Bookkeeping Using Online Accounting Software

The easiest way to do your bookkeeping is to use online accounting software. It automates a lot of the bookkeeping for you, so you don’t need to be an accounting expert. You can also get free online accounting software, so it’s worth giving it a try to do your bookkeeping. Also, if you’re a sole trader or landlord, you will have to use some sort of software from April 2024. So you might as well use online accounting software for everything. This is our general guide on how to use online accounting. For specific guides see our software reviews.

online accounting software
Traditional Cashbook. Photo by Pixabay


Getting your bank transactions in

The heart of any online accounting software is the banking and this is where the investment really pays off. Most online accounting software can automatically import your bank transactions – they just appear! If not you can download a CSV/Excel bank statement from your online banking, then upload it into your online accounting software. Otherwise, you can manually enter transactions but that’s not going to save you any time.

Dealing with your bank transactions

Once your transactions are on the software, you then need to tell the software what to do with each transaction. We call that categorising it, but others call it explaining, reconciling, adding, tagging, labelling. Whatever it’s called it’s the process of allocating that transaction to the correct place or ‘account’. That could be Sales for income. Payments could be to Telephone, Travel, Rent, Materials, Wages etc. There are some really nifty timesaving tools in this part of the process. Some online accounting software learns from what you did with a similar transaction before and automatically suggests doing the same again. Some also allow you to set up bank rules, where if a transaction meets the criteria you set, e.g. the payee is Vodafone, the software will automatically put it to the Telephone account with standard rate VAT selected.

online bookkeeping software
Dealing with transactions (Xero)

Checking that the bank is reconciled

The bank balance on the online accounting software at any date, should always agree with the bank balance on your bank statements at the same date. This is what we mean when we say the bank is ‘reconciled’. If you have an automatic bank feed, you still need to regularly check that the bank is reconciled, very occasionally the feed has gaps and duplications. This can also happen if you import bank statements using a CSV/Excel file – overlapped or missing transactions. It easily happens if you enter bank transactions manually. Some online accounting software has a separate Reconciliation feature, where you enter the bank balance for a date then compare/tick off the transactions on the software until it agrees. Others, like Xero, does it all together so you effectively reconcile the bank as you categorise the transactions.

Check the bank balance agrees with statement balance – it doesn’t here (Xero)



It’s a really good idea to create your sales invoices using the online accounting software for several reasons. By doing this, you’re updating your online accounting software with the sales you’ve made. So it saves you from recording your sales again. A lot of online accounting software has an app you can use on your phone or tablet. So you can create a sales invoice while you are away from your computer before you forget! You can also email the sales invoice to customers and set up a payment service so the customer just clicks a button on the invoice to set up a payment. To save you from chasing payment, you can set up automatic reminders to do that for you. Finally, can run a report to show you exactly who owes you money, email statements, and chase customers yourself if necessary.

When you receive the money into the bank account, you need to match the income against the sales invoice. If you categorise the income to sales, you will have a duplicate amount in sales and an unpaid sales invoice.

Entering sales invoices is usually very easy, and looks just like a conventional invoice. Just complete all of the boxes in the usual places then click save.

Sales invoice (Xero)


You should also be able to enter purchase invoices (or bills). This will help you keep an eye on how much you owe to suppliers. Similar to sales, you will need to match bank payments to the bill rather than categorising the bank payment to the type of expense. Otherwise you will end up with a duplicate cost, and an unpaid bill.

Entering bills is usually very easy. Some online accounting software use a bill layout so you know exactly what to enter where, others use a one line format to make it quicker to add more than one bill.

Payroll using Online Accounting Software

Why use the built in payroll?

Most online accounting software has a payroll facility. You might need to upgrade or pay for an add-on to use it. The advantage of using the payroll provided with your online accounting software is that it does the bookkeeping for you. It will put the wages, NI, and pension costs to the appropriate cost category. It also puts the amounts payable to the appropriate liability category. So it gives you accurate accounts without the need to make manual adjustments called journals.

Avoid duplication

If you use the payroll facility, or if you use journals, the actual bank payments will need to be categorised to the liability account, such as wages payable. Otherwise, you will end up with duplicate amounts in the cost account.

How to use the payroll facility

Using the payroll facility isn’t as easy as banking or invoicing. So we suggest you watch or read guidance provided by the software. You will need to enter general settings such as the reference numbers, pay calendars, whether the employment allowance can be claimed etc. Then you will need to add employees with all of their data and pay details. Once set up, every month/week you will start a ‘payrun’ check the pay and deductions for each employee, then update it. The software will normally automatically send the necessary reports to HMRC. You will need to send payslips to employees and physically pay employees and HMRC.


There are various reports you could run to help you check the bookkeeping looks ok, and to see how well the business is doing. You will be able to set the report dates to the period or day you want to look at.

Profit and loss account

The profit and loss account, or the income and expenditure report, shows you all of the sales, income, and costs of a business. Use this to see how much profit the business has made, to estimate how much tax you might have to pay. You can also check that there are no obvious errors with the bookkeeping e.g. are sales double what they should be because you use sales invoices and the bank income also goes to sales?

online bookkeeping software
Profit and Loss (Xero)

Balance sheet

The balance sheet lists all of the amounts that the business owns, is owed, and owes, on a particular date. It owns equipment, stock, bank accounts. Customers usually owe money to the business (trade debtors), and suppliers might owe services to the business (prepayments). The business could owe suppliers money (trade creditors), owe customers services (deferred income), owe HMRC money (taxes payable), and owe the owners money (directors loan account, shares, profit reserves). You can use the balance sheet to check that the balances are what you expect them to be. For example, the bank balance agrees with bank statements, and trade debtors agree with how much you think customers owe you. If you’re a company, you can also use the ‘retained earnings’ at the bottom to judge how much profit reserves are in the company from which you can pay dividends.

Balance sheet (Pandle)

Aged Receivables and Payables

Aged receivables, aged debtors, amounts receivable, are all the same thing. They list the amounts that customers owe to the business as at a certain date. It is usually retrospective, so if the customer has paid an invoice after the report date, the invoice will still show as unpaid on the report. Aged payables, aged creditors, amounts payable reports are all the same as above except it shows the amounts owed to suppliers. You can use this report to check that the bookkeeping has been done correctly. The amounts shown should agree with reality.


To various degrees of usefulness, the cashflow report should show how much money has come into and gone out of the business, and where. It will be similar to a profit and loss account except it is based on the payment of invoices and ignores the invoices. You could use this to help explain why your bank balance has changed. For example, you’ve made a profit but the bank balance is much lower, the cashflow reports shows that the money received from customers is lower, and the amount of tax paid is higher.

VAT returns

Using online accounting software makes it very easy to submit your VAT returns. You just need to make sure you select the correct VAT rate as and when you enter transactions. Then check the details on the VAT return before clicking ‘submit’ to HMRC.

General ledger

The general ledger lists all of the transactions grouped by account/category for the dates selected. This is useful report to check that every transaction has been put to the correct account.

Other useful features of online accounting software

Depending on which online accounting software you use there may be other features to help you with the bookkeeping.


Your software may provide a mobile app as well as the full desktop version. The app will be useful for updating things while away from your desk. Such as reconciling bank transactions, creating and sending invoices, taking a photo of receipts and bills.


An expenses facility is a useful way of adding the costs that you incur personally. Such as business mileage and travel costs. However, if it costs extra there are other ways to make this easy, such as setting up a ‘dummy’ bank account just to enter your expenses.

Stock management

If you buy and sell stock, you may want to make use of the stock or inventory management feature. This will automatically update the number of items you have when you buy and sell them. You can also enter values so the invoices are easier to create, and you can get a value of the stock held.


Journals are manual adjustments to your accounts. You usually wouldn’t need to use this but it could come in handy. If you find a mistake in your bookkeeping, rather than correcting lots of transactions it could be easier to make an adjustment. However, you need to know your debits from your credits! Debits increase a cost account, reduce an income account, increase an asset account, and reduce a liability account. Credits do the opposite of the above. Every journal needs to have total debits that equal total credits, so that the accounts stay balanced.

Journal (Xero)

Fixed Assets

Fixed assets are the things used by the business in the long term. Such as a van, a computer, big tools, office furniture. If you’re keen to keep a list of the business’s equipment, you could use a fixed assets feature. This should be tied in with the payments/bills that you’ve categorised to a fixed asset account (e.g. computer equipment). So hopefully, you just need to add a few details, then add the item to the list. Then if you’re really keen, you can set up the depreciation adjustments. Depreciation is an adjustment that reduces the value of the fixed asset and reflects that as a cost to the business. So the full cost of the equipment isn’t shown on the profit and loss account straight away, it is spread out over several years.

online bookkeeping software
Fixed assets (Xero)

Chart of accounts

This is the list of all of the accounts/categories used by your online accounting software to do the bookkeeping. Here, you can edit the accounts (name, VAT rate), add new ones, or remove ones you don’t need. If you add new ones, check that you select the correct type (e.g. income, costs, asset, liability).


Hopefully you have found this a useful general guide on using online accounting software to do your bookkeeping. If you have any questions you can ask us or your particular software provider.