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Bookkeeping Essentials for Small Businesses
 

Bookkeeping Essentials for Small Businesses

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Bookkeeping for small business owners: what information you need to track, how to record and check your small business revenues, expenses, bank reconciliation and petty cash. Our bookkeeping guide ...

Bookkeeping for small business owners: what information you need to track, how to record and check your small business revenues, expenses, bank reconciliation and petty cash. Our bookkeeping guide also includes considerations regarding the use of spreadsheets vs. bookkeeping software, double entries and other accounting technicalities. Get in touch if you want to benefit from cost-effective bookkeeping services for your small business.

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    Bookkeeping Essentials for Small Businesses Bookkeeping Essentials for Small Businesses Presentation Transcript

    • ESSENTIAL BOOKKEEPING FOR SMALL BUSINESSES SEPTEMBER 2013
    • Agenda What information do you need to record? • Legal obligations • Sales cycle • Purchase cycle How do you go about recording and checking this information? • Recording revenue and expenses • Spreadsheet vs software? • Bank reconciliation • Petty Cash Accounting technicalities • What is double entry • Glossary
    • Record Keeping According to the Companies Act all companies must keep “true and fair” financial and accounting records • All money received and spent by the company • Details of assets owned by the company • Debts the company owes or is owed • Stock the company owns at the end of the financial year • The stocktakings you used to work out the stock figure • All goods bought and sold • Who you bought and sold them to and from (unless you run a retail business) • You must also keep any other financial records, information and calculations you need to complete your Company Tax Return • You must normally keep records for at least 6 years from the end of the last company financial year they relate to. • You may need to keep records longer if: • they show a transaction that covers more than 1 of the company’s accounting period • the company has bought something that it expects to last more than 6 years, like equipment or machinery • you sent your Company Tax Return late • HMRC have started a compliance check into your Company Tax Return Accounting records you must keep How long to keep records If you don’t keep accounting records, you can be fined £3,000 by HM Revenue & Customs (HMRC) or disqualified as a company director
    • Record Keeping Where bookkeeping meetings accounting Sales cycle (controlled by a customer ledger) Purchase cycle (controlled by a supplier ledger) VAT Wages Journals Trial Balance Bank & Cash Reconciliation Final year end accounts Book-keeping Accounting + corporation tax Client A good book-keeper should be able to post sales and purchase transactions to the appropriate ledger and reconcile this with the bank statement
    • Record Keeping Sales Cycle: Invoices are added to and tracked through the Customer Ledger Added to customer ledger Amend customer ledger Invoice created and sent to customer Customer pays the invoice The cash or bank balance will increase Classified to a specific nominal code But they may not always pay the full amount Outstanding payments identified and tracked here Need to reconcile vs ledger regularly
    • Record Keeping Purchase Cycle: Expenses are added to and tracked through the Purchase Ledger Added to purchase ledger Amend purchase ledger Invoice received by company Company pays the invoice The cash or bank balance will decrease Classified to a specific nominal code But possibly not in full or on time! Outstanding payments identified and tracked here Need to reconcile vs ledger regularly
    • Agenda What information do you need to record? • Legal obligations • Sales cycle • Purchase cycle How do you go about recording and checking this information? • Recording revenue and expenses • Spreadsheet vs software? • Bank reconciliation • Petty Cash Accounting technicalities • What is double entry • Glossary
    • Bookkeeping processes Classifying expenses to the correct nominal code can be tricky Principle • Sage and similar software package have a pre-defined list of nominal codes under which you can classify transactions • By correctly classifying the transaction, the software is generally able to treat it correctly in terms of tax and depreciation Common mistakes • Using too many nominals (or creating new ones) can make the reports difficult to read • Try to limit yourself to the 15 or so most relevant expense nominal codes • If you need to use more, then consider grouping them when it comes to preparing a P+L for management accounts • Selecting the wrong nominal leading to incorrect tax treatment e.g. including staff entertainment in client entertainment code could see any allowable cost disallowed. Example • Examples of expenses: Direct costs, Wages, Marketing, Telephone, Accountancy & Insurance. • Example of grouping: A company may have a separate nominal for PR, online advertising, brochures & TV advertising but this will then all be grouped as ‘Marketing’ in P&L of the management accounts.
    • Bookkeeping processes Invoices and expenses • Spreadsheets/word is cheap. • Accountant has flexibility over data i.e. will classify expenses appropriately. • Inputting errors & formula breaks on dates & amounts are more common and can come across as amateur. SPREADSHEETS SOFTWARE (e.g Sage) • Software can be expensive. • Time consuming to customise invoices but once in place invoices can be replicated quickly. • Software has extra functions like the ability to automatically raise (recurrent) invoices & email on to clients. Reconciling bank balance • Incorrect postings can be easily edited. • Old posting can be overtyped meaning a very time consuming historic reconciliation. • Once mastered makes the process very simple. • The system locks the data so any edit to old data will show up on the new reconciliation. Discrepancies become easy to spot. Cash flow forecasting • Flexible and easy to factor in variances. • Not a common function. VAT returns • Formula breaks can create incorrect VAT calculations plus manually input errors onto final VAT return expose the business to VAT checks and fines. • An automatic feature, but errors can exist if wrong VAT tax codes are used. • Often include the function of VAT return being automatically submitted to HMRC Inventory control • Can be easily customised. • Manually tracking can be very time consuming. • Time consuming to set up & input all the stock lines but gives enhanced stock control. The main bookkeeping alternatives are spreadsheets and accounting software: The pros & cons of both methods Using dedicated accounting software like Sage requires some technical knowledge, so keeping good spreadsheet records is sometimes best for small businesses
    • Bookkeeping processes What is a bank reconciliation and why should I care? What is a bank reconciliation? Why is it important? How often should it be done? • A method of checking your sales and purchase ledgers against what has gone through the bank • Each item on the Sales Ledger should become a credit on your bank statement • Each item on the Purchase Ledger should be a debit on your bank statement • It can be performed manually, by literally ticking off transaction on the bank statement • Or you can upload the bank statement to your software and reconcile automatically • Because it enables you to detect financial errors and problems, e.g. • Clients who have not paid • Clients who have paid the wrong amount • Double payments to suppliers • Bounced cheques or refused payments from clients • It depends on the volume of transactions, but once per month is usually fine for small businesses • The longer you leave it, the more your trade debtor figure will increase • And the more overdue an invoice is, the harder it is to collect The bank reconciliation process is essential to making sure that the company has collected all cash owed and paid outstanding invoices
    • Bookkeeping processes Bank Reconciliation: Illustrated Example Date Item Amounts Balance Type 30/08/13 Sale £1,000 £3,050 Bacs 31/08/13 Telephone (£250) £2,800 Chq 27/08/13 Wages (£900) £1,900 Bacs 31/08/13 Sale £4,600 £6,500 Chq 26/08/13 Rent (4,000) £2,500 Chq 31/08/13 Sale £5,700 £8,200 Bacs 30/08/13 Accountant (£6,500) £1,700 Chq Date Item Amounts Balance Type 26/08/13 Rent (4,000) £7,750 Chq 27/08/13 Wages (£900) £3,750 Bacs 30/08/13 Sale £1,000 £2,850 Bacs 31/08/13 Sale £5,700 £3,850 Bacs Bank StatementSystem Balance per system £1,700 Less: Uncleared receipts Sale (£4,600) Add: Unpresented Cheques Telephone £250 Accountant £6,500 Expected Balance £3,850 Bank statement balance at 31/08/2013 £3,850 Difference nil Effectively adjusting the sales and purchase ledger for trade debtors and creditors
    • Bookkeeping processes Petty Cash What is Petty Cash? How do you account for it? What are the tax implications? • Petty cash is the use of a relatively low amount of cash to pay for smaller business expenses like milk, pens & minor repairs. • The most common method is to start with an amount, say £500, and when that reduces to nil the company withdraws a further £500. • Receipts should be kept. • This should be accounted for just like any other business account. • The cash balance should be reconciled on a timely basis. • The balance you reconcile to is the amount of cash you physically count at a certain date. • If petty cash items are spent from cash taking (i.e. sales) a very good accounting record must be kept as this is often a key area for investigation for HMRC. • If a receipt is kept and the item contains VAT then for VAT registered enterprises this can be reclaimed on your VAT return. • The company profits will be reduced by the business expenses spent through petty cash. This can be quite a substantial tax saving over the course of a year. Petty cash is considered “high risk” by HMRC and needs careful accounting records
    • Agenda What information do you need to record? • Legal obligations • Sales cycle • Purchase cycle How do you go about recording and checking this information? • Recording revenue and expenses • Spreadsheet vs software? • Bank reconciliation • Petty Cash Accounting technicalities • What is double entry • Glossary
    • Accounting Technicalities What is Double Entry? • A business receives £1,000 into the bank account for a sale it made a few days ago. • On the system you would post a customer receipt from the bank to the customer ledger to clear down the £1,000 invoice. • This is what happens behind the scenes, altering the trial balance • Dr Bank • Cr Debtors Concept • Double entry is the fundamental principle that underpins record keeping in accounting • Every debit has an equal and opposite credit • The P&L is made up of debits (expenses) and credits (sales) • The balance sheet is made up of debits (assets) and credits (liabilities) • The trial balance combines the P&L and balance sheet. Example
    • Accounting Technicalities Glossary • A summary of all the invoices raised and received. • The balance is increased as invoice are added and reduced as payments are made or income received. Ledgers Journals Accruals Prepayments • Journals are often used by accountants to make adjustments. For example if £2,000 worth of expenses have been classified as telephone instead of repairs then a journal will save recoding all the incorrect invoices. • Dr repairs (increases the expense in the P&L). • Cr telephone (decreases the expense in the P&L). • Wages are an example of a journal as the tax is often the paid in the following month and wouldn’t match the month in which the cost is suffered. • An expense invoiced after time period that is it suffered can be brought into the correct period via an accrual. • An example is a company with a 30th April 2013 year end have their accounts completed and invoiced in July 2013. The cost clearly relates to the April year end but is not invoiced till after this period. • Prepayments are the same as accruals but the other way around. • The expense has already been suffered but relates to a future period. • An is a company being invoiced for a years insurance cover on 1st January 2013. The year end is 30th April 2013 so 8 months of that costs relates to a future period.
    • Bookkeeping Summary What information do you need to record? • The Companies Act obliges you to keep “true and fair” financial records • Records should generally be kept for 6 years How should you approach book-keeping? • A good book-keeper should be able to post sales and purchase transactions to the appropriate ledger and reconcile this with the bank statement • Using accounting software helps you maintain your purchase ledger and chase trade debtors (which aids cash flow) • However, using dedicated accounting software like Sage requires some technical knowledge, so keeping good spreadsheet records is sometimes preferable • The bank reconciliation process is essential to make sure that the company has collected all cash owed and paid outstanding invoices • Petty cash is considered high risk by HMRC and needs careful accounting records Accounting technicalities • Double entry underpins the bookkeeping process • Your book-keeper should have a good understanding of ledgers, journals, accruals and prepayments
    • Bookkeeping Thanks Thank you for reading! Need further help with your bookkeeping? Our team are happy to answer any of your questions. Contact Us Accounts and Legal Ltd. 20 Kentish Town Road, London, NW1 9NX 0207 043 4000 info@accountsandlegal.co.uk YOUR TEAM