What should my first year accounts include as a sole trader?

What first year accounts mean for a sole trader

Your first year as a sole trader can feel like a juggling act: finding customers, delivering work, keeping an eye on cash flow, and learning what “accounts” actually means in practice. When people ask what first year accounts should include, they usually mean two related things: (1) what records you must keep during the year, and (2) what you should produce at the year end so you can understand performance, complete your tax return, and show evidence to banks, landlords, or suppliers if needed.

As a sole trader, your business and you are legally the same person. That doesn’t mean your finances should be messy; it means the accounting is usually simpler than a limited company’s statutory accounts. Your first year accounts are best thought of as a tidy, well-supported summary of everything your business earned and spent, plus the key details needed to calculate your taxable profit and submit the right information to the tax authority.

This article walks through what your first year accounts should include, why each part matters, and how to build a solid accounting pack even if you’re starting from zero.

Start with your accounting period and “year end”

Before you can decide what your accounts include, you need to know the period they cover. For a first year, you might trade for a few months or nearly a full year before you prepare your first set of accounts. Your “year end” is the date you choose to stop and summarise the year’s activity. Many sole traders choose a year end that fits neatly with the tax year or that aligns with quieter months in their business.

Your first year accounts should clearly state the start date and end date of the period. That might be the date you began trading to your chosen year end, or a full 12 months if you happened to start at the beginning of a convenient period. Clarity here helps you (and anyone reviewing your figures) understand why the totals are what they are.

The backbone: income records (sales and turnover)

The most fundamental element of your accounts is a reliable total for income. Depending on your type of work, this might be called sales, fees, turnover, or revenue. Your first year accounts should include the total business income earned in the period, supported by records that explain where it came from.

What counts as income?

Income is typically what you charge customers for goods or services. It can also include other business-related receipts such as commissions, referral fees, service charges, or certain grants (depending on their nature). If you receive tips or small cash payments, these can also be part of income. The key idea is that your accounts should capture all money earned through trading activities, whether paid immediately or invoiced and paid later, depending on your accounting method.

Documents and evidence to keep

To support the income figure in your accounts, you should keep a clear trail such as:

- Sales invoices you issued (or till receipts / online order confirmations for retail)

- Payment confirmations (card receipts, payment processor reports, bank statements)

- A sales log, spreadsheet, or accounting software report summarising each sale

Even if you operate mainly in cash, you still need a record of each sale. Your first year accounts are stronger when they can be traced back to individual transactions.

Gross vs net income and what to show

A practical first year accounts summary often shows total income as a single number, but it’s useful to also keep a breakdown by customer, product line, or service type. This helps you spot what’s working and what isn’t. If you charge sales tax/VAT or similar indirect taxes (where applicable), your accounts should separate the tax element from your true income, because the tax portion is collected on behalf of the authority rather than earned by you.

Cost of sales (if you sell products or use direct materials)

Not every sole trader needs a cost of sales section. If you provide services with minimal direct costs (for example consulting or design work), most of your expenses will sit in overheads instead. But if you sell physical products, manufacture items, or buy materials specifically for jobs, your first year accounts may include “cost of sales” (also called “direct costs”).

Cost of sales commonly includes items that directly relate to producing what you sold, such as stock purchases, raw materials, packaging used for specific orders, or subcontractor costs tied to a particular project. Some businesses also include delivery costs for sending goods to customers as a direct cost, depending on how they price and track shipping.

Why cost of sales matters

Splitting cost of sales from other expenses allows you to calculate gross profit (income minus direct costs). Gross profit is a helpful measure because it tells you whether your pricing and direct costs make sense before you consider rent, phone bills, marketing, and other overheads.

Allowable business expenses (your overheads)

Expenses are the costs you incur to run your business. Your first year accounts should include a sensible categorisation of these costs, and ideally totals for each category. This makes it easier to understand profitability and to complete your tax return accurately.

Common expense categories to include

While the exact categories vary by business, first year accounts for a sole trader often include totals for:

- Advertising and marketing (website, ads, printing, social media spend)

- Professional fees (accountant, solicitor, consultancy)

- Insurance (public liability, professional indemnity, equipment cover)

- Office costs (stationery, postage, small consumables)

- Telephone and internet

- Travel (fuel, public transport, parking, accommodation for work trips)

- Vehicle costs (if you track actual costs rather than mileage, where applicable)

- Software subscriptions and online tools

- Training and courses (where business-related)

- Rent, utilities, and premises costs (if you have an office, workshop, or studio)

- Repairs and maintenance (tools, equipment, work premises)

- Bank charges and payment processing fees

- Wages to employees (if you employ staff) and any related costs

- Subcontractors and freelance help

- Interest on business borrowing (where applicable)

Evidence to keep for expenses

For each expense, your accounts should be backed by evidence such as receipts, supplier invoices, contracts, and bank statements. If you pay in cash, keep the receipt and note what it was for. If you pay online, keep the invoice or email confirmation. A strong habit in your first year is to store everything in one place, labelled by month and category, so you can recreate your accounts easily.

Separating business and personal spending

Because a sole trader and the business are the same person, it’s common in the first year to accidentally mix personal and business purchases. Your accounts should exclude purely personal expenses. If an item is partly business and partly personal (such as a mobile phone plan, broadband, or a vehicle used for both work and home life), your accounts should include only the business portion. That portion should be reasonable and consistent with your usage.

In practice, your first year accounts should include a note in your working papers (even if not in the final summary) showing how you calculated any split. For example, you might claim 60% of your phone bill based on estimated business use, or use mileage logs to calculate business use of a vehicle.

Capital purchases and equipment (assets vs expenses)

One of the biggest first-year confusions is whether a purchase is an “expense” or an “asset.” If you buy something that will last and be used over time—like a laptop, camera, specialist tools, or machinery—that often counts as capital expenditure rather than a day-to-day running cost.

Your first year accounts should still include this information, but it may appear differently depending on local tax rules and how you prepare your accounts. For internal management purposes, it’s helpful to list key assets purchased during the year, including the date, cost, and what they’re used for. This creates a clear picture of what the business owns and helps you plan replacements and upgrades.

Why tracking assets matters from day one

Even if your accounts for tax purposes allow immediate deductions for certain equipment under special rules, you should still keep an asset register in your first year records. This prevents confusion later when you sell an item, stop trading, or need to prove ownership for insurance claims.

Stock and inventory (if relevant)

If your business sells goods, your first year accounts may need to include stock. Stock is what you have on hand at the end of your accounting period that you haven’t sold yet. This matters because your profit for the year depends not only on what you bought, but also on what you sold and what remains unsold.

Good first year accounts include a stock figure as at the year end, supported by a stock count or inventory list. Even a simple inventory sheet with item names, quantities, and estimated costs can significantly improve the accuracy of your profit calculation.

Debtors, creditors, and timing differences

Your accounts can be prepared using different methods. Two common approaches are:

- Cash basis: you record income when you receive money and expenses when you pay them.

- Accruals basis (traditional accounting): you record income when you earn it (issue an invoice or deliver the service) and expenses when they are incurred, even if you pay later.

Whichever approach you use, your first year accounts should be consistent and clear. If you use accruals, you may need to include:

- Debtors (accounts receivable): money customers owe you at year end

- Creditors (accounts payable): bills you owe suppliers at year end

- Accruals: expenses incurred but not yet billed or paid

- Prepayments: expenses paid in advance that relate to the next period (for example annual insurance paid upfront)

Even if you use cash basis for tax, it’s still useful to keep a list of unpaid invoices and outstanding bills. It helps you manage cash flow and follow up on late payments.

Bank, cash, and payment reconciliations

Strong first year accounts are built on reconciled records. That means your sales and expenses totals should tie back to real-world evidence. One of the best ways to do this is by reconciling your bank account and cash movements.

What a reconciliation does

A bank reconciliation is a check that the transactions in your bookkeeping match the transactions on your bank statements for the same period. It helps you catch missing receipts, duplicated entries, and timing differences (like payments that have not yet cleared). If you take cash, a simple cash reconciliation can help you confirm that cash sales and cash expenses make sense and have been recorded properly.

Payment platforms and merchant accounts

If you use payment processors (such as card machines or online payment platforms), your first year accounts should include records of gross receipts, fees, chargebacks (if any), and net deposits to your bank. These platforms often produce monthly statements that are ideal evidence.

Owner’s drawings and personal contributions

In a sole trader business, you don’t pay yourself a salary in the same way an employee would. Instead, you usually take money out of the business as drawings. You might also put money into the business to fund start-up costs, cover a cash shortfall, or buy equipment. Your first year accounts should track both drawings and personal contributions clearly.

Tracking drawings matters for understanding how much cash the business generated versus how much you withdrew to live on. Tracking contributions matters because it explains where the business’s funding came from, especially in the early months when expenses can exceed income.

Home working costs and use of home as office

Many sole traders begin by working from home. If that’s you, your first year accounts can include a reasonable amount for home working costs, depending on the rules that apply to your situation. These costs might relate to electricity, heating, broadband, rent or mortgage interest, council tax, or home insurance, typically apportioned based on business use.

To keep your accounts robust, record how you calculated the business portion. For example, you might base it on the number of rooms used for work and the time they’re used, or apply a simplified method if one is available to you. The important part is consistency and evidence.

Business travel and mileage logs

Travel costs can be a major expense category, and they’re one of the areas where record-keeping matters most. Your first year accounts should include either:

- A mileage log (date, destination, purpose, miles) if you claim mileage, or

- Actual vehicle running costs with a business-use percentage if you claim actual costs

Also keep supporting evidence for parking, tolls, train tickets, flights, and accommodation where they relate to business trips. Add a short note on the business purpose. That tiny detail can be incredibly helpful months later when you’re finalising accounts and can’t remember why you stayed in a hotel on a random Tuesday.

Subcontractors, freelancers, and labour costs

If you outsource parts of your work, your first year accounts should clearly show payments to subcontractors or freelancers. Keep contracts, invoices, and proof of payment. It’s also useful to keep a brief note on the project or service they supported, especially if you work with multiple subcontractors across different jobs.

For businesses where labour is a major cost, separating subcontractor costs from other general expenses makes it easier to see the true margin on work delivered.

VAT or sales tax records (where applicable)

Not every sole trader is registered for VAT or a similar sales tax system. But if you are registered, your first year accounts should include a clear record of:

- Output tax charged on sales

- Input tax paid on purchases (where recoverable)

- Returns filed and payments made

In practical terms, your accounts should be able to produce totals that match your VAT returns for the period. Even if you use software to file returns, keep copies of submitted returns and any correspondence related to registration or inspections.

Payroll records (if you have employees)

Many sole traders start without employees, but if you hire staff during your first year, your accounts should include payroll records such as wage summaries, payroll reports, and evidence of tax and social contributions paid. Also keep employment contracts, timesheets (if relevant), and documentation for any benefits provided.

Payroll adds complexity, so your first year accounts pack should separate gross wages, employer costs, and any other staff-related expenses like uniforms or training.

Bad debts and refunds

Sometimes customers don’t pay, or you need to refund them. Your first year accounts should include a sensible treatment of these situations. Practically, keep a list of unpaid invoices, your attempts to collect, and any decisions you made to write off amounts that are genuinely uncollectable. For refunds, keep the original invoice, the refund confirmation, and a note explaining why it was refunded.

Tracking these properly helps you understand whether non-payment is a one-off issue or a sign you need to tighten payment terms, deposits, or customer screening.

Year-end summary statements to include

When people talk about “accounts,” they often expect a set of statements. For a sole trader, your first year accounts should typically include, at minimum, a profit and loss summary. Depending on your needs, you may also want a simple balance sheet-style summary and notes.

Profit and loss statement (income and expenses)

This is the core of your first year accounts. It should show:

- Total income for the period

- Less cost of sales (if applicable)

- Gross profit (if applicable)

- Less overhead expenses (by category)

- Net profit (or loss) for the period

Even if you don’t produce a formal document, you should be able to print or export a report that shows these totals clearly.

Balance sheet-style snapshot (optional but useful)

While a sole trader may not be required to produce a formal balance sheet in the same way a company does, it can be extremely useful to create a simple snapshot at the year end that shows:

- Business bank balance and cash on hand

- Money owed to you (unpaid invoices) if you track it

- Money you owe (unpaid bills) if you track it

- Major equipment and assets purchased (with an approximate remaining value if you track depreciation)

- Any loans or finance agreements related to the business

This snapshot helps you understand liquidity and obligations, and it can be handy if you apply for a loan or rental agreement.

Supporting schedules and notes (your “working papers”)

Your first year accounts should include supporting schedules such as:

- A list of fixed assets purchased

- Stock count sheets (if applicable)

- Mileage logs and travel summaries (if applicable)

- Home office calculation notes (if applicable)

- Aged receivables list (who owes you and how long it’s been outstanding)

- Aged payables list (who you owe and when payment is due)

These don’t need to be fancy, but they should exist. If your accounts are ever questioned, these schedules often do most of the heavy lifting.

Taxable profit vs cash in your pocket

One of the most important lessons in a sole trader’s first year is that profit is not the same as cash. You can be profitable on paper and still feel broke if customers pay late, if you invested heavily in equipment, or if you took large drawings. Conversely, you might have cash in the bank but have a tax bill coming because the business earned more than you spent during the period.

Your first year accounts should help you bridge this gap by making it easy to see:

- How much profit the business generated

- How much you withdrew as drawings

- Whether you have money set aside for tax

- Whether unpaid invoices are making cash flow look worse than performance

If you do only one extra thing beyond basic bookkeeping, make it this: keep a simple tax reserve calculation alongside your accounts so you’re not caught off guard.

Choosing a bookkeeping system for your first year accounts

How your accounts look depends on how you keep records. In your first year, the simplest workable approach is the one you’ll stick to consistently. Many sole traders use spreadsheets; others use accounting software; some use a bookkeeper who uses software on their behalf.

Minimum viable record-keeping

At minimum, your first year records should include:

- A sales record (invoice number/date, customer, description, amount, payment status)

- An expense record (date, supplier, category, amount, payment method)

- Storage for receipts and invoices (digital folders are fine if organised)

- Bank statements (download monthly PDFs and keep them safe)

From that, you can build your profit and loss summary and maintain a clear audit trail.

Why monthly routines make year-end painless

If you wait until the end of the year to organise everything, your first year accounts can feel overwhelming. A monthly routine—reconciling the bank, uploading receipts, sending overdue invoice reminders, and updating your sales log—keeps the workload small and your numbers accurate.

What lenders, landlords, and partners often want to see

Even if you are preparing accounts mainly for tax purposes, it’s common for third parties to ask for evidence of income and stability. Banks might request accounts to support a mortgage application, and landlords might ask for proof of earnings. A potential business partner might want to understand performance before collaborating.

For these audiences, your first year accounts are stronger when they include:

- A clear profit and loss statement for the period

- A short narrative explaining the business model and any unusual first-year costs

- Evidence that the figures tie to bank statements (reconciliations)

- A view of ongoing work (pipeline), if you can summarise it responsibly

The narrative matters because first-year results can be distorted by start-up costs, one-off purchases, or a ramp-up period. Explaining these factors makes your numbers easier to interpret.

Common first-year accounting pitfalls and how to avoid them

Many first-year issues are predictable. Avoiding them can save money, stress, and potential tax trouble.

Forgetting small income streams

It’s easy to track big invoices and forget small payments, tips, or platform payouts. Make sure your accounts capture everything by cross-checking sales logs against bank deposits and payment processor statements.

Losing receipts and relying on memory

Memory is not a record. Create a habit: photograph receipts immediately and file them into a dated folder. If a receipt fades or gets lost, you’ll be glad you captured it early.

Mixing personal and business spending

Using one bank account for everything makes bookkeeping harder and increases errors. If you can, use a separate business account. If you can’t, be disciplined about labelling transactions and keeping personal purchases out of business categories.

Not tracking what customers owe

Cash flow problems often come from slow-paying customers. Keep an invoice list with due dates, and follow up consistently. Your accounts will be more accurate and your bank balance healthier.

Misclassifying equipment purchases

Big purchases can distort your profit if you treat everything as a regular expense without thinking. Keep an asset list and note which purchases are long-term equipment. Even if your tax treatment allows a full deduction, the asset list provides clarity.

A practical checklist: what your first year accounts should include

Here’s a practical checklist you can use to ensure your first year accounts are complete:

- Accounting period start and end dates

- Total income figure with supporting sales records

- Cost of sales totals (if applicable) with purchase and stock records

- Expense totals by category, supported by receipts and invoices

- Bank statements for the full period and a reconciliation summary

- Cash records (if you take cash)

- Payment processor statements (if applicable)

- List of assets/equipment purchased (asset register)

- Stock count at year end (if applicable)

- List of unpaid customer invoices (debtors), if you track it

- List of unpaid supplier bills (creditors), if you track it

- Notes for any splits between personal and business use (phone, internet, vehicle, home office)

- Mileage log or vehicle cost calculations (if applicable)

- VAT/sales tax records and returns (if applicable)

- Payroll records (if applicable)

- Drawings and personal contributions summary

- Final profit and loss summary showing net profit or loss

How detailed should first year accounts be?

Detail is a balance. Too little detail makes your accounts unreliable and hard to defend. Too much detail can waste time. A good rule in the first year is: include enough detail that you can explain any number quickly and prove it with evidence. That typically means clear categories, neat records, and supporting schedules for anything that involves estimates (like home office use) or timing differences (like unpaid invoices).

If you’re new to bookkeeping, aim for slightly more detail than you think you need. You can always simplify in year two once you understand what information is genuinely useful.

When to get professional help

Many sole traders can assemble first year accounts themselves, especially if the business is small and transactions are straightforward. But professional help can be valuable if:

- Your income streams are complex (multiple platforms, foreign currency, mixed services and products)

- You have significant equipment purchases or financing agreements

- You register for VAT/sales tax or hire employees

- You’re unsure about what’s allowable and what’s personal

- You want your accounts presented in a way that supports lending or investment applications

Even a one-off consultation can help you set up categories correctly and avoid repeating mistakes for the rest of the year.

Building good habits that carry into year two

Your first year accounts are not just a compliance exercise; they are the foundation for better decision-making. If you build accurate accounts, you gain the ability to answer questions like:

- Which services or products are most profitable?

- How much should you set aside for tax each month?

- Can you afford to invest in new equipment or outsource work?

- Are your prices high enough to cover your true costs?

- What months are busiest, and when should you plan for quieter periods?

In year two, those insights become even more valuable because you can compare performance across periods and spot trends.

Final thoughts: what “good” first year accounts look like

Good first year accounts for a sole trader are clear, complete, and supported. They don’t have to be complicated or beautifully formatted. They should simply tell the story of your first year: what you earned, what you spent to earn it, what you invested in, and what the end result was.

If your accounts include a clean profit and loss summary, reliable supporting records, sensible treatment of mixed-use costs, and a reconciliation to real bank activity, you will have done the most important things right. From there, you can refine, streamline, and improve your process as your business grows.