A sole trader's guide to bookkeeping in Australia

Fear of making costly mistakes often lurks in the background, casting a shadow over the business. If you've ever felt lost in a sea of invoices, or worried about staying on top of tax obligations, you're not alone.

This article will provide a clear and concise definition of bookkeeping and explain its importance in business management. It will also cover the basic principles of bookkeeping, including recording financial transactions, maintaining financial records, and generating financial reports. 

What is bookkeeping, and why does it matter 

Think of bookkeeping as your business' financial journal. It's the practice of carefully recording, sorting, and organising every financial transaction within your business. Every sale, purchase, and bill paid is documented.

You might be thinking, "Why should I bother with all this tedious record-keeping?" Well, buckle up because here's why bookkeeping is an absolute game-changer for Aussie sole traders like yourself:

1. Stay on the ATO's good side: In Australia, the taxman (aka the ATO) expects you to keep accurate and detailed records of your income and expenses for at least five years. Trust us, you don't want to mess with the ATO. Proper bookkeeping ensures you're paying the right amount of tax, avoiding nasty surprises like audits, fines, and potential legal trouble. It's your insurance policy against unnecessary financial headaches.
2. Make smart business decisions: Ever wish you had a crystal ball to predict your business's future? Well, bookkeeping is the next best thing. By diligently tracking your income and expenses, you gain a clear understanding of your profitability, cash flow, and overall financial health. This knowledge is your way to boost your business performance —it empowers you to make informed decisions about pricing, investments, expansion, and everything in between.
3. Build trust and open doors: Let's face it, nobody wants to do business with someone whose finances are a mess. Impeccable financial records show that you're a serious and responsible business owner. They build trust with potential investors, lenders, and partners, opening doors to exciting opportunities for growth and collaboration.
4. Spot trouble before it hits: Bookkeeping is an early warning system for your finances. Regularly reviewing your records can quickly identify red flags like cash flow problems, overspending, or declining profits. This allows you to address these issues head-on before they snowball into major crises.
5. Sleep soundly at night: Imagine the relief of knowing that your financial house is in order. No more sleepless nights worrying about taxes, bills, or unpaid invoices. Proper bookkeeping gives you peace of mind, allowing you to focus on what you do best – running your awesome business.

Accounting vs. bookkeeping: Is it the same?

While bookkeeping and accounting are closely related, they're not exactly the same thing. Think of it like this:

• Bookkeeping: Hands-on work of recording and organising financial data. It's like the foundation of a house—essential but not the whole picture.
• Accounting: Interpretation and analysis of that data to paint a bigger financial picture. It's like the architect who uses the foundation to create a beautiful and functional house.

Bookkeepers focus on the day-to-day tasks of recording transactions, categorising them correctly, and ensuring everything balances. They're the detail-oriented folks who make sure the numbers add up.

Accountants, on the other hand, use that data to create financial statements, analyse trends, provide strategic advice, and ensure compliance with tax laws. They're the big-picture thinkers who help you understand your business's financial health and make informed decisions.

In a nutshell, bookkeepers lay the groundwork, and accountants build on it. Both are essential for your business's financial well-being, but they play different roles.

Read our blog to know when to hire an accountant or bookkeeper.

What records does your business need to keep?

In Australia, the ATO requires you to keep records of all your business transactions for at least five years. This includes both physical (e.g., receipts and invoices) and electronic documents (e.g., bank statements and emails). All records need to be in English or easily translatable.

Here's a breakdown of the essential records you need to maintain:

Income records

• Sales invoices: These are detailed records of every sale you make, including the date, customer name, description of goods/services, and the amount charged.
• Bank statements: These show all incoming payments, such as customer payments, loan proceeds, or interest earned.
• Cash register tapes or POS system reports: If you accept cash payments, keep these records to track your daily sales.‍
• Online payment records: If you receive payments through platforms like PayPal or Stripe, keep records of these transactions.

Expense records

• ‍Purchase invoices or receipts: Keep records of all business expenses, including the date, supplier name, description of goods/services purchased, and amount paid.‍
• Bank statements showing payments: These show all outgoing payments for expenses, such as rent, utilities, advertising, and supplies.‍
• Credit card statements: Keep records of all business-related expenses paid with your credit card.

Other records

• ‍GST records: If you're registered for GST, you need to keep records of your GST collections and payments.‍
• Employee records: If you have employees, you must keep records of their wages, superannuation contributions, and tax withheld.‍
• Asset register: This is a list of all the assets your business owns, along with their purchase date, cost, and depreciation.
• Loan documents: If you have business loans, keep copies of the loan agreements and repayment schedules.

Remember, the ATO may ask to see your records at any time, so it's essential to keep them organised and accessible. If you're unsure what records you need to keep or how to keep them organised, check out our blog.

Where do you start doing bookkeeping?

Now that you're convinced that bookkeeping is the secret sauce to your business' financial success, you might wonder where to begin. Let's explore the options available and help you find the perfect fit for your needs:

Spreadsheets

Who it's for: If you're a budget-conscious sole trader with minimal transactions and a knack for organisation, spreadsheets might be your starting point. They're free, readily available, and offer a degree of flexibility for customisation.

Pros:

• Cost-effective (usually free)
• Simple to use for basic tracking
• Offers customisation options

Cons:

• Prone to errors (manual data entry)
• Not scalable for growing businesses
• Lacks advanced features (invoicing, bank reconciliation, reporting)

Accounting book

Who it's for: If you prefer a tangible record of your finances and have a small number of transactions, an accounting book might appeal to you. It's a hands-on approach that allows you to physically record each transaction.

Pros:

• Provides a physical record of transactions
• Simple for basic bookkeeping

Cons:

• Time-consuming and cumbersome
• It is not ideal for businesses with high transaction volumes
• Prone to human error

Bookkeeping software

Who it's for: This is the go-to choice for most sole traders, especially those who value efficiency, accuracy, and scalability. Accounting software streamlines your bookkeeping processes, saving you time and reducing the risk of costly mistakes.

Pros:

• Automates many tasks (data entry, bank reconciliation, report generation)
• Reduces the risk of errors
• Offers a wide range of features (invoicing, expense tracking, payroll, reporting)
• Cloud-based options provide accessibility from anywhere
• Scalable to accommodate business growth

Cons:

• It can be expensive for small businesses with limited budgets
• Requires some time investment to learn the software
• Might offer more features than you need

Choosing the right bookkeeping method depends on your business type, transaction volume, budget, and desired level of automation. Remember, AI-powered bookkeeping solutions like Thriday makes finance management easier and more efficient than ever for busy entrepreneurs. 

Popular bookkeeping software for sole traders

When choosing the right bookkeeping software, there's no one-size-fits-all answer. The best choice for your business depends on various factors, such as your industry, goals, budget, and the specific features you need.

Think of it like choosing a car – a tradie might need a sturdy ute, while a rideshare driver might prefer a fuel-efficient hatchback. Similarly, different businesses have different accounting needs, and the right software can make all the difference.

Thriday

Thriday is a revolutionary bookkeeping software designed specifically for Australian sole traders. It combines banking, bookkeeping, accounting, and tax into one seamless experience, eliminating the need for multiple tools and platforms.

Here are just a few examples of how Thriday has made a difference:

Freelancers: Freelancers love Thriday's ability to easily track multiple income streams, create professional invoices, and manage their tax obligations.

Tradies: Thriday helps tradies track their expenses, manage their invoices, and get paid faster so they can focus on their craft.   

Creative professionals: Thriday's intuitive interface and automated features have been a lifesaver for creative professionals who often struggle with the administrative side of their business.

Thriday is a relatively new platform, so it might not have all the advanced features that some larger businesses need. Recently, Thriday has introduced a high-yield interest savings account for its business customers. No monthly fees, minimum deposits or restrictive terms.

Xero

Xero is a popular cloud-based accounting software that caters to businesses of all sizes, including sole traders. It offers a wide range of features, including invoicing, bank reconciliation, expense tracking, and financial reporting. Xero also integrates with various third-party apps, making it a versatile solution for managing your finances.

While Xero is a powerful tool, its extensive features might be overwhelming for beginners. Additionally, the pricing can be relatively high compared to other options, especially for sole traders with limited needs.

MYOB

MYOB is another well-established accounting software provider in Australia. They offer a range of products tailored to different business needs, including MYOB Essentials and MYOB AccountRight. MYOB provides invoicing, bank reconciliation, payroll, inventory management, and more features.

MYOB's interface can be less intuitive than some other platforms, and the pricing can be complex, with different tiers and add-ons. Some users have also reported occasional glitches and slow performance.

For more comprehensive bookkeeping software review, you may also check out our blog on the best accounting software.

Thriday: A smarter way to manage your books

While you can certainly handle bookkeeping yourself, many sole traders find it beneficial to partner with a modern accounting platform like Thriday. Thriday automates many of the tedious tasks, like bank reconciliation and expense tracking, so you can focus on running your business. They also offer expert advice and support to help you navigate the complexities of tax and compliance.

Expense management is so easy with this app. You just need to snap a photo of your receipts, and Thriday's OCR technology will automatically extract the relevant information. No more shoeboxes full of receipts!

Plus, Thriday's AI-powered engine automatically categorises your income and expenses, reconciles your transactions, and tracks your GST. You can try Thriday for free!

Frequently asked questions 

How do I track expenses?

• Get receipts: Always obtain and keep receipts for all business purchases.
• Categorise: Organise expenses into clear categories (e.g., advertising, rent, supplies).
• Use software: Utilise tools like Thriday or Xero for automated tracking and reporting.
• Reconcile: Regularly compare your bank statements with recorded expenses.

What expenses can I deduct?

You can deduct most expenses directly related to earning your business income, such as:

• Advertising & Marketing
• Home office expenses (portion of rent, utilities, etc., if applicable)
• Travel expenses
• Office supplies & equipment
• Professional fees

How can I maximise deductions?

• Keep meticulous records: Ensure you have proof for all claimed expenses.
• Claim everything eligible: Don't overlook small expenses that can add up.
• Understand depreciation: Certain assets can be depreciated over time for deductions.
• Consult a tax professional: Seek advice to ensure you're claiming everything you can.

Why is expense tracking important for ATO compliance?

Accurate expense tracking is crucial for the following:

• Substantiating deductions: You need proof to claim them on your tax return.
• Avoiding over-claiming: Proper records prevent claiming ineligible deductions.
• Proving business activity: Detailed records demonstrate your business is legitimate.

What if I lose a receipt?

If you lose a receipt, you may still claim the deduction with other evidence (bank statement, credit card statement). However, always try to keep original receipts.

Focus on growing your business, not balancing your books. Leave the bookkeeping to Thriday.

Bookkeeping doesn't have to be a burden. By understanding the basics, choosing the right tools, and staying organised, you can take control of your business finances and set yourself up for success. Consider exploring options like Thriday to streamline your bookkeeping and free up your time to do what you do best—running your business.