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A Freelancer’s Guide to Basic Bookkeeping

This post is part of a series called Freelance Financial Bootcamp.
A Freelancer’s Guide to Insurance
A Freelancer’s Guide to Getting Paid on Time

As a freelancer, you probably don’t get excited when you think about bookkeeping (unless you happen to be a freelance bookkeeper). You probably just want to keep simple, clear records, and think about it as little as possible.

The good news is that this is exactly the right approach.

After all, the basic dynamic of the freelance life is that you only get paid when you are completing projects for clients. To be successful, you need to maximize the time you spend working for clients, and minimize the time you spend on admin.  

So the more complex double-entry bookkeeping systems that larger businesses use would probably be overkill for most freelancers. If you’re interested, you can read about those systems in this Bookkeeping 101 tutorial. But what I’m going to do in this tutorial is keep things simpler, focusing only on the key records you need to keep as a freelancer, and how you can organize things.

We’ll start by looking at what bookkeeping is and why it’s important. Then we’ll cover the records you need to keep, and we’ll examine some different ways of keeping track, from paper to spreadsheets to financial apps and software. We’ll also address the question of how long you need to keep all these records.

1. What Is Bookkeeping?

In a previous tutorial in this Freelance Financial Bootcamp series, you learned how to budget as a freelancer. In that tutorial, we set up a system for tracking your income and expenses and projecting them into the future.

Bookkeeping is also concerned with your income and expenses, but is different in a couple of ways.

First, it’s about the past instead of the future. We’re not trying to estimate how much we’ll make next month or next year here. We’re solely concerned with keeping accurate records of what’s happened.

Second, bookkeeping is much more granular. When we were making a budget, we focused on the totals: total income, total expenses, and whether they added up to leave a total profit. With bookkeeping, on the other hand, we need to track each individual transaction, so that we know who paid us, when they paid us, how much they paid us, and what they paid us for (and the same for expenses).

So essentially, bookkeeping is the systematic recording of the financial affairs of your freelance business. It can take many forms, and we’ll get to some of those later, but the important thing is to have a system that works for you and lets you easily keep track of how much you’ve earned and how much you’ve spent.

Why do we need such records? One important reason is for tax purposes. Filing tax returns can often be more complicated for self-employed people than it is for salaried employees, and it gets a whole lot more complicated if you have to dig through a pile of receipts and bank statements to work out how much money you made. If you have detailed, well-organized financial records, things will go a lot more smoothly. And if the tax authorities ever ask for more clarification, or even do a full-scale audit of your affairs, good records are a necessity.   

But it’s not only for the taxman that you need to keep good records. It’s also the foundation of being successful in your freelance business. Whether you’re setting objectives for your business, budgeting, planning your savings and investments, setting your prices, or anything else, you need good, solid data to work from.

2. What Records Do You Need to Keep?

So now that you know what bookkeeping is and why it’s important, let’s look at what records you need to keep.

The Basics

A simple way to look at it is this:

Every time you receive money from a client, you need to record that; every time you spend money on behalf of your business, you need to record that too.

What you need to record and how you record it may vary depending on the type of income and expense, but here are the minimum requirements:

  • who you received the money from or paid it to
  • the date
  • the amount
  • the purpose

So if you’re a freelance designer, for example, your income for August may look something like this:

Date Client Amount Details
1-Aug-15 XYZ Corp. $250.00 Logo design
5-Aug-15 ABC Inc. $1,000.00 Website rebranding
20-Aug-15 John Smith $1,750.00 Wedding invitations
And your expenses could look like this:
Date Payee Amount Details
10-Aug-15 Acme Software $500.00 Design software package
15-Aug-15 ABC Realty $500.00 Rent on office space
17-Aug-15 XYZ Stationery $200.00 Supplies for wedding invitations

Don’t worry for now about how you organize these records in a spreadsheet or elsewhere. We’ll cover that in Section 3.

More Details

As well as recording the dates, amounts and other basic data in a list, you’ll also need to keep extra details about each transaction, including supporting documents that you can refer to if necessary.

For the logo design, for example, you should keep the invoice you sent to the client, which will show the client’s full address and more information about the job itself. And you should keep a record of the payment itself, for example a bank statement showing the transfer of funds.

For expenses like the stationery supplies, you should keep the original receipt you received from the vendor. You could also keep proof of the payment if appropriate, for example a credit card statement showing the $200 being charged to your card.

The main reason to keep these extra records is so that you can always prove where your income came from, and show that your expenses were valid business expenses (for example if you’re claiming them as deductions on your tax return, and the tax authorities demand proof).

But it’s also good to keep these records for your own sake. If an old client comes back to you after a few years and wants to work with you again, it’s good to be able to lay your hands on the original invoice for the previous work, so that you can see how much you charged and how you broke it down. If your expenses are getting out of control, it’s good to be able to look at the details of where you spent your money, so that you can identify areas to cut back on.

Depending on how you organize your freelance business, you may need to keep track of extra things, like records of anybody you employed, and details of how much you used your car or your home for business vs. personal use. I can’t cover all possibilities, so for the purposes of this tutorial I’m covering general principles, and you can adapt them to your personal circumstances.

3. How Should You Organize Your Records?

We’ve looked at what you need to keep, but so far we’ve just got a couple of lists and a stack of invoices and receipts. That’s not very organized. In this section we’ll pull it together into something more workable.

The Spreadsheet Version

There are several ways of organizing your records, but I’ll start with a simple version using a very basic Excel spreadsheet.

The idea is simply to set up a spreadsheet for each year, with one tab for “Income” and another for “Expenses”. Have columns for all of the important details like date, client, amount and so on, and just fill them in as you go along. I’ve attached the template to this tutorial, so feel free to download it from the sidebar.

As spreadsheets go, of course, this is very basic. The idea is to keep it simple for now, and to make it as easy as possible for you to start recording all the relevant transactions. If you can do that, then at the end of the year you’ll at least have complete records to work from. And you can of course use the power of Excel to analyze the data, calculating your income by month, by client, by type of work, and so on. Consider this basic template as a starting point, the bare minimum of record-keeping, and customize it as much as you want.

So then what to do with all those invoices and receipts? If possible, scan them all, give them meaningful names (e.g. “XYZCorp-Logo-Apr15.pdf”, not “Scan01.pdf”!), and keep them in folders on your computer organized by year and month. So the hierarchy would look something like this:

File system hierarchy

Within each folder, you have the scanned copies of each receipt, statement or other document from that month. That way, if you need to know more about a transaction that took place on 12 April 2015, you just go to the April 2015 folder, and find the relevant document. If you have a large-scale business and a huge amount of documents, you may need to adopt a more sophisticated filing system, but this should work fine for most freelancers.

One important point to note: You need to be sure that the tax authorities in your country will accept electronic copies of documents as proof. If they demand the original paper copies, of course you’ll need to keep those. You can adopt the same principle as I’ve laid out above, but in physical form: paper or plastic folders for income and expenses each year, divided up into sections for each month.

Financial Software/Apps

I started by showing you the spreadsheet method, because it’s simple, free, and easy to implement. But there’s a huge range of financial apps and accounting packages out there, like Quicken Home & Business, FreeAgent, FreshBooks, Pulse, Xero, and many more.

The main advantage of using software or online apps is that you can do much more with the data. Many of them have a whole range of different functions, allowing you to gauge the overall health of your business, to track clients, issue invoices, set up a budget, and so on. So the data you enter can really help you understand the bigger picture, instead of being isolated in a spreadsheet. You can also attach documents in some of these packages, so you can keep all of your files in one place as well.

I won’t go into detail in this tutorial about how each piece of software works, because there are so many of them and they have so many functions, but I’d recommend checking out some of them to see what they can do. Let me know in the comments if you have a particular app or software package you’d recommend.

And whether you use a simple spreadsheet or a complex piece of accounting software, be sure to keep everything backed up securely!

4. How Long Do You Need to Keep Your Records?

So far, so organized. But exactly how long do you need to keep these records for? After all, even the most well-organized system can become unusable when it gets cluttered up with too much data. If you can digitize the records, you don’t have such a problem with storage space, but as anyone with a hard drive full of years-old files, folders and sub-folders knows, digital clutter can be a problem too.

The tax authorities in each country have rules about how long you need to keep records. In the U.K., for example, it’s five years for self-employed people. In the U.S., it’s three years in general, but longer in certain situations. Check the website of the tax authorities in your country to find out the rules where you live.

But don’t let that be your only guide. The tax rules establish a minimum period for which you need to keep records, and of course you must adhere to that. But feel free to keep them for longer if it makes sense for you.

Personally, I’ve been freelancing for almost ten years now, and I’ve kept my records going right back to the beginning. I like to be able to look back and see what I was working on back in 2007, who I was working for, how much I was charging, and so on. I don’t actually do it very often, but I like to know the records are there! Because they’re well organized, they don’t take up much space, and I keep the old records separate from the newer ones so there’s no confusion. 

If you’re like me, then just make sure you keep everything well organized, and keep it for as long as you like! If not, feel free to conduct a purge as soon as the minimum holding period for tax purposes has expired.

Next Steps

In this tutorial you’ve learned how to keep basic records of your financial transactions as a freelancer. You’ve seen which records you need to keep, how to keep them and organize them, and how long you need to keep them for.

The next step is to pick a system you like, and implement it. Whether you choose a basic spreadsheet solution, an online bookkeeping app or a complex accounting software package is up to you. You could even type up your transactions on a typewriter and staple the receipts and invoices to the page if that’s a system that makes sense to you. The important thing is to have a system that you can follow easily, and then follow it, for every single transaction.

It may sound boring, but it pays off in the long run. The system I’ve laid out is quite simple, and recording a single item of income only takes a few seconds. But when you come to file your tax return at the end of the year, you’ll save a huge amount of time from having everything well organized and easy to access. So get started today, and enjoy the fruits of your careful bookkeeping in the future!

And stay tuned for the next tutorial in this series, in which we’ll look at a subject close to most freelancers’ hearts: getting paid on time.


Graphic Credit: Ledger icon designed by Musket, US from the Noun Project.

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