At its most basic all bookkeeping is is keeping a record of what money your business is making and what money your business is spending to make that money.
What is important is RECEIPTS. Especially for expenses and even more so if you are VAT registered. HMRC expect you to be able to show a receipt for any VAT amounts you are reclaiming. I mention this now as most people are really very bad at remembering to get receipts and don’t realise how important it is.
We have developed a very easy to use bookkeeping program along the lines of a spread sheet which will let you keep track of your business incoming and outgoing. (for non VAT registered companies or VAT cash accounting companies).
This works very well for very small businesses that deal mainly in cash accounting i.e. paying for things at the time of purchase and getting paid as soon as they have done the job. It can still work if you have debtors and creditors and had some sort of system whereby you keep all unpaid invoices together and then when you pay them or get paid you then enter them into the software.
By keeping records you will have the information needed to be able to do your self-assessment tax return. If you do not want to do this yourself, or if your business is a bit more complex and requires an accountant to finalise your accounts, then it will save you money on their fees if you have the basic information entered this way as it will cut down on the amount of time it will take them to do your accounts, therefore hopefully saving you money.
Keeping records of your business income and expenses is essential if you are looking for a business loan or an investor for your business as they will want to know how your business is doing or how you forecast your business will do in a specific period ahead.
You do not necessarily need to have a business bank account unless you will require a bank loan. The bank will probably require that you have a business account in this instance. It is normally wiser to have a separate bank account for your business so you can keep your personal transactions separate from your business transactions. You could just open a second personal account and use it for your business. If you incur any business bank charges on the account that you use for business then you can claim these as an expense.
Bookkeeping is also very important to you so that you can see what is happening in your business.
- If you are making very little profit, why?
- Look at your sales and what it is actually costing you to produce a sale.
- Are you charging enough for your product, would you be able to increase this price?
- If your time is your product (builder, gardener etc.) then are you charging enough per hour for your time? Could you charge more? Check out your competitions prices, if you are lower than them then you could possibly increase your prices.
- If you think your product/service is fairly priced, then you need to look at the costs involved in providing the product/service.
- Where can you cut down? Could you find another supplier who is cheaper but has the same quality of product?
- Are your overheads high, if so where could you cut down on these?
Always check around and see who can supply you more cheaply. Gas and electric are prime examples here. I have just checked around for the company I work for, which is a small company, and we could save almost £700 on gas and electric by changing. I hit a problem as one of my predecessors signed a three year contract for the electricity in 2003, and due to staff changes no one had given the required notice to cancel when the renewal notice came in. If you don’t give the correct notice of cancellation of your contract it rolls over for another two year period and will keep doing this until you give the correct written notice. (The law has just changed and they can only roll the contract over for one year periods now), but not keeping an eye on your contracts can cost you a lot. Another way of saving money is if a company who supplies you goods also give credit try to negotiate a discount for paying cash on delivery or within 7 days as opposed to the normal 30 days credit.
Filing is a very important part of accounting as if the HMRC ever come to check your accounts they will expect you to be able to find anything they ask for and will not be happy if you cannot. The HMRC can do checks on your accounts going back 6 years so you need to keep your records for this length of time.
If you start straight away with a good filing system this will be one of the best things you will ever do for your business. If you do not intend to enter your figures monthly into whichever accounts system you decide to use, including a bookkeeper, then try to keep each month’s paperwork together or it will take you ages to sort through it and put it in some sort of order later and if using a bookkeeper then it will cost you more for their time to sort it out.
Taxation and National Insurance (NI)
Everyone has to do their self-assessment tax return online now (I did for my brother for the first time this year, he is a subcontractor, and I was surprised at how easy it was). To do this you have to register with the HMRC. It takes at least 7 days after registering before you are able to submit your return as the HMRC has to send you a logon reference to use so please take this into account and do not leave till the last minute.
When you do your self-assessment tax return online it works out what you have to pay for you.
Basic tax workings are:
Free pay is £8105.00 for year 2011/2012. This normally increases each year and is the amount you are allowed to earn each year before you pay tax.
0% on £00 to £8,105
- 20% on £8,106 to £34,370
- 40% on £34,371 to £150,000
- 50% on £150,001 and above
You have to Class 2 NI of £2.50 per week. If your earnings are likely to be less than £5,595 per year then you may apply to be granted exception from payment. You will need to get Form CF10 which will give you full details.
You also pay class 4 NI at 9% on profits of £7,605 to £42,475. Above £42,475 you pay an additional 2%. This is worked out when you do your self-assessment tax return and you pay it with your tax due.
You can find out more on NI rates at http://www.hmrc.gov.uk/rates/nic.htm
But as we said, if you do your return online this is worked out for you.
As a sole trader you do not need to have a balance sheet to do your self-assessment tax return, but other information, other than your sales (income) and expenses that you will need for your tax return are:
Depreciation amount for year on assets.
- Any interest you have received on any savings you may have. If you have any joint accounts you only need to take into account 50% of the interest on those accounts.
If you have additional properties or dividends from shares, have a look at the self-assessment tax return and see if you feel you can do it, but it may be in your best interest to have an accountant or tax specialist do your return for you.
There are two payment dates for paying self-assessment tax, January 31st and July 31st.
On your first self-assessment tax return submitted you will have to pay the tax due on the profit for the year up to the 5th April, plus a 50% payment on account for the next year. It is assumed for tax purposes that whatever profit you have made in the previous year you will make the following year, so the payments on account in January and July will be based on those figures.
The following years, if you made more profit than the previous year and so have underpaid the previous January and July you will then pay any balance due, plus a 50% payment on account for the current year and so on. If you have not made as much as the previous year and so have overpaid, then whatever you overpaid take of the 50% payment you are paying on account for the current year in January.
After you have submitted your self-assessment tax return the tax office will send out a tax payment statement outlining what you have paid, what you are due to pay and when, and any interest you are due if you overpaid.
Hope you find this information useful. For more information on VAT, home use expenses, travel expenses etc. please visit our blog at www.bookkeeping-made-easy.co.uk/blog
About the Author
Dawn Kent is a bookkeeper and has been for 27 years now; In the past she has worked for companies and accountants but is now self-employed and has a variety of clients which she says is great as each ones accounts are different.
Dawn is happily married with 2 grown children who still live at home (which she think is great but isn’t sure her husband agrees with her!!).
Dawn’s sister (who is also a bookkeeper) & Dawn found that most software on the market was too complicated for the sole trader and SME’s who wanted to do their own bookkeeping and so they set to and developed one that does only the basics which is all most sole traders need. With this they can either do their own self-assessment tax return or give the completed figures to their accountant to do the tax return with thereby saving them money.