Summary of Key Points
- Use computer software for your accounts if at all possible.
- Keeping an accurate cash book is the single most important thing to get right.
- Decide on a relevant sales or cost code for everything – never cop out with “general” or “miscellaneous”.
- The VAT account is the most important one from a legal point of view.
- Make sure all your sales invoices contain all the information required by law.
Keeping accounts can be daunting at first. The key is to break it down into a series of simple, manageable tasks. This note will summarise these and suggest the best ways for putting together an accurate set of books.
Using Computer Software
Unless you have a really deep-seated fear of using computers – which is OK and it’s better to acknowledge that than use a computer – then there are lots of advantages of buying accounts software (for less than £200 for most small businesses):
- You won’t have to spend lots of time manually adding up data, the computer will do that for you.
- You won’t have any errors due to poor handwriting, though you will have the odd keying error.
- You will be able to send your data electronically to your accountant to check that everything is OK.
- It should save in accountancy fees as your accountant will have less “bashing in” of raw data to do.
- It is extremely difficult – and inadvisable to try – to work out payroll manually if your business employs anyone.
- A good system will quickly generate accurate, businesslike legally compliant sales invoices for you.
- You are less likely to make errors on the VAT return by using computer software to do it.
- You’ll get a set of account codes – the “Chart of Accounts” which have been tried and tested by similar businesses.
Keeping an accurate cash book is the single most important feature of any set of accounts. Even if other aspects of the books are not right, a good accountant will be able to re-create them if the cash book is in good order. Key points:
- In a cash business such as retail, prime evidence such as till receipts should be kept for at least six years. These are the first things HMRC normally ask for when they visit such businesses.
- Reconcile the cash balance back to the bank statements at least monthly, and ideally every week.
- Cash in transit is one reconciling item – this is normally cheques you’ve received from customers and entered into the cash book but which have yet to clear the bank statement.
- Unpresented cheques are a reconciling item – in this case you have written out a cheque and entered it in the cash book, but it has not yet cleared the bank.
- Any other differences you have are probably because you have transactions on the bank statement which you need to enter into the cash book. A standing order received from a customer, a direct debit payment you’ve made, interest charges or credits from the bank, and bank charges are the main things to look out for.
Chart of Accounts
This is the name given to the various headings under which the business will report its results.
- The profit and loss headings deal with the ins and outs over a period of time – Sales, Direct Costs and Overheads are the main headings used. The balance sheet headings show the trading balances of the business at a given date – Fixed Assets, Current Assets, Current Liabilities and Capital are the main headings used.
- When you are posting transactions to the chart of accounts, never post anything to “general expenses”, “miscellaneous” or other headings of that sort – these headings are all tax disallowable. Make a decision at the time of posting as to which account name best fits the transaction being posted.
- One good thing about accounting software is that it will set you up with Charts of Accounts which have stood the test of time – and HMRC investigations! Good packages will come with different options suitable for different industries.
The VAT Account
All VAT-registered businesses have a legal obligation to keep a separate account within their books for their VAT – the VAT control account. This records the amounts due to or from HMRC and the cash movements made to settle these balances. The amounts due will normally be made up of 2 offsetting balances:
- Output VAT on sales – to be paid to HMRC, less
- Input VAT on purchases to be repaid by HMRC to the business.
If anything is likely to trip up the beginning book-keeper it is probably VAT. The trickiest things to deal with are purchases which have some VAT-chargeable items and some zero-rated items, typically:
- Invoices from supermarkets and similar businesses selling food (zero-rated) and non-food items.
- Expense claims from employees which have non-VAT elements such as mileage claims and food bills.
One way round these complexities is to use the VAT cash accounting scheme. This is a separate paper in itself. Many new businesses will benefit from using the VAT flat rate scheme – this is also a separate paper.
Your Sales Invoices
Any business which invoices its customers – as opposed to being paid in cash – needs to set out its invoices carefully in order to comply with the law. The following need to be shown:
- The word “Invoice”
- A unique identification number
- Name, address and contact information of whoever is raising the invoice
- Name and address of the customer being invoiced
- A clear description of what is being charged for
- The date the goods or service were provided (supply date)
- The date of the invoice – often the same as the supply date
- The amount(s) being charged
- VAT amount if applicable
- VAT registration number if applicable
- Company registration number in the case of a limited company
- The total amount owed.
Even relatively simple businesses will want to keep other ledgers for greater control. The two most commonly used are:
- The Purchase Ledger which shows balances owed to each supplier.
- The Sales Ledger which shows balances owed by each customer.