Accounting and bookkeeping for small business – a small business accounting guide - Robinsons London

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Accounting and bookkeeping for small business – a small business accounting guide

Accounting & Bookkeeping

This post is just one part of a 12-part small business accounting guide to setting up a new business. Download the full business set-up guide to discover everything you need to know about satisfying HMRC and steering clear of any unwanted penalties and fines. 

Most operators of a new and growing business have a flair for the environment in which the business operates. They may be a great salesperson, an outstanding mechanic, carpenter, solicitor, or inventor. Unfortunately, most people don’t like to keep the books. As an owner of a business, you must remember that your company’s books and financial statements represent a score sheet which tells how you are progressing, as well as an early warning system which lets you know when and why the business may be going amiss. Financial statements and the underlying records will provide the basis for many decisions made by outsiders such as banks, landlords, potential investors and trade creditors, as well as taxing authorities and other governing bodies. The necessity for good, well-organised financial records cannot be over-emphasised. One of the greatest mistakes made by owners of small businesses is not keeping good financial records and making improper or poor business decisions based on inadequate information.

Quality financial information does not necessarily translate into complicated bookkeeping or accounting systems. Far too often owners of businesses become overwhelmed by their accounting system to the point where it is of no use to them. An accounting or book-keeping system is like any tool used in your business; it needs to be sophisticated enough to provide the information you need to run your business and simple enough for you to run it (or supervise the book-keeper). Questions you should ask in developing an accounting and financial reporting system are:

  1. Who will be the users of the financial information?
  2. What questions do I need answered to manage the business?
  3. What questions should be answered for HMRC authorities? It should be noted that HMRC are increasingly making Business Records Checks of those businesses they reckon could have poor records

As your business grows, you should work closely with your accountant to ensure that your accounting system is providing you with appropriate information.

The Government proposes to require businesses to submit accounts information to HMRC quarterly as part of the “Making Tax Digital” project. This is planned to start for some businesses in 2018 and you should consider a computerised accounting package from the outset that enables you to comply with this new obligation. We can advise on the most suitable accounting software for your business.


Chart of Accounts

The basic road map into any accounting system is the chart of accounts. It is this chart that helps establish the information that will be captured by your accounting system, and what information will subsequently be readily retrievable by the system. This tool, like the rest of the accounting systems, needs to be dynamic and should grow as the size and needs of your business changes.

To help establish a good working chart of accounts you need to answer some questions, in conjunction with your accountant, as to how your business will operate and what is important to you. Some of these considerations might be:

  1. Will your business have stock to account for? If so, will it be purchased in finished form or will there be production costs?
  2. Are fixed assets a significant portion of your business?
  3. Will you sell only one product or service or will there be several types of business?
  4. Will you have accounts receivable from customers, which you will have to track?
  5. Are you going to sell in only one location or will you do business in several places?
  6. Are the products you sell subject to value added tax?
  7. Do you need to track costs by department?
  8. What type of government controls or regulatory reporting are you subject to?

Each one of these questions can have several answers and will probably generate more questions. Each answer will have an impact on how the chart of accounts is structured. It may seem that developing a chart of accounts is not particularly high on your list of things to do as you start a new business. The amount of time and money a well organised accounting system may save you can be significant as the need to generate information for various purposes increases. An example of a basic chart of accounts follows this section.


Cash or Accrual Accounting

One of the decisions to be made as you start a business is whether to keep your records on a cash or accrual basis of accounting. The cash basis of accounting has the advantage of simplicity and almost everyone understands it. Under the cash basis of accounting, you record sales when you receive the money and account for expenses when you pay the bills. The increase in the money in “the cigar box” at the end of the month is how much you have made. Businesses may choose to report their profits on a cash basis for tax purposes if their annual turnover is below £150,000.

Unfortunately, as we all know, the business world is not always so easy. Sales are made to customers and you sometimes must extend credit. Your business will incur liabilities which are due even though you may not have received the invoice or have the cash available to pay them.

Most users of financial statements such as bankers and investors are used to accrual-basis statements and expect to see them. Once you become familiar with them, they provide a much better measuring device for your business operations than cash-basis statements.

Whether you use the cash or accrual basis, it is possible to keep books for income tax purposes on a different basis than for financial statements. It may be more advantageous (less tax) for you to do so. ABC Accountants can advise you on the advantages and feasibility of doing this in your particular circumstances.


Accounting Records and Record Keeping

Another question that the owner of a business must answer is “Who will keep the books of the business?” Will you do it yourself, will the receptionist or a secretary double as a part-time bookkeeper, will you have a bookkeeper that comes in periodically, or will the volume of activity be such that a full-time bookkeeper will be required?

Very often the owners of a business decide to keep the books themselves and underestimate the commitment they have made to other phases of the operation and the time required to maintain a good set of financial records and books of account. As a consequence, the record keeping is often low priority and must be caught up later. This approach, though rarely planned, can require a substantial expenditure of time and money. While it is important for the owners of a business to maintain control and stay involved in the financial operations of the enterprise, this can be achieved by maintaining close control over the cheque-signing function and scrutinising certain records. We can help develop a good programme of record-keeping duties for you, your employees and any outside book-keepers you may engage.


A Word about Accounting Software Systems

There are a number of very good and easy to use accounting software systems which are commercially available, but none of them will solve the problems of inaccurate or poor quality financial records. All they will do is generate bad information faster. This is one of the reasons that the computer has also probably caused more headaches for the owners of modern businesses than any other single cause. If you want to use a computer-based accounting package, either in your own business, with a service bureau, or through your accountant, it is imperative that you generate accurate information to be entered into the system.

The real value of accounting software becomes apparent once it is running smoothly in your business. Your accountant can then function in the capacity for which he was trained, not as a “number cruncher”, but as your business adviser, consultant and strategist. Both of you can focus not on producing reports for various regulatory agencies but on analysing your business to make it more profitable. 


Internal Control

What is internal control? It is the system of checks and balances within a business enterprise that helps to ensure that the company’s assets are properly safeguarded and that the financial information produced by the company is accurate and reliable. When you are operating as a “one man shop”, or at least handling all of the company’s financial transactions, maintaining good internal accounting control is relatively straightforward.

However, when your company grows to the size where you must delegate some of the functions, it becomes more difficult to ensure that all the transactions are being accounted for properly.

No matter the size of your business, you should always be able to answer “YES” to the following questions:

  1. When my company provides goods or services to our customers, am I sure that the sale is recorded and either the debt is recorded in accounts receivable or the cash is collected?
  2. When cash is expended by my company am I sure we received goods or services?

The method used to ensure that these two questions can be answered affirmatively will be widely varied. They are essential stepping-stones to maintaining good control in your business. The solution in your particular instance may be as simple as numbering the sales tickets and being sure ALL TICKETS ARE ACCOUNTED FOR or reviewing all invoices and timecards before signing company cheques. These are fundamentals in a well-run business. As the company grows you will need to consider concepts such as segregation of authority or controlled access storerooms. No matter what the size of your enterprise, you should consider controlling your business and safeguarding hard earned assets as a priority from the outset.


EXAMPLE: Illustrative Chart of Accounts (Sole Trader)


0010     Freehold property cost

0020     Freehold property depreciation

0110     Leasehold property cost

0120     Leasehold property depreciation

0210     Plant and machinery cost

0220     Plant and machinery depreciation

0310     Fixtures/fittings cost

0320     Fixtures/fittings depreciation

0410     Motor vehicles cost

0420     Motor vehicles depreciation



0700     Investments

0900     Goodwill



1000     Stocks and work in progress

1100     Trade debtors

1103     Debtors and prepayments

1200     Bank current account

1230     Petty cash



2100     Purchase ledger control

2109     Creditors and accruals

2200     VAT control account

2300     PAYE/NI creditor



2600     Bank loans

2700     Hire purchase creditors

2800     Lease purchase creditors

2900     Other loans



3000     Capital account – balance brought forward

3100     Capital introduced

3200     Profit and loss account

3300     Drawings



4000     Sales/work done

4009     Discounts allowed

4100     Export sales



4200     Royalties received

4210     Commissions received

4220     Insurance claims

4230     Rental income

4240     Bank interest received



5000     Purchases

5900     Opening stock and work in progress

5950    Closing stock and work in progress



6000    Direct labour

6100    Goods outward costs

6200    Goods inward costs

6300    Packaging

6400    Duty paid

6500    Transport insurance

6600    Sales commissions payable

6700    Royalties payable



7000    Motor expenses

7100    Telephone

7200    Wages

7250    Spouse’s wages

7300    Rent

7400    Rates

7500    Heat and light

7600    Postage, stationery and advertising

7700    Repairs and renewals

7800    Insurance

7900    Bank charges and interest

8000    Hire purchase interest

8050    Mortgage interest

8100    Accountancy fees

8200    Legal charges

8300    Use of home as office

8400    Protective clothing

8500    Cleaning

8600    Sundry expenses

8700    Subsistence

8800    Profit on asset sales

8900    Depreciation

9000    Bad debts written off


This provides an illustrative list – but you can generally create as many accounts as you need for your own analysis and information. Most software packages come with pre-configured codes set up, sometimes generic and sometimes for a specific trade or industry.