I’ve never been the best with numbers, and always thought to play it safe I’d just employ a professional, but it was discussed that although an accountant is necessary, a lot of the basics are easy to do once you know the process. This also saves money when you do have to employ an accountant by reducing their workload.
The first areas covered, and the most relevant to TEDA were book-keeping and discussion on basic records to hold, which are essential for traceability, to understand profitability and maintain cash flow. It is advised that these are kept up to date, especially during a recession.
These include:
Cashbook
Record of all business transactions and monies coming in and out of the company. Always keep your cashbook up to date, as this is the most accurate account of money for your business.
Cash Book spreadsheet I prepared for TEDA
• Always enter data from source documentation e.g. cheque number/paying in number
• Banks make mistakes – always check against originals
• Only enter payments in cashbook when cheques clear
• Keep paid and unpaid invoices separate
• Always cross reference
Bank Reconciliations/Statements
Much like the bank statement you receive on a monthly basis for your personal account, this document offers a monthly reconciliation for businesses. Remember some cheques and wireless transactions take time to clear which can make the monthly reconciliation document inaccurate.
Petty cash book (PCB)
Businesses need a small amount of cash for miscellaneous items (transport, stationery etc), which still need to be recorded. Your PCB keeps a record of these transactions. When using a PCB, it’s essential to record all transactions, order data logically and keep receipts to check against and form basis for business expenses (non-taxable). For TEDA, I will use this to record expenses such as petrol for meetings and lunch at events etc.
Sales Book
A sales book is purely used to record sales, and can be done in a ‘per day’ format, ‘per week’ or others dependent on your level of sales. It records sales in a sequential format, and if a number is missed, it is also recorded. You need to keep a copy of all invoices issues, filed numerically, and note in the sales book the dates of payment for each sale.
In the initial period with an expected level of 10 sales per month, keeping track of this should be easy. When sales increase, it will include distributor sales, individual sales and bulk sales to customers.
Payroll Records
Keeping track of a company’s payroll can be done manually or using software such as Sage. It is important to keep records to produce year-end returns for the HMRC P35’s etc. Payroll can be tedious and is often outsourced at little cost to payroll bureau. As there are no employees, payroll will purely be in the form of dividends (payment received by directors).
VAT Records
You are only required to register VAT records if the business has a turnover of more than £67,000 (figure as of April 2009 from http://www.hmrc.gov.uk/vat/start/register/index.htm.). VAT can become a complex issue as there are different methods of VAT accounting and I’d strongly recommend you speak to an accountant for the best method for you. In the first year I do not anticipate to reach this threshold, however could become VAT registered at any point once the threshold is reached.
Purchase Invoices
To keep a record of all purchases/transactions from my suppliers all purchase invoices will be filed alphabetically, and will be used to cross reference against other records, such as the cashbook.
Sales Ledger
Used as part of the ‘double-entry’ system and keeps track of sales. It must be reconciled regularly, and is usually most appropriate when a large number of credit sale transactions occur.
Purchase Ledger
As with the sales ledger, this is most applicable if making a large number of purchases on credit. Forms basis of double-entry system and will be regularly used for cross checking.
Year-End Accounts
Irrelevant of the legal status of a business, accounts must be prepared annually for HMRC and as a measure of the venture’s success. Annual accounts are reviewed during loan applications and in the event of a business sale, therefore accurate year end accounts are vital.
Sole traders and partnerships have no legal obligation to employ an accountant and are able to keep these accounts private, but TEDA, as a limited company will employ an accountant and have to publish accounts through companies house where they can be requested by anyone.
There is flexibility in setting the date of year end accounts for tax and practical reasons, in most cases this is in line with the traditional tax year. Accounts must be prepared promptly, or penalties are incurred.
You may have heard of the term creative accounting, which comes from accountants being able to off-set specific items against tax, such as charitable donations or if a home office is used (like many of you out there do) you can off-set some utility/rent costs against tax. If you wish to investigate this further, try searching under:
- Disallowable items
- Private usage adjustments
- Depreciation/Capital Allowances
HMRC may adjust these types of calculations, so be aware that your year-end submission is not the final amount of tax you may have to pay.
Stock cut-off is important, and you must ensure that goods purchased close to the year-end are accounted for in the correct period. Also, if your business keeps some stock, they must be detailed in your accounts.
The remainder of the workshop went into more detail on VAT, obviously this is not relevant for me at present, but for more detail please see: www.hmrc.gov.uk under the ‘business & corporations section’, or post a comment through the blog and I'll answer any questions.
The Law & Directors’ Responsibilities
The other most relevant point I learnt for myself and TEDA was surrounding the law and Directors’ responsibilities. I was amazed to learn that there are about 50 separate duties placed on directors with regards to filing, which if ignored could result in disqualification for a minimum of 2, and maximum of 15 years – this could seriously affect my entrepreneurial aspirations!
I was interested to find that a register of company directors must be maintained, and changes notified to the Registrar of Companies within 14 days:
- Appointment by form 288a
- Resignation by form 288b
All directors are expected to act in the best interest of their company and must avoid conflicts of interest. In some cases, a director’s actions can be a criminal offence, usually as a result of ‘insider dealing’.
Directors are ultimately responsible for meeting the stringent accounting procedures, and that they show ‘true and fair view’ for HMRC. For more information please refer to Part 10 of the Companies Act 2006, available at:
http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_13.
The final part of this workshop involved a question and answer session about income tax bandings. If you would like to get up to date information on personal and corporate tax please see the HMRC website.
Recommended Links:
• Income tax & National Insurance – www.inlandrevenue.gov.uk
• VAT – www.hmce.gov.uk (HMRC)
• Managing Creditors & Debtors – www.payontime.co.uk
• Addressing cashflow problems – www.icm.org.uk (Institute of Credit Management)
• Issuing invoices and collecting debts – www.courtservice.gov.uk (Credit Service Association)
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