What records does a sole trader need to keep?
Sole traders do not have to file accounts with a public body (like Companies House for limited companies). However, they should prepare a balance sheet and profit & loss account each year. Maintaining proper records enables you to manage your business, but also provides an audit trail for tax purposes.
By law you must keep records of all business income and expenditure, and should keep these records for 5 years from the latest date of sending back your tax return.
It is advisable to have separate bank accounts for your personal and business dealings. If you don't have separate accounts you must keep clear records of what is personal or to do with your business. This applies equally to business and personal cash. Keep both a cash book (summary and analysis of bank account entries, cash receipts, payments and drawings) and a petty cash book.
If your business involves stock (and work in progress) you should carry out a stock taking exercise at the end of the accounting year, and keep a record of this.
If you are employing people you'll need to keep a record of everything paid to them, including wages, expenses and benefits.