Why keep your records effective?
One of the main reasons you have an accountant is to produce a set of accounts and the associated tax work. A set of accounts is essentially a summary of the income and expenditure in your business as well as its assets and liabilities (debts). The key word here is “summary”, after all HMRC wouldn’t accept a carrier bag full of your receipts. So, there must be a process by which the receipts are converted into a raw summary that can then be turned into a set of accounts, from which we can work out how much tax you need to pay.
This process is called bookkeeping and can be done using a variety of methods including via software like Xero or as a spreadsheet. The main point is to be able to record all of the transactions that have occurred in your business and assign them to a category:
1) Income – Money coming in from customers, although this wouldn’t include any money that you’ve paid into the business or repayment of loans.
2) Direct costs – Any costs that directly relate to a specific job or service you’ve provided e.g. Materials, Courier costs
3) Overheads – General costs relating to your business, e.g. Accountancy Fees, Staff Salaries
4) Assets – Equipment you’ve purchased, generally anything with a lifespan of greater than a year and worth more than £100.
5) Tax – Corporation tax you’ve paid
6) Directors Loan Account – This is where you’d assign any personally related transactions between you and the company, like money you’ve invested or drawn out or anything the company bought on your behalf.
There’s no need to worry about breaking your drawings down into salary or dividends when you record it as we’ll do this for you, the best place to put it is the directors loan account.
It’s important to be able to tie any records you keep back to the movements in your bank balance, this is the sure-fire way to know that you haven’t missed anything out or duplicated it.
Certain types of accounting software will provide you with reports and these are important in helping you understand the profitability of your business and any upcoming tax bills. For these reports to be effective, your records will need to be updated regularly!