One of the big differences between self-employment and employment is a regular salary. As an employee, you know exactly how much you’ll receive, and when, each month.
But freelancers don’t have the same luxury. Instead, you'll need to keep a close eye on the money coming in, and leaving, your account. And if you aim to do this every month, you won't end up having to do 12 months' worth when the time comes to submit your tax return.
Let’s explore the three simple bookkeeping sheets that can help you do this. These are your:
Sales
Payments
Expenses
Each of these can easily be created using Excel, or you can use any of a number of accounting apps to help you. Let’s identify what each of these documents is used for.
Sales sheet
Your sales sheet keeps a record of all the work you’ve done. It’s an at-a-glance document that shows every project, job or commission you’ve completed on a month by month basis.
Unlike employees, freelancers have to submit invoices in order to be paid. The sales sheet is the place where you record every invoice you send out.
It’s usually split into two sections. On the left side of the sheet, you’ll find information such as the invoice date, name of company/person you’re invoicing, how much for, how much VAT (if relevant) and the total.
Here’s what this section looks like when created as an Excel spreadsheet:
In January, for example, this freelancer worked for four different companies. You can see what date they were invoiced and the invoice reference numbers so each one can be easily tracked.
Once you’ve been paid, you will then fill in the right-hand section of the sales sheet:
Here you record which method of payment your clients used to pay you:
CASH: Sales made in person using money.
PAYPAL: Through your online Paypal account.
BACS: A payment made directly into your bank account which takes three days to clear.
CHAPS: Same day transfers into your bank account.
You’ll notice that the first entry on the BACS column for £3400.62 doesn’t match the Goods Total amount of £2900.62. That’s because the client paid for both this invoice and an earlier one in one payment. The Refer To column shows which earlier invoice the extra £500 refers to.
The only other thing you’ll need to set up on your sales sheet are Total boxes at the bottom of both the left and right sections. That way, you can easily see how much money you’ve invoiced for and how much you’ve actually received.
Payments sheet
A payment sheet is used to record everything your business has had to pay out. For example, this can include bank charges, phone bills, subscriptions, your salary or expenses. It’s a way of keeping track of every payment that’s left your business bank account each month.
Again, it’s a good idea to break this down into two sections. On the left side, you’ll record all the businesses/people you’ve had to pay. These are your payees. You can also specify how you’ve made these payments – whether by check, bank transfer etc – and you have a column to list when the payments left your account. Again, here’s an example using Excel:
The right side of your payments sheet breaks down the payments you’ve made into different categories, such as wages, expenses or accounting services (if you decide to hire someone to do your books). Each of these columns has a Total box at the bottom of each year. This allows you to see how much you’ve spent on each category both monthly and annually.
Expense sheet
Expenses are the costs you incur when carrying out your business. Allowable expenses are tax deductible. This means you don’t pay tax on them (you deduct them from your income before you calculate how much tax you owe).
Expense sheets are, again, fairly straightforward. Here’s a sample:
You’ll need a separate column for each allowable expense so you can see how much you’ve spent on each. You’ll also record the date and a short description of the expense you’re claiming. You will need to back this up with receipts so if you spend money on something for your business, get into the habit of keeping receipts somewhere safe.
Visit the HMRC website for a list of allowable expenses.
Accounting software
A quick and easy way to manage your accounts is to use software specifically designed to do all the calculations for you: Quickbooks, Xero and FreeAgent for example. And with most offering mobile app versions, these are also accessible on the go.
SimplyBusiness has an excellent comparison guide to help you choose the software that’s best for you.
Will I need a bookkeeper or an accountant?
A bookkeeper looks after the daily/monthly management of a company’s finances. Thanks to computer software and a wide choice of user-friendly apps and accounting software on the market nowadays, it has become a little easier to manage your bookkeeping yourself.
However, an accountant looks at the bigger picture and can help with financial strategies such as tax-planning. You’ll definitely need one if you’re registered as a limited company as you’ll need to submit company accounts each year, which need specialist knowledge.
You should now have a clearer idea of the kinds of records you’ll need to keep track of your business income. In the next chapter, we’ll look at invoicing, credit control and how to deal with late or non-payment of invoices.
