Bookkeeping for sole traders

The bookkeeping itself is the same as in any business: record each transaction, file the paperwork that supports it and check the figures against outside records. What changes is who does the work and how close the business sits to your own finances. A sole trader often runs every part of the business from the same phone and the same bank as their personal life, so the books are only as clear as the habits behind them.

business.gov.au notes that the records a business has to keep depend partly on its structure: sole trader, partnership, company or trust. For a check of your own, it links to a free ATO tool that works out which records the business needs and how well you are currently keeping them.

The ATO adds that it is up to you, as the owner, to understand what records the business must keep, and that this responsibility stays with you even if the job is given to someone else, an employee for instance.

Every amount that comes into or leaves the business belongs in the books, small cash purchases included. business.gov.au sets out the records a business needs to keep. In everyday terms, for a sole trader they include:

• your sales: the invoices you send and the takings you receive
• what you spend, with the supplier's receipt or bill for each purchase
• bank and card statements for every account the business uses
• at the end of the year, a list of the customers who still owe you and the suppliers you still owe
• records about any equipment or stock you buy for the business.

The ATO says a record generally needs the date and amount, a description (a sale or a purchase, say), and what the transaction was for, plus the relationship between the parties where that matters. That last detail is worth noting whenever you buy from or sell to someone you know, such as a family member.

business.gov.au describes manual systems kept in books or ledgers, and digital options: accounting software, web-based systems and spreadsheets. It suggests spreadsheets for owners who are confident on a computer but can't yet stretch to an accounting package.

A simple starting point is a cash book. business.gov.au's glossary calls it a daily record of every cash, credit or cheque transaction that comes in or goes out. Kept in a spreadsheet, with one row for each transaction and a column that sorts it into a category, it lets you total your sales, each kind of cost and your drawings for any period.

You also decide when income and costs are recorded. In business.gov.au's explanation, cash accounting records them when the money changes hands. It calls this a simple system that suits smaller businesses whose transactions are mostly cash, though it leaves out what customers owe you and what you owe others. Accrual accounting enters them when they happen, which shows those amounts but takes more work. If you sell on credit, keep a list of unpaid invoices whichever method you use, and ask your accountant which method suits your business.

For a sole trader, keeping business money apart from personal money comes down to how you set up your banking and how you record what moves between the two.

A separate business account isn't compulsory for a sole trader, business.gov.au says, though it recommends one. Where one account carries both, it says you must flag every personal payment or expense clearly in the cash book.

• Paying yourself: money you take for personal use is drawings, which business.gov.au describes as personal expenses paid from a business account. Record it in a drawings account, not among the business's expenses.
• Putting money in: if you top up the business from a personal account, enter it as money you contributed, not as income from sales.
• Business costs on a personal card: hold on to the receipt and record that you paid the cost personally, so it doesn't go missing from the business's figures.

Some costs are shared with home, such as a phone or internet plan. The ATO asks for clear documents showing the business portion of any expense that is partly personal, and its tips say to work that portion out and record it accurately. Our guide to separating business and personal finances covers shared costs and money moving between you and the business in more detail.

The ATO suggests keeping records as transactions happen and building record keeping into the daily running of the business. For a busy sole trader that can mean a few minutes a day and a longer session each week.

• Each day: keep every receipt, and jot down any cash you took or spent.
• Each week: enter or import the week's transactions, match each one to its receipt or invoice, and send the invoices that are due.
• Each month: reconcile the bank account to its statement, follow up overdue invoices and look at the bills coming up.
• If you take cash or card payments: the ATO suggests reconciling them regularly against outside records, such as your payment provider's reports, which it says may be daily, weekly or monthly depending on the business.

The ATO's tips also say to look for errors whenever the figures don't add up. A difference you can't explain at the monthly reconciliation is often a missing or doubled entry, and it is far easier to find while the month is still fresh.

Most business records must be held for 5 years, business.gov.au says, with the period running from whichever is later: getting the record, or finishing the transaction it relates to. Some have a longer period.

Paper and digital records are both allowed. business.gov.au says that once you have stored a true and clear image of a paper record, made under the record-keeping rules, the paper version no longer needs to be kept unless another law or rule requires it. It adds that records must be in English, or easily translated into it, and stored where they are protected from change or damage.

If the books take more time than you have, a bookkeeper can take over the day-to-day recording and reconciling, and your accountant can answer questions about how particular items should be treated in your accounts.

Whoever does the work, keep access to your own records and look over the reports each month, since the accountability for them stays with you.