Many businesses spend hours on book-keeping but achieve little. Many other businesses “bury their heads in the sand” and simply don’t do anything at all!
There is a legal requirement for all businesses and the self employed to keep complete and accurate accounting records.
There is an excellent article on the ICPA website by Mark McLaughlin about the risks of having inadequate book-keeping:-
The best way to do keep proper records is to use proper accounting software such as Xero, Quickbooks, Kashflow, FreeAgent, Quickbooks or VT.
Improved bookkeeping can be achieved in the following ways.
• Use a simple computer software package.
• Reduce the number of transactions.
• Keep business and private transactions completely separate.
• Avoid cash transactions where possible.
• Properly administer petty cash
• Keep separate bank accounts.
• Use a separate credit card.
• Keep completely up to date
Many small businesses already use a computer system for word-processing, stock control, spreadsheets, databases or invoicing. Until recently, accounting and payroll software has been expensive and hard to use. A new breed of software is now available cheaply or even free, aimed at the very small business, and being simple to use. Using accounting software will increase the accuracy of your records and save you time. You will also be able to see “at a glance” how well your business is performing.
The fewer individual transactions you have, the fewer entries you will need to make. No – we’re not telling you to leave transactions out of your records! You need to reduce the number of payments you make. With fewer transactions, your bookkeeping time is reduced and there is far less chance of errors. This can be achieved very simply – use one cheque to pay several bills from the same supplier, use fewer suppliers, use a petty cash reimbursement system, use a credit card for your business expenses. With fewer transactions to review, your annual accountant’s bills are likely to be lower!
Distinction Between Business And Private
Never treat the business and your private monies as the same. There must be a clear distinction between business and private transactions. Anything that is private must not be put through the business books. If you have expenses that are partly business and partly private, you are better paying them privately and letting your accountant know about them at the year end. By doing this, the volume of transactions through your business account are minimised. There is no legal requirement to keep detailed or accurate records of your private payments. Set-up a regular weekly or monthly standing order from your business account to your private account and then draw your spending money and pay your private bills from your private account!
Avoid Cash Transactions
It is very tempting to use cash sales to pay bills and other expenses. This practice should be avoided at all costs unless your bookkeeping is perfect and you can keep an accurate daily summary of cash in and cash out, balanced to daily cash in hand. By using cash sales to pay bills, you immediately lose a valuable audit trail and the probability of cash differences increases. HM Revenue & Customs will attempt to argue that cash sales have been under-recorded and cash payments over-recorded if differences arise – resulting in higher tax bills for you and penalties! You should try to bank all your sales income and pay all expenses by cheque – this produces a valuable audit trail – your bank statements – to “prove” your transactions and reduce the risk of problems with the tax authorities. You should try to minimise any additional bank charges by changing your business bank to one with lower charges, or to open another business bank account specifically to handle cash bankings – many banks and building societies offer free banking – shop around for the cheapest options! The taxation authorities will always regard businesses with cash sales as “high risk” – the proprietors have the opportunity to “pocket” sales income without recording it in the accounting records. They have recently started to “count” customers in and out of businesses and even watch the tills “under cover” to estimate takings – they then check the recorded takings at a later date and charge tax on any differences!
Please don’t clutter your accounting records with hundreds of entries for individual small cash payments, such as till slips, milk, window cleaning etc. Pay these out of your own pocket, keep the receipts or a petty cash voucher. Every week or month, just make a list of the payments you have made, and write yourself a business cheque to repay the money to you from the business – simple – just one line in your accounting records!
You should have a separate designated bank account for your business. Put all sales and business income into this account, and pay all business expenses out of this account. Avoid, at all costs, paying private monies into the business account or paying private expenses out of the business account. By doing this simple procedure, your accounting records will only contain business transactions – why waste time and effort writing your private transactions into the business records, simply to put them in the “private” column! As banks often charge for business accounts, if you trade under your own name, and not through a limited company, you may be able to use a second “personal current account” from your own bank or building society. As long as the number of transactions is not too high and you are not paying in loads of “cash” there should be no problem. If you need a business account because of a trading name, or you have a limited company, chose a bank offering “free banking” for one/two years. After the free period, change your bank to the next on the high street, and so on. Some postal and telephone banks offer “free” business banking and offer credit interest.
Most businesses now accept credit cards. Get a separate credit card for use only for business expenses and use it as much as possible! Keep your card in your purse or wallet. On your monthly credit card statement will be a record of your business expenses, you just make a “one line” entry in your accounting records. Remember, you must still get receipts or invoices – a credit card slip is not good enough – staple the invoices to the credit card bill and file it. Make sure you pay your credit card bill in full each month and you won’t pay interest – probably a better deal than getting goods on credit – and certainly simpler than writing cheques to your suppliers at every month end!
Try to avoid giving credit. If you really have to, make sure that you issue regular statements and chase debtors regularly. Start as you mean to go on – your customers will take advantage if they get the chance! Always ensure that an invoice is sent with the goods or as soon as the work is completed – it is always better to hand the invoice personally to the customer – they may even offer to pay! Seriously consider accepting credit cards. You would receive the money within a few days, your customers get credit, and you immediately reduce risks of bad debts. The costs of accepting credit cards are getting lower and more and more businesses are accepting cards – more importantly, more and more customers expect businesses to accept cards!
Don’t throw it away. Keep all invoices, statements, delivery notes, even diaries and general correspondence, etc for as long as possible. You may not think you need them, but your accountant probably will, and the tax authorities certainly will in a tax enquiry! Many items have to be kept for six years by law, but it’s even better to keep things for longer than that and some documents should be kept indefinitely – seek your accountant’s advice before throwing anything away and make sure that you store them somewhere safe where they won’t get lost, damaged or stolen. In case of tax investigation, keeping everything will help your defence against unfounded or false allegations raised by the tax inspector.
If you are up to date, your accounting and book-keeping should take very little time. Time consuming problems arise when you ignore it for weeks – you then need a day or two to sort it out. Put a small amount of time aside every day to keep up to date with the paperwork and you won’t even miss the time spent! More time is wasted in continually looking for things, trying to sort things out, constantly looking back etc.!
Never pay round sums to your suppliers – if you cannot afford the full amount of the month end statement, just pay some of the bills, and pay the others later – this stops your accounts and your suppliers accounts getting in a mess!
Don’t ‘contra’ if you and your suppliers/customers owe money to each other. You should write and swap cheques to keep your records straight and up to date. If, for example, you owed a supplier, say £10,000 who also owed you £12,000, if your supplier went bust, the receivers would still demand the £10,000 from you – you cannot set off the amount owed to you! A very costly mistake to many businesses!
With a bit of time and organisation, every business could save valuable time, improve its accounting records, reduce annual accountants bills and reduce the risk of problems with the tax authorities.
If you don’t have the time or inclination to do your own bookkeeping, then get someone else to do it for you. You can’t abdicate your bookkeeping responsibilities, but you can certainly delegate it to someone leaving you with more time to enjoy or grow your business.
Contact us for more information about I can help you with your bookkeeping or you may like to read the excellent bookkeeping for dummies book to learn about the basics: