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

Accounting records you must keep 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

How long to keep records 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 companys 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

If you dont 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

Client
Sales cycle (controlled by a customer ledger)

Book-keeping

Accounting

VAT

Wages

Journals

Trial Balance

Final year end accounts

Purchase cycle (controlled by a supplier ledger)

Bank & Cash Reconciliation

+ corporation tax

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
Classified to a specific nominal code But they may not always pay the full amount

Added to customer ledger

Customer pays the invoice

Invoice created and sent to customer

Amend customer ledger

Outstanding payments identified and tracked here

Need to reconcile vs ledger regularly

The cash or bank balance will increase

Record Keeping
Purchase Cycle: Expenses are added to and tracked through the Purchase Ledger
Classified to a specific nominal code But possibly not in full or on time!

Added to purchase ledger

Company pays the invoice

Invoice received by company

Amend purchase ledger

Outstanding payments identified and tracked here

Need to reconcile vs ledger regularly

The cash or bank balance will decrease

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. 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.

Example

Bookkeeping processes
The main bookkeeping alternatives are spreadsheets and accounting software: The pros & cons of both methods
SPREADSHEETS 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. Can be easily customised. Manually tracking can be very time consuming. Incorrect postings can be easily edited. Old posting can be overtyped meaning a very time consuming historic reconciliation. 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.

Invoices and expenses

Inventory control

Time consuming to set up & input all the stock lines but gives enhanced stock control.
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. Not a common function. 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

Reconciling bank balance

Cash flow forecasting

Flexible and easy to factor in variances. Formula breaks can create incorrect VAT calculations plus manually input errors onto final VAT return expose the business to VAT checks and fines.

VAT returns

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?

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

Why is it important?

How often should it be done?

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
System Bank Statement

Date 30/08/13 31/08/13 27/08/13 31/08/13 26/08/13 31/08/13 30/08/13

Item Sale Telephone Wages Sale Rent Sale Accountant

Amounts 1,000 (250) (900) 4,600 (4,000) 5,700 (6,500)

Balance 3,050 2,800 1,900 6,500 2,500 8,200 1,700

Type Bacs Chq Bacs Chq Chq Bacs Chq

Date 26/08/13 27/08/13 30/08/13 31/08/13

Item Rent Wages Sale Sale

Amounts (4,000) (900) 1,000 5,700

Balance 7,750 3,750 2,850 3,850

Type Chq Bacs Bacs Bacs

Effectively adjusting the sales and purchase ledger for trade debtors and creditors

Balance per system Less: Uncleared receipts Sale Add: Unpresented Cheques Telephone Accountant Expected Balance Bank statement balance at 31/08/2013 Difference

1,700 (4,600) 250 6,500 3,850 3,850 nil

Bookkeeping processes
Petty Cash

What is Petty Cash?

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.

How do you account for it?

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.

What are the tax implications?

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?

Concept

Example

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. 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

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. 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 wouldnt 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.

Ledgers

Journals

Accruals

Prepayments

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
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