How to set up your bookkeeping

business.gov.au says a partnership, company or trust must have a separate bank account. A sole trader doesn't have to, but it is a good idea.

A separate account makes it easier to track and control the business's income and expenses, keeps business and personal finances clearly apart, and gives your accountant the information they need. If you do use one account for both, you must clearly identify every personal payment or expense in your cash book.

business.gov.au describes four kinds of system. Which suits you depends on how many transactions you have, how comfortable you are with software and what you can spend.

• Manual books or ledger accounts: cheaper to set up, less likely to have data corrupted, and simpler if you are not used to accounting software.
• Spreadsheets: a digital option if you are confident with a computer but don't want to pay for an accounting package.
• Accounting software: records transactions, updates the ledgers, produces financial statements and invoices, and makes reports easy to generate.
• Web-based or cloud systems: let you update the books from anywhere and store them off-site automatically, though they carry security risks to manage.

The ATO is moving towards digital records and recommends them where possible. Before you choose software, check what your accountant or business adviser recommends.

Your accounting method decides when a sale or a cost goes into the books.

Accrual accounting gives a truer picture of the business's financial position but takes more work. business.gov.au suggests weighing the size of the business, how complicated its transactions are and whether you have the resources to manage accrual accounting, and talking to a professional if you are not sure.

A chart of accounts is the list of accounts the business uses to classify its transactions, grouped into assets, liabilities, owner's equity, income and expenses. Accounting software comes with a default chart that you can change to suit the business.

Keep it short enough to use consistently. An account for each kind of income and each main kind of expense is usually enough to start, and a new account is worth adding only when you want to see that figure on its own in your reports.

The ATO says each record should generally show the date, the amount and a description of the transaction, its purpose and, where it matters, the relationship between the parties. Keep the document behind every entry, such as the invoice, receipt or bank statement.

Most records must be kept for 5 years, and a company's financial records for 7. Records must be in English or easy to convert to English, and stored so they can't be changed or damaged.

The ATO's record-keeping tips are to keep accurate records of all cash and electronic transactions, to reconcile cash and EFTPOS sales regularly, daily, weekly or monthly depending on the business, and to check for mistakes when figures don't add up. Where an expense is partly business and partly private, work out and record the business portion.

A simple routine might look like this:

1. Each week, enter or import new transactions and file the documents behind them.
2. Each month, reconcile every bank account and review unpaid invoices and bills.
3. Each year, after 30 June, check that every account is reconciled before the year's reports are prepared.