Bookkeeping for Beginners: 9 Basic Concepts to Get You Started

Is your small business encountering some inaccurate financial reports? Or are mismanaged accounts draining your profits?

An AAT (Association of Accounting Technicians) survey revealed that 42% of UK businesses lose money due to poor accounting. The respondents had to hire professional accountants to fix the errors. 

Basic bookkeeping shouldn’t have to be overwhelming. Here are nine basics to help you get started. You’ll learn to organise your records. You’ll understand key terms. Plus, you’ll use simple practices to make managing finances easy.

9 Core Elements of Bookkeeping

Grasping these nine key bookkeeping concepts will keep you organised. It will also help you avoid big mistakes and improve decision-making. Think of these as the bedrock for sustainable growth and compliant accounts. 

Assets

Assets are what your business owns. These can be tangible, like equipment or stock, or intangible, like intellectual property. Common asset categories include:

• Cash in the bank
• Accounts receivable 
• Inventory
• Fixed assets such as property, vehicles, or office equipment

Imagine operating a coffee shop: its coffee machines, tables, and chairs would constitute fixed assets, while any stored coffee beans and milk cartons would fall under inventory.

Understanding your assets allows you to accurately calculate your company’s financial position on its Balance Sheet and make informed decisions, such as investments or expansion.

Liabilities

Liabilities are any financial obligations your business owes to other parties, whether short-term, like supplier invoices, or long-term, like business loans. Examples include: 

• Accounts payable
• Loans from lenders
• Tax liabilities (VAT/CT/PAYE due to HMRC).

So if you run a pet grooming salon and purchase £2,000 worth of grooming supplies on credit, this amount would appear as an accounts payable liability until paid off.

Understanding liabilities is key to managing cash flow issues and paying your bills and taxes on time.

Equity

After deducting assets from liabilities, what remains is known as the business’s remaining ownership stake. 

For limited company accounts in the UK, this refers to shareholder equity, while sole traders refer to it as the owner’s capital.

Imagine your online retail business has £20,000 in assets and £12,000 in liabilities; therefore, its Equity would be £8000

£20,000 (assets) – £12,000 (liabilities) = £8,000 (equity)

Tracking Equity highlights how much of your business value belongs to you or your shareholders.

Single-Entry Bookkeeping

Single-entry bookkeeping records transactions only once, either as income or expenses. Sole traders and small startups with simple finances often use this system.

For example, if your flower makes a £200 sale in your cash receipts log, you’d record it. Sadly, this doesn’t provide a complete financial picture, which restrains you from growing.

Double-Entry Bookkeeping

The double-entry system is essential for businesses with more complex operations. Each transaction is recorded twice—as a debit in one account and a credit in another.

Say you purchase office supplies for £500 for your recruitment agency in Leeds. It would look like this in your books:

• Debit: Office supplies account increases by £500
• Credit: Cash account decreases by £500 (Card account would credit the bank)

Double-entry bookkeeping ensures accuracy and helps you balance the equation Assets = Liabilities + Equity on your Balance Sheet. Bookkeeping software, like Xero or QuickBooks, follows this system.

Cash Basis of Accounting

Here, we only record transactions when cash is received or spent. Many small UK businesses and sole traders prefer this approach, which is simple and aligns with the VAT Cash Accounting Scheme.

For instance, if your design studio in Brighton sends an invoice to a client in October but only gets paid in November, you would record the income in November. This system works best for smaller businesses with straightforward finances.

Accrual Basis of Accounting

The accrual method records transactions based on when they occur, which is required for larger businesses.

Suppose your company completes a project worth £10,000 in December. But you won’t get paid until February. With accrual accounting, you record the income in December when you complete the work.

Accruals help you understand your business’s immediate performance.

Income Statement

Your Income Statement is a snapshot of your business’s performance over time. It includes three key elements:

• Revenue (sales or income)
• Cost of goods sold (COGS) (direct costs of your products or services)
• Operating expenses (salaries, rent, utilities, etc.)

Knowing how to read an Income Statement helps you identify profitability trends and areas for cost improvement. For example, a gift shop owner in Liverpool might notice their rent expenses are eating into their profit margins.

Retained Earnings

Retained earnings represent the cumulative profits that your business keeps rather than paying out as dividends to shareholders.

If your business made a £50,000 profit this year and paid a £30,000 dividend to shareholders, £20,000 would remain retained earnings. Meanwhile, you can reinvest these profits into the business for exponential growth.

Final Takeaway

The above nine concepts form the cornerstone for keeping finances organised, adhering to HMRC regulations, and making better decisions.

Are You Feeling Overwhelmed with Bookkeeping?

Don’t Worry; You Aren’t Alone

Many entrepreneurs start with limited knowledge of bookkeeping. Taking things a step further, speaking to a professional could make all the difference—invest in yourself today by starting bookkeeping!