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:
Who will be the users of the financial information?
What questions do I need answered to manage the business?
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:
Will your business have stock to account for? If so, will it be purchased in finished form or will there be production costs?
Are fixed assets a significant portion of your business?
Will you sell only one product or service or will there be several types of business?
Will you have accounts receivable from customers, which you will have to track?
Are you going to sell in only one location or will you do business in several places?
Are the products you sell subject to value added tax?
Do you need to track costs by department?
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:
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?
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)
FIXED ASSETS – TANGIBLE
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
FIXED ASSETS – INTANGIBLE
0700 Investments
0900 Goodwill
CURRENT ASSETS
1000 Stocks and work in progress
1100 Trade debtors
1103 Debtors and prepayments
1200 Bank current account
1230 Petty cash
CURRENT LIABILITIES
2100 Purchase ledger control
2109 Creditors and accruals
2200 VAT control account
2300 PAYE/NI creditor
LONG TERM LIABILITIES
2600 Bank loans
2700 Hire purchase creditors
2800 Lease purchase creditors
2900 Other loans
CAPITAL AND RESERVES
3000 Capital account – balance brought forward
3100 Capital introduced
3200 Profit and loss account
3300 Drawings
SALES
4000 Sales/work done
4009 Discounts allowed
4100 Export sales
OTHER INCOME
4200 Royalties received
4210 Commissions received
4220 Insurance claims
4230 Rental income
4240 Bank interest received
COST OF SALES
5000 Purchases
5900 Opening stock and work in progress
5950 Closing stock and work in progress
DIRECT COSTS
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
OVERHEADS
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.
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:
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:
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:
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)
FIXED ASSETS – TANGIBLE
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
FIXED ASSETS – INTANGIBLE
0700 Investments
0900 Goodwill
CURRENT ASSETS
1000 Stocks and work in progress
1100 Trade debtors
1103 Debtors and prepayments
1200 Bank current account
1230 Petty cash
CURRENT LIABILITIES
2100 Purchase ledger control
2109 Creditors and accruals
2200 VAT control account
2300 PAYE/NI creditor
LONG TERM LIABILITIES
2600 Bank loans
2700 Hire purchase creditors
2800 Lease purchase creditors
2900 Other loans
CAPITAL AND RESERVES
3000 Capital account – balance brought forward
3100 Capital introduced
3200 Profit and loss account
3300 Drawings
SALES
4000 Sales/work done
4009 Discounts allowed
4100 Export sales
OTHER INCOME
4200 Royalties received
4210 Commissions received
4220 Insurance claims
4230 Rental income
4240 Bank interest received
COST OF SALES
5000 Purchases
5900 Opening stock and work in progress
5950 Closing stock and work in progress
DIRECT COSTS
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
OVERHEADS
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.
Archives
Categories
Archives
Recent Post
Categories
Portfolio
Meta
Calender