Limited company bookkeeping comes with legal duties that sole traders don't face. Here's which records a company must keep, how long to keep them, what is different from sole trader bookkeeping and when to hand it over.
When you run a limited company, bookkeeping stops being just good housekeeping and becomes a legal duty. The company is a separate legal entity, its money is not your money, and the directors are responsible for keeping proper records of everything it receives and spends. This guide covers what limited company bookkeeping involves, what is different from being a sole trader, and how to keep on top of it, whether you're a director in Bristol or anywhere else in the UK.
What records must a limited company keep?
A company must keep accounting records that show all the money it receives and spends, along with its assets and debts. In practice that means:
- Sales invoices and records of all income
- Purchase invoices, receipts and records of all costs
- Bank and credit card statements, and loan agreements
- Details of what the company owns and owes
- Stock records, if the company holds stock
- Supporting paperwork such as orders and delivery notes
- Payroll and VAT records, where they apply
Separately from the accounting records, a company must also keep company records, such as details of shareholders, share transactions and shareholder resolutions.
How long do you need to keep them?
Company records must be kept for six years from the end of the last financial year they relate to, and for longer in some situations, such as when HMRC is carrying out a check. If a company doesn't keep proper accounting records, HMRC can fine it £3,000 and directors can be disqualified.
How limited company bookkeeping differs from sole trader bookkeeping
- Separate finances. The company needs its own bank account, and every transaction between you and the company has to be recorded properly. Personal spending on the company account can cause tax problems.
- Accruals accounting. Limited companies can't use the cash basis, so income and costs are recorded in the period they relate to, whether or not they've been paid yet.
- Director payments. Salary, dividends and any money you borrow from or lend to the company must be recorded, and the paperwork has to match.
- Statutory accounts. Your books feed the annual accounts filed at Companies House and the Company Tax Return sent to HMRC, so they have to stand up to scrutiny.
The director's loan account
If you take money out of the company that isn't salary, a dividend or a repayment of money you've lent it, it is usually recorded in the director's loan account. If the account is overdrawn at the year end, there can be tax consequences for the company and for you, so it's one of the first things we check. Talk to your accountant before you take money out in an unusual way.
A simple monthly routine
- Reconcile the bank account, so every transaction in the books matches the statement
- Match receipts and invoices to transactions, and chase any that are missing
- Issue invoices promptly and follow up overdue payments
- Run payroll and record the payments, if you employ anyone
- Record VAT, if you're registered, and keep digital records
- Review a short profit and loss report and the cash position
Cloud accounting software with a live bank feed does most of the heavy lifting. Xero, QuickBooks and Sage are all popular with small companies.
What good bookkeeping gets you
- Year-end accounts and Corporation Tax prepared faster, and usually for less
- Confidence that you're paying the right amount of tax, no more and no less
- Up-to-date numbers to make decisions with
- A clean record if a lender, buyer or HMRC ever asks questions
When to hand bookkeeping to someone else
Plenty of directors start out doing their own books. It's worth outsourcing if you are regularly behind, you've started employing staff, you've registered for VAT or are approaching the £90,000 threshold, or the time bookkeeping takes would be better spent on the business. Our general guide to small business bookkeeping covers the basics in more detail.
Limited company bookkeeping from LN Accountants
Our Limited Company plan starts from £150 a month (exc VAT) and includes monthly bookkeeping and management reports, statutory year-end accounts and Corporation Tax, the director's Self Assessment return and payroll for up to five employees, for one fixed fee. Your accounting software subscription is included. See our pricing or get in touch to talk it through.
Frequently asked questions
Is bookkeeping a legal requirement for limited companies?
Yes. A limited company must keep accounting records showing its income, spending, assets and debts. Failing to do so can lead to a £3,000 fine from HMRC and directors being disqualified.
How long must a limited company keep its records?
Six years from the end of the last financial year they relate to, and longer in some situations, such as an HMRC compliance check.
Can a limited company use the cash basis?
No. Limited companies can't use cash basis, so they record income and costs in the period they relate to.
Can I do my own limited company bookkeeping?
Yes, many directors do. The key is keeping accurate, up-to-date records. Many outsource it once the business grows, registers for VAT or employs staff.
What is the difference between bookkeeping and accounting?
Bookkeeping is the day-to-day recording of transactions. Accounting uses those records to prepare accounts and tax returns and analyse performance.
