entry bookkeeping records every transaction twice, as a debit and a credit, so the books balance and errors show up. Limited companies, and nearly all accounting software, use double entry.

How Making Tax Digital changes bookkeeping

Making Tax Digital (MTD) means keeping records in software and sending figures to HMRC from it. For VAT, Notice 700/21 says records must be kept digitally in compatible software, and HMRC does not accept cut and paste as a digital link.

For Income Tax, HMRC’s eligibility guidance sets these start dates:

Read our guide to digital record keeping for MTD for the detail.

How to start bookkeeping: a simple routine

1. Open a separate business bank account. GOV.UK recommends it for companies, and it makes any business easier to track.
2. Choose a method. A spreadsheet works for a small sole trader not yet in MTD; otherwise use software. See accounting software for small businesses.
3. Record every sale and cost weekly, with the receipt or invoice attached.
4. Reconcile to the bank each month.
5. Review unpaid invoices and chase late payers.
6. Back up your records and keep them for the required period.

Sole traders can read more in our sole trader bookkeeping guide.

Frequently asked questions

What is bookkeeping in simple terms?

Bookkeeping is keeping a record of all the money coming into and going out of your business, with the evidence for each transaction.

Is bookkeeping a legal requirement in the UK?

Yes. HMRC requires every sole trader, partnership and limited company to keep records of business income and expenses for tax.

How long do I need to keep business records?

Sole traders keep records at least 5 years after the 31 January deadline. Limited companies keep them 6 years from the end of the financial year.

Can I do my own bookkeeping?

Yes. Many small businesses do their own bookkeeping using a spreadsheet or software. From 6 April 2027 more sole traders and landlords will need MTD-compatible software.

What is the difference between a bookkeeper and an accountant?

A bookkeeper records day-to-day transactions. An accountant uses those records to prepare accounts and tax returns and to give tax advice.