Book-Keeping And Accounts

 

Before you begin trading, it is essential to have a suitable system in place for keeping financial records. Such records are vital, both for the information they can give you about the success (or otherwise) of your business, and when the time comes to prepare your end-of-year accounts.

 

The Need for Financial Records

There are many good reasons why businesses need to keep accurate financial records. For one thing, as mentioned above, at the appropriate time you will have to use them to prepare accounts for the tax authorities, so that they (and you) know how much tax you will have to pay. If your accounts do not show clearly what you have earned the tax inspector will make his own estimate, and you may find yourself paying more tax than you should.

Keeping good records is to your own benefit as well. For one thing, they will show you how well or badly you are doing at any given time, so that you will not suddenly find yourself having to sell your business, or even your home, to pay off your debts. Before you spend money, you will want to be sure that you can afford to spend it. If you know about money problems as soon as they arise, you have a much better chance of putting them right before they become too serious.

If you want people to lend money to you, they will certainly expect to see your accounts. For example, a bank will want to ensure that the business is likely to do well enough to pay back any loan, together with interest, within the time specified. Finally, if at some stage you decide to sell your business, any potential purchaser will wish to see the books and accounts.

However small your business, therefore, you must keep accurate financial records. The smaller your business, the simpler these can be, but they must still be accurate, detailed and up-to-date. All bills sent out and received must be carefully filed, and you must be organised and methodical in all your record-keeping.

 

Book-keeping Systems

Particularly if you are operating as a sole trader or a partnership, you have considerable freedom of choice in deciding what books to keep. In making your decision, there are a number of factors to keep in mind.

 

1) Simplicity

There is no point in having a system more complex than you require. Especially if you have little knowledge or experience of book-keeping, a simple system such as an analysed cashbook – to be discussed shortly – may be perfectly adequate. In any case, your book-keeping system should be simple enough that you understand it and can easily explain it to someone else if you are away for any reason.

If your books are unnecessarily complex, the danger is that you will spend excessive amounts of time in maintaining them, time you could more profitably use in running your business; or else your books may not be completed fully or correctly, and the information in them will be worthless.

 

2) Legal Requirements

While simplicity is important, your books and accounts must meet the requirements of business law. In particular, if you have chosen to trade as a limited company, there are quite strict conditions on what records you must keep and when and how you submit your accounts. Your professional advisers (accountant and solicitor) should be able to advise you on these points. If your business is a particularly complex one, or you know that working with figures is not your strong point, it may be advisable to engage a freelance book-keeper to take on this area of responsibility.

 

3) Usefulness

As already mentioned, one of the most important reasons for keeping financial records is to obtain useful information on which to base decisions. A system that is too complex and difficult to understand may not produce information quickly enough to identify problems or exploit profitable opportunities.

 

4) Professional Advice

Before making any decision on what book-keeping methods and systems to use, it is highly advisable to consult an accountant. Your accountant will be one of your most important professional advisers, as it is he who will have to translate the information in your books into accounts for the tax authorities. If you consult him at an early stage you can ensure that your systems are set up in the way in which he prefers, and so cut down the time he has to spend preparing your accounts (and hence the amount you have to pay for his services).

A Simple Book-keeping System – The Analysed Cashbook

This is a simple system that will nevertheless meet the needs of many home-based businesses (during their early years at least). To operate it you will require an analysis book, available from all office stationery suppliers (the system can also be easily adapted for use on a computer with a spreadsheet program – see below). Analysis books are large, hard-backed books, pre-ruled with narrow horizontal lines and up to thirty (or more) vertical columns. You can use one book for income and another for expenditure; or, to economise even further, use the front of your book for expenditure and the rear for income.

The use of the system is best explained using an example. The one used here concerns an individual working as a freelance proofreader and editor; but it would work just as well with the great majority of home-based businesses. The example page below shows how income is recorded. As you will see, the first column is used for the date of each item, and the second for a brief description of the item itself. The next column is then used to record the amount of the item, while the columns to the right of this are used for income in particular categories. The choice of categories is entirely up to you. In the example the three categories chosen are proofreading, editing and sundry income (money from any other source).

 

Date	Item	Total	Proofrdg	Editing	Sundry
1/3	Hodson’s	350	350
4/3	HPI Ltd	560		560
18/3	Hodson’s	350	350
24/3	XYZ	50			50
27/3	HPI Ltd	100		100
30/3	Farmer’s	250	250
	TOTAL	1660	950	660	50

Record of Income

 

As you will notice, each item is entered twice (though this is not the same as double-entry book-keeping!). By totalling up all the columns at the end of each month, you will be able to see the total you have earned that month, and the amount contributed towards that by the different types of income. If you keep a running total from one month to the next, you will be able to keep track of your progress throughout the year, and will have the figures all ready for your end-of-year accounts.

Your record of expenditure would look similar. Again, a simple example is shown below.

 

Date	Item	Total	Stationery	Postage	Phone
3/3	Stamps	10.00		10.00
7/3	Phone	60.00			60.00
16/3	Envelope	0.45	0.45
24/3	Stamps	5.00		5.00
24/3	Folders	8.25	8.25
30/3	Stamps	20.00		20.00
31/3	Labels	5.95	5.95
	TOTAL	109.65	14.65	35.00	60.00

Record of Expenditure

 

This method of record-keeping helps you keep track of what you are spending in different categories. For example, in the record above, you can see at a glance that you have spent a total of £35 on postage during March. For practical purposes, there would probably need to be a few more categories of expenditure other than those shown above, including perhaps training, travel, insurance, professional fees and subscriptions, bank charges, and – not least – money you have withdrawn for your own use (usually known as drawings).

To claim an item of expenditure against tax, you should if at all possible get a receipt for it. It would therefore be a good idea to have an extra column on the left-hand-side of the page for receipt numbers. You can number receipts consecutively, starting again from 001 each year. Mark the reference numbers on the receipts as well, so that you have an easy way of identifying which item of expenditure each receipt refers to.

A further refinement is that, instead of the single column for ‘Total’, you might instead have two columns: one for items paid for out of your business account (by cheque, standing order, etc.), and the other for items paid for in cash. This will make life easier when checking your financial records against your bank statements. And when/if the day arrives when you have to register for VAT (see Chapter 15, Tax, National Insurance and VAT) you could simply add further columns to record VAT paid to suppliers and VAT charged to customers.

Although this is a very simple system, it contains all the information that would be required to draw up a set of accounts. This system has been used satisfactorily by the present author for nearly twenty years.

 

Using a Computer

If you have a computer with a spreadsheet program, it is easy to adapt the system described above to it. Keeping your books on computer has one great advantage: the computer can do all the calculations for you (e.g. adding up columns and calculating running totals). This can lead to considerable savings in time and effort. Most spreadsheet programs will also allow you to display financial information in the form of graphs and tables, which can be helpful in seeing long-term trends.

The analysed cashbook system can be used with any spreadsheet program, e.g. Microsoft Excel. You can also, however, buy dedicated programs (again based on spreadsheets) on which to keep your financial records. By far the most popular of these in the UK is Microsoft Money. This program includes the facility to download information from your bank account via the Internet (assuming, of course, that you have online banking set up). This can save you time in entering data, and will provide you with a mass of tools for displaying and manipulating financial information. You will still, however, need to do some work to customise the program to your own individual circumstances.

 

Submitting Your Accounts

It is, of course, quite possible to prepare and submit your annual accounts to HMRC without involving an accountant. If your annual turnover is below a certain figure (currently £15,000), you do not have to submit detailed information, just figures for your total business turnover and allowable expenses. If you are running your business as a part-time sideline, you may prefer to do this rather than paying an accountant to produce a full set of accounts that are unlikely to be required. Even so, if you do this you should still keep detailed and accurate financial records, both for your own benefit and for calculating the figures for your tax return. Remember, also, that HMRC may decide to investigate your return in more detail (a certain number of taxpayers are randomly chosen for this ordeal each year). In this case you are likely to be required to produce the records from which your income and expenditure figures were compiled.

If you are running a full-time profitable business, you are still of course at liberty to produce your own accounts. However, most self-employed people in this category prefer to pay an accountant a few hundred pounds to handle this task for them. There are many advantages to this, including the following:

 

• Paying an accountant to do this leaves you more time to concentrate on running your business.

• The accountant will have much more experience of dealing with the tax authorities than you do, and is far less likely to make mistakes.

• If the tax inspector has any queries, the accountant should be able to answer them.

• The accountant may be able to suggest (legal) ways you can reduce the amount of tax you have to pay.

• He or she may also be able to suggest additional benefits and allowances you could be claiming.

• And finally, the tax authorities may be less inclined to query a tax return if they can see that it has been completed by a qualified accountant.

 

Overall, for most small business owners, trying to do your own end-of-year accounts is likely to prove a false economy. Certainly the great majority, unless they have an accounting or book-keeping background, use a professional accountant to prepare their accounts and handle any negotiations with HMRC. Most accountants, incidentally, will also complete and submit your annual self-assessment tax return as part of their service.