Book keeping basics
This article explains about why you need to ‘keep books’ and what you need to keep. If you are a small business, it is likely you will be able to book keep yourself. The larger you grow, the more likely it is that you will need outside help. Whether you do your own books, or get someone else to do them for you, this article is for you.
Even if you hire outside help, it is useful to know the basics. If you are looking to use outside help, you will need watertight, professionally drawn terms and conditions to regulate the relationship between your business and your book keeper. There are links to documents at the end of this article.
Whether you need an accountant depends on your trading status, your financial experience, how much financial and accounting work you wish to do yourself, and whether you feel competent to deal with your tax return.
Why keep books?
All businesses need to keep records of their financial transactions for several practical reasons:
- You need to know how well you are doing, whether you are making or losing money, what money you have in hand, and what money is owed to you and by you;
- You need to show the taxman, bank manager and any investors how things stand within the company;
- You are required by law to keep to all documents which form the basis of information on your tax return for six years. This includes petty cash records, bank counterfoils, and goods in and out records;
- You need to know your turnover, precisely. For instance, if you turnover more than a certain amount in any twelve-month period, you are obliged by law to register for VAT purposes within 30 days of crossing this threshold. Failure to comply can result in heavy penalties.
Sole traders and partnerships do not have to get their accounts audited by a qualified accountant.
As a limited company you don’t need to have your accounts audited if your turnover is below a certain threshold, though you must still file your accounts at Companies House. Small companies can file a shortened balance sheet and special accountant's report.
How to keep books
There are several inexpensive book-keeping packages on the market that make book-keeping a easy. It is also easy to use a simple spreadsheet or literally write down the money flowing in and out of your business under different headings.
Record keeping is one thing, interpreting the figures is another? If you have your own business and can afford a book keeper or accountant, it is a good idea to use one. You can save yourself a fortune in accountancy fees by keeping tidy, well laid out records.
Here is a very basic how to: Give each sales invoice a unique reference number and file invoices in that order. Do the same for purchase invoices and receipts. Keep all this paper work in two sets of files, one for sales and one for purchases.
That way you can track paperwork quickly should you have a tax or VAT inspection.
Money in. Establish one section of your cashbook, for all the money you have been paid. Starting from the left of the page, assign columns for the date of the transaction, the amount received, the customer’s name and your own invoice reference number.
Money out. Establish another section in your cashbook for all the outgoings. Starting from the left of the page, assign columns for the date of the transaction, your cheque number, the supplier or payee you have paid the money to, the amount you have paid, the reference number you put on the supplier’s invoice and finally, a column for petty cash (which you draw from the bank).
You will also need to keep a note with details of each transaction. For example, divide expenses up into columns with headings such as: cost of sales, rent and rates, utilities, insurance, wages, telephone, stationery, travel, postage and so on. At the end of the tax year, you can total the amounts under headings to get a breakdown of your expenses.
- If you have a petty cash float, keep a sheet of paper petty in the cash box on which you note down every purchase. Always get a receipt for every item and staple them to the sheet of paper;
- Whenever you put more money into petty cash, update the new balance onto a new record sheet and transfer the old sheet and its receipts to your folder of expenses receipts;
- One technique than many businesses use is to keep the float at a constant £100 – either in cash, or cash plus receipts. When you need to top up the cash, only put in as much as you need to, to take it back to £100 mark again, and remove all the receipts to enter into your books properly.
At least monthly, do‘bank reconciliation’. How? Take the previous balance as shown in your bank statement, add all payments in and subtract those you have made. The new balance should reflect your new bank balance. If it does not, either you or the bank has made an error.
You don’t need any special knowledge or qualifications to keep the books of your own company. It’s a simple, common-sense job requiring nothing more than a bit of organisation. The only hard part is being disciplined about doing it regularly.
Benefits of using a book keeper
You can concentrate on what makes your business tick instead of worrying about the maths and admin
By keeping neat, professional records, your accountant will have to do less work. Book keepers charge professional rates but not as much as accountants.
Decrease your chances of receiving penalties from the Inland Revenue (for example, if you have employees, and file documents and forms late, you will be heavily penalised)
You no longer have to worry about finding, training and maintaining your accounting staff.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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Bookkeeping services agreementPrice £35.00 Format Available: Read More
Bookkeeper: terms and conditionsPrice £20.00 Format Available: Read More
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