Starting Up a New Business - Setting Up a UK Accounting System
Perhaps one of the greatest disadvantages of being self-employed is the amount of paperwork needed to comply with statutory regulations, for example, PAYE and VAT in the UK.
Accounting records
It is essential that a business starts up with a set of accounts that are suitable for its needs. There is no point in maintaining books which are a duplication of existing records, but it is equally important to ensure that all transactions of the business are properly recorded.
A list of essential books and their purpose follows. You may also wish to consider computerisation. Many different programs are available and you should consider your business requirements carefully before making a decision.
Cash book
To record all payments made into, and amounts drawn from, the business bank account. The cash book should be reconciled regularly with the bank statements.
Petty cash book
To record all small amounts of sundry expenditure. A float of money should be maintained and replenished at the end of each week/month.
Sales book
To record sales invoices or daily cash takings. This book can be used to note amounts banked and cash-in-hand.
Purchases book
To record all purchases.
Ledgers
Where the business is offering credit to customers, it should maintain a debtors' ledger, which will record details of transactions with each customer, for example, invoices, credit notes and payments received. Similarly, a purchase ledger should be maintained if the business has several suppliers. These ledgers must be reconciled regularly with the sales and purchase day books.
Wages book
This is essential to maintain a record of all payments to employees, as well as details of deductions made.
VAT book
A record summarising the make-up of amounts included in each VAT return is helpful to satisfy HMRC that VAT has been accounted for correctly.
Debt control
Cash flow is one of the biggest problems encountered by small businesses, in common with many large concerns. If a small business allows its customers unlimited credit, it will soon collapse through lack of cash or because its debtors have become bankrupt. It is essential, therefore, that a new business establishes a system of debt control.
The debtors' ledger is essential for debt control. Even more important is to establish the credit worthiness of potential customers. This may be done either by contacting a credit agency or by asking your bank to carry out investigations. Where possible, take up credit references.
Factoring
Businesses can consider 'factoring' to give a cash flow benefit. Factoring essentially means that a finance house or bank buys the outstanding debts of a business and collects them for itself.
The factor will deduct a percentage of the total debt as a fee and the business is relieved of both the risk and effort associated with debt collection.
Bad debts
Specific bad debts are deductible in calculating taxable profits. The VAT element of the debt is normally paid to HMRC at the time of the original invoice. If the debt is still unpaid six months after payment is due, a claim for relief can be made. There is automatic relief where cash accounting is used, because the VAT element would not be paid to HMRC until the debt is paid.
Accounting records
It is essential that a business starts up with a set of accounts that are suitable for its needs. There is no point in maintaining books which are a duplication of existing records, but it is equally important to ensure that all transactions of the business are properly recorded.
- From a tax point of view, it is a statutory requirement to keep adequate business records. In some cases, penalties of up to £3,000 may be levied for a failure to keep proper records. Business records and associated personal tax records should normally be kept until five years after 31 January following the year of assessment;
- As an alternative to the more formal books of accounts detailed below, a business may operate quite efficiently by using, for example, the 'Simplex' range of books, plus a sound filing system for invoices so as to keep track of sales, statements, etc.;
- Whatever system is adopted, it must be maintained regularly to provide accurate details of the trading performance;
- If the business deals in second-hand goods, a comprehensive stock book has to be maintained so that the correct amount of output VAT can be calculated. See the relevant HMRC leaflets;
- For dealers specialising in low value bulk volume goods, for example, stamps, a method of global accounting has now been introduced for VAT purposes.
A list of essential books and their purpose follows. You may also wish to consider computerisation. Many different programs are available and you should consider your business requirements carefully before making a decision.
Cash book
To record all payments made into, and amounts drawn from, the business bank account. The cash book should be reconciled regularly with the bank statements.
Petty cash book
To record all small amounts of sundry expenditure. A float of money should be maintained and replenished at the end of each week/month.
Sales book
To record sales invoices or daily cash takings. This book can be used to note amounts banked and cash-in-hand.
Purchases book
To record all purchases.
Ledgers
Where the business is offering credit to customers, it should maintain a debtors' ledger, which will record details of transactions with each customer, for example, invoices, credit notes and payments received. Similarly, a purchase ledger should be maintained if the business has several suppliers. These ledgers must be reconciled regularly with the sales and purchase day books.
Wages book
This is essential to maintain a record of all payments to employees, as well as details of deductions made.
VAT book
A record summarising the make-up of amounts included in each VAT return is helpful to satisfy HMRC that VAT has been accounted for correctly.
Debt control
Cash flow is one of the biggest problems encountered by small businesses, in common with many large concerns. If a small business allows its customers unlimited credit, it will soon collapse through lack of cash or because its debtors have become bankrupt. It is essential, therefore, that a new business establishes a system of debt control.
The debtors' ledger is essential for debt control. Even more important is to establish the credit worthiness of potential customers. This may be done either by contacting a credit agency or by asking your bank to carry out investigations. Where possible, take up credit references.
Factoring
Businesses can consider 'factoring' to give a cash flow benefit. Factoring essentially means that a finance house or bank buys the outstanding debts of a business and collects them for itself.
The factor will deduct a percentage of the total debt as a fee and the business is relieved of both the risk and effort associated with debt collection.
Bad debts
Specific bad debts are deductible in calculating taxable profits. The VAT element of the debt is normally paid to HMRC at the time of the original invoice. If the debt is still unpaid six months after payment is due, a claim for relief can be made. There is automatic relief where cash accounting is used, because the VAT element would not be paid to HMRC until the debt is paid.
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