Keeping Financial Records: Income

Back in January, we looked at the common types of financial system used by small businesses, whether paper-based; a simple spreadsheet; or commercial software. Now we are moving on to think about the data we will keep within those systems. Let’s start by asking the question: what records do we need to keep?

Well, at its simplest, we need to know what money came in (our income) and what money went out (our expenditure). The difference between the two is our profit or loss. If our income is greater than our expenditure, we have made a profit. However, if our expenditure is greater than our income, we have made a loss.

We’re going to start by looking at keeping records of income.

As writers, our income can come from lots of different source. Here are a few I thought of and there will be others you can think of too:

·       Sales of our books, either to bookshops or direct to readers;

·       Sales of articles or short stories to magazines, journals or websites;

·       Prizes from writing competitions;

·       Fees for running workshops or courses on writing;

·       Advance payments and royalties from publishers;

·       Payments through PLR (Public Lending Rights, relating to books borrowed from libraries);

·       Payments through ALCS (Authors’ Licensing and Collecting Society, relating to photocopying).

Most of these payments will come in as cheques or direct payments into the bank, so there is an immediate paper trail. Others will tend to come as cash, especially the direct sales of books. Some, particularly the bottom three on the list, will come with full statements.

The two classic ways to document income are by issuing an invoice, which is a demand for payment; or by issuing a receipt, which is a record of payment made. Some companies issue both for the same transaction, although this is not necessary.

There is no standard format for an invoice, but some pieces of information must be present:

·       Date of the transaction;

·       Invoice number;

·       The Sellers’s name, contact details and VAT number (if applicable);

·       The Customer’s name and contact details;

·       Description of the goods or services being sold;

·       The net price, any discounts applied, rate of VAT and amount of VAT (if applicable), and the final gross amount to be paid.

Some invoices also carry details of: customer account numbers; order number; payment terms and instructions on how to pay (who to make the cheque out to; bank details for direct transfers). The back of the invoice can be a useful space for advertising or getting other messages directly to our customers; for example, these days our utility bills and credit card statements come stuffed with additional information. 

If we have a system for issuing invoices, we also need a way of recording when those invoices are paid. However, from the point of view of the buyer, the invoice is sufficient record, so there is no need to issue a receipt against payment of an invoice unless we want to.

Receipts are generally issued against smaller payments, received by cash or cheque. Once again, there is no standard format. Think of a simple receipt issued when we buy something at a craft fair; or the till receipts issued by a larger retailer or petrol station. There is a world of difference between the levels of detail in the two. However, as a minimum, they need to show the date, customer’s name, description of the goods or services; and amount paid. If the seller is VAT registered, the VAT number should also be shown.

Invoices and receipts are ways of issuing documents to our customers; as mentioned earlier, some customers will issue documentation to us, in the form of payment statements. So it is likely we will end up with a complete mix of different types of income record.

At some point, all the documentation needs to be collated in order to calculate total income. We can give this to the accountant to do for us at the end of the year, which is effective but costly. We can give this to a book-keeper to do, either monthly or at the end of the year; again, this is effective and less costly than an accountant, but still means paying out money. Or we can do it ourselves, either monthly or at the end of the year. This option may be effective, depending on our abilities with numbers, and is the least costly in terms of actual expenditure, but it is costly in terms of our time.

There really is no right answer on this one. It depends on individual circumstances, resources and preferences. However, let’s assume we decide to do it ourselves on a monthly basis. The benefits are that the task is smaller and our memory will be fresher. Basically, all we are doing is listing all the sources of income in one place. Let’s look at what that might look like for our three types of financial system:

·       Paper-based: a simple cash book with appropriate layout can be bought from any stationers. An A4 hard backed notebook will do the job just as well, but the columns will have to be drawn in. Start each month on a new page. List the income-generating transactions in date order (which helps when reconciling the bank statement) and put a total at the bottom.

·       Spreadsheet: Use one spreadsheet for all the accounts, but use a separate worksheet for each type of transaction (income, expenditure etc). List the income-generating transactions in date order and use the software to calculate a total at the bottom.

·       Commercial software: Each transaction will need to be converted to an invoice to enter it into the system. However, these invoices do not necessarily have to be issued to the customer. For example, PLR and ALCS do not need an invoice as they generate the appropriate documentation themselves. If there are a lot of small cash transactions, it can be time-consuming and unnecessary to issue an invoice for each one. My solution is to list all the books sold, and the prices on a single invoice issued to myself, then accounted against the cash receipts.

Using any of the above systems on a monthly basis means that at the end of the year, there will be just twelve figures to collate in order to identify total income. Next time, we will look at recording business expenditure.

Closing notes: This article is about recording income. Some of that income will be taxable, some may not be. No distinction is made here between the two. At this point, we are only looking at what records we need to keep. What we do with them later is a whole different subject.

As always, note that I am not an accountant or a lawyer, just a long-term business owner, talking about my own experience. If you are unsure about anything, always take advice from an appropriate professional.

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By Elizabeth Ducie

Elizabeth Ducie was a successful international manufacturing consultant, when she decided to give it all up and start telling lies for a living instead.

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