Maintaining your financial records is an essential part of any small business. Productive bookkeeping will enable you to keep track of your accounting and react quickly to any financial changes. It will also help your firm to remain profitable and speeds up the process of filing your accounts.

Once your business reaches a certain size, it may become increasingly difficult to maintain a high quality and consistent level of bookkeeping by yourself. PPS Chartered Accountants can aid with the bookkeeping process to ensure you are never left in doubt as to your financial situation.

We have several tips when it comes to effective bookkeeping for your small business. Read on to find out more!

What Exactly Is Bookkeeping?

Bookkeeping is the recording of the finances of a company on digital formats. It keeps track of any bills that have been paid or are due to be paid and any sales invoices paid or due to paid. Also, records any other sources of income, taxes and the payroll of your workforce.

The main part of bookkeeping involves allocating transactions from the bank to the correct nominal accounts and reconciling to the bank statement. This is where all money coming into and out of the company is recorded. This process will ensure that the quarterly VAT returns are correctly calculated.

If your business is faced with an audit, the quality of your bookkeeping will be a crucial part of the auditor’s report. This is another reason why your records must be kept securely and organised.

Making Tax Digital

Making tax digital is a government initiative to bring the UK tax system into the digital era. In April 2022, MTD rules stated that all VAT registered businesses, regardless of turnover had to use compatible online software. The purpose of this software is to keep and maintain digital records as well as submitting tax returns directly to HMRC.

The advantages of MTD are that the software aids efficiency of the operations of a business and also helps reduce errors for incorrect data as well as minimising human error in data entry.

From April 2024 unincorporated business and landlords with annual revenue of more than £10,000 will be subject to MTD rules therefore individuals need to consider this change and make sure they are aware this is happening.

Choose The Right Accounting Method

There are two main types of accounting that a company can use when recording a business’ finances.

Cash accounting records sales and purchases on the day that the money actually enters and leaves your accounts respectively. While only available for businesses with a turnover of £1.35 million or lower, the main advantage of cash accounting is that it reduces the risk of paying taxes on money you are still owed.

On the other hand, traditional accounting doesn’t have a turnover cap, so any company can use this method. This is the more popular method of accounting and shows a more accurate position of a business at the year end in terms of assets and liabilities. However, since reporting of the finances occurs upon receiving or sending the invoice, it can cause confusion when you have to pay taxes to HMRC.

Track Your Business Expenses

Make sure to separate expenses from your own. In this way, it will be much easier and simpler to identify purchases made for the business and distinguish them from your own personal expenses. The easiest way for this to happen is to have a business bank account which you only record business transactions in, and the risk of misstatement is reduced.

Furthermore, this makes VAT returns easier to complete. A business only needs to register for VAT (value added tax) if their turnover exceeds the annual registration limit of £85,000. A VAT return is usually done on a quarterly basis during the year and is calculated through the VAT on your sales invoices deducted from VAT on purchases. The balance is payable to HMRC unless VAT on purchases is bigger than sales, then a repayment would be due from HMRC.

Keep To Deadlines

This one applies both to yourself and to your customers/clients.

Missing the deadline for personal tax returns to HMRC comes with a monetary penalty. If you are late in sending the necessary documentation by more than three months, you will incur a late filing penalty of £100, plus any interest on late payments.

Business deadlines are just as important. VAT returns are due a month and 7 days after the end of the quarter your company is reporting. From January 2023 VAT penalties are worked out on a points-based system. For each return you submit late you will receive one penalty point. The penalty threshold for quarterly returns is 4 therefore if this is reached there will be a £200 penalty.

For filing your limited company accounts, you have 9 months from your company’s year end to file your accounts and 12 months to submit your company CT600. If this isn’t met, there is a £100 penalty fee for late submission and interest is charged on any corporation tax that isn’t paid from 9 months and a day after the year end.

Setting clear and fair payment deadlines for your clients will ensure that you receive any money that you are owed in good time. If certain customers repeatedly pay for goods and services very late or fail to pay on occasion, it may be worth ending further business with them to stay in control of your finances.

File Invoices in Order

A rather simple tip, but a critical one nonetheless. Keep all invoices stored safely and in order, whether they are on paper or digital. You don’t want to lose receipts for any purchases which had VAT claimed on them as keeping the VAT receipt is a requirement to being able to claim the VAT back. Also, you don’t want to fail to record invoices which need to be part of the accounts, as this could result in misstatement of the accounts.

It should be in order from earliest to the latest (or vice-versa). The dates could be different depending on whether cash accounting or traditional accounting methods are being used.

Moreover, making sure the invoice files are in the correct order makes transferring the information onto the online bookkeeping software much faster.

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