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. If you keep up-to-date records yourself, you will have a reasonable idea of your company’s financial health
- 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 the documents – bills and receipts – 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. After registration, you need to keep accurate records for the VAT man
click here for this year’s thresholds
There are several inexpensive book-keeping packages on the market that make book-keeping a doddle. However, you can use a simple spreadsheet or literally keep ‘books’ where you write down the money flowing in and out of your business under different headings.
Record keeping is one thing, interpreting the figures is another. This is where many people use the services of an accountant. However, you can save yourself a fortune in accountancy fees by keeping tidy, well laid out records.
Audited accounts
Do you need to get you accounts audited?
Not necessarily. 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. As a small company, you can file a shortened balance sheet and special accountant’s report if you choose.
for the current small and medium company thresholds and audit exemption thresholds click here
Categorising income and expenses
First, make life simple. Give each sales invoice a unique reference number and file them 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 tot up the amounts under headings to get a breakdown of your expenses for the taxman
Petty cash
- if you have a petty cash float, keep a sheet of paper 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
Keep on top of cash flow
At least every month do a ‘bank reconciliation’. This involves taking the previous balance as shown in your bank statement, adding all payments in and subtracting 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.
For example:
- Last month’s balance £1,234
- Add incoming payments + £3,234
- Less outgoing payments – £1,267
- This month’s bank balance £3,201
To keep a more accurate measure of your financial health, keep a running total of your cash balance at the same time as you enter money in and out.
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.
Useful contacts
Companies House publishes a useful guide on its website entitled accounts and accounting reference dates
