Why Freelancers Should Keep Bookkeeping Records
Independence comes at a cost. So, is the case with freelance professionals. Freelancers are able to enjoy independence in choosing the working hours and in short, flexibility with regards to almost everything. But this comes at a cost. The burden of doing everything heaps into freelance professionals.
Freelancers may have to outsource their ancillary works helping in their core work expertise or they may decide it to do it themselves. One such work is maintaining finance or bookkeeping records.
Freelancers may outsource the work to professional bookkeepers if the records are vast. It is however best suited to small freelancers to maintain records themselves as the financial records are less complicated.
Bookkeeping can be challenge specially for freelance web designers or developers. This can be reduced due to the use of bookkeeping software which makes financial complications specially bookkeeping easy and simple. It comes handy to the finance and accounting freelancers though.
Freelancers should have basic bookkeeping knowledge not only to comply with tax legislation but also other aspects which goes hand to hand in establishing a healthy business. I have shortlisted some important reasons why freelancers should keep bookkeeping records.
Receivables and Payables Management
Unless you are working in a Fiverr or Upwork or similar freelancing sites, it is necessary to know the due date regarding the receivables and when the expenses have to be made to assist in providing freelance services. It helps to keep you stay on top of accounting. This does help when you do bookkeeping on regular basis.
Let me give you an example. Suppose Mr. X is a client who has ordered you to design a WordPress website within 5 days. The payment shall be made with 5 days of completion. Considering you have number of clients, it can be assumed that you may forget the amount to be received in that time. In such cases, bookkeeping comes in handy. It helps and specifically states the day on which amount is to be received from clients. There are various bookkeeping software which has alarm features regarding payments to be made and received.
Bookkeeping helps freelancers to keep track of all the essential financial activities. It gives an eagle eye view of all the accounting records. I have here referred better organization with respect to effectiveness and efficiency in tracking outstanding bills, billing the clients, managing cash flows and other similar activities.
In many cases, it is seen that bookkeeping records are used as financial tool to spot the inefficient activities and cutting costs on the same. If bookkeeping activities are outsourced, freelancers would obviously have more time to focus on their core business purposes.
Tracking Income and Expenses
It is necessary for freelancers to track income and expenses as some of these are incurred on an hourly basis. The various expenses such as expenses on bank transfers, power utility, travel expenses, rent, internet bills, office supplies, etc. have to be tracked regularly so as to arrive at a fair profit and loss statement. At the end of the day, freelancers can easily see how much money they have made working on a particular project after incurring all the expenses.
There are various bills which need to be kept as a copy. Some expenses include utility bills, bills of good amount, traveling expenses, etc. Keeping copies of expenses incurred is a prudent idea. However, it is not necessary to have bills of all the petty expenses incurred. Maintaining petty cash account is however necessary to reflect better financials.
The tracking of all the freelance related expenses helps the freelancers to keep taxes in check. If expenses are not tracked properly, freelancers may end up paying higher income taxes. Freelancers are also associated with various taxes like a normal profession.
There are certainly various direct and indirect taxes involved in freelance business. The most regular taxes associated is service tax and income taxes. When the bookkeeping is made on regular basis, it is easier for estimating taxes quarterly or annually as the case may be. It is due to the fact that all incomes and expenses are tracked as well.
Safeguards from Compliance Violations
It is a felony not to keep bookkeeping records when it is mentioned in laws and regulations that you should. There are various fines and penalties associated with non-compliance. So, regular payment of taxes like service taxes and income taxes would help you to avoid interest on delayed payment and strict cases penalty due to non-compliance.
The tax department may scrutinize your accounting records when they have doubt on the integrity of your filing of returns with them. In such cases, bookkeeping records act as a tool to help you to comply with tax officials and clear their doubt. It is also therefore healthy to avoid any unseen obstacles regarding taxation and legal aspects.
Let me give you an example. If tax officials suspect that you are violating tax laws and not paying taxes appropriately, they may knock at your door anytime making search and seizures of your accounting records. In that time, to prove your innocence is that you must have appropriate financial records.
This is only thing that can help you clear your name off. Tax officials even check random tax payee to ensure tax compliance. It is only matter of coincidence; your tax return might be scrutinized by random. Hence, it is always safe to have accounting records made periodically.
Many freelancers regularly use accounting/bookkeeping software such as xero, QuickBooks, tally, etc. Freelancers having less work can prefer to maintain records in excel too which is handy to use. Establishing a system to record financial data is strictly necessary to lead better freelance work.
Once, bookkeeping habits are known, establishing bookkeeping system is easy. It is necessary that freelancers keep records either in cash or mercantile basis. Specified limits have been stated in laws that cash basis of bookkeeping is allowed up to that limit of business done.
After that, mercantile system of accounting shall be made. Once these aspects are factored into, activity of managing income and expenses with better time management will be second nature to you.