Peter Taylor: Fully Revised and Updated

Fully revised and updated^ - \
Peter Taylor
7 90278 0697
Book-keeping
and
Accounting
for the
Small Business
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Book-keeping
and
Accounting
for the
Small Business
How to keep the books and maintain
financial control over your business
Fully revised and updated

8th edition
PeterTaylor
howtobooks
Published by How To Books Ltd
Spring Hill House, Spring Hill Road, Begbroke, Oxford 0X5 IRX
Tel: (01865) 375794. Fax: (01865) 379162
info@howtobooks.co.uk
www.howtobooks.co.uk
How To Books greatly reduce the carbon footprint of their books by sourcing
their typesetting and printing in the UK.
All rights reserved. No part of this work may be reproduced or stored in an

information retrieval system (other than for purposes of review) without the
express permission of the publisher in writing.
The right of Peter Taylor to be identified as author of this work

has been asserted by him in accordance with the Copyright,
Designs and Patents Act 1988.
© 2012 Peter Taylor
British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library
ISBN: 978 1 84528 493 0
Produced for How To Books by Deer Park Productions, Tavistock

Typeset by Kestrel Data, Exeter
Printed and bound in Great Britian by Bell & Bain Ltd, Glasgow
NOTE: The material contained in this book is set out in good faith for general
guidance and no liability can be accepted for loss or expense incurred as a
result of relying in particular circumstances on statements made in the book.
The laws and regulations are complex and liable to change, and readers should
check the current position with the relevant authorities before making personal
arrangements.
Contents
List of Illustrations ix
Preface to the eighth edition xi
1 Why You'll Need Proper Business Records 1

How your accounts will help you 1
What records will I need? 9
Summary 17
2 How to Keep Your Accounting Records 18

Questions to be asked 18
A choice of systems 21
Handling banking 26
Handling invoices 30
Work plan 33
Summary 34
3 Starting Your Record Keeping 36

Expanding your records as your business grows 38
Recording your sales 45
Using computer spreadsheets 47
An introduction to computerised bookkeeping 52
Other tools and reports from a computerised system 60
Computers in accounting 62
Summary 64
V
vi Contents
4 Accounting for VAT 65

What is value added tax? 65
How VAT affects your business 67
The standard invoice basis - the tax point system 72
Other key points about VAT 84
Summary 89
5 Double Entry Bookkeeping 90

The pros and cons of double entry 90
Why do I need to know about double entry bookkeeping? 91
Personal and impersonal accounts 97
Recording your sales 97
Your Double Entry Accounts 98
Hints on finding errors 105
Summary 107
6 Doing the Wages 108

Your legal obligations 108
Online filing 108
Working out the wages 112
Deductions from wages 113
What accounting records will I need 119
Owners and directors 122
Summary 123
Future plans for PAYE 123
7 Preparing your Annual Accounts 125

What the annual accounts show 125
The annual accounts ' I35
The profit and loss account I35
The balance sheet 138
Contents vii
Notes to the accounts 140

A standard approach to accounts 141
Summary I45
Company accounts 146
Summary I5I
8 How to Use Management Information 153

Controlling the cash position 153
Managing a budget 158
Summary 161
9 Taxation and Your Business 162

Sole traders and partnerships 162
Capital allowances 166
Company taxation 175
Summary 179
10 Accounting for Loans, Hire Purchase

and Leasing 180
The different types of finance 180
Accounting treatment 184
Taxation treatment 187
Summary 189
11 Dealing with Your Professional Advisors 190

Dealing with your accountant 190
Dealing with your bank manager 193
Dealing with your solicitor 196
Using an insurance broker 196
Looking for extra help 197
Summary 199
viii Contents
Appendices 200
Sources of Further Information 200
HM Revenue & Customs Contact Details 201
List of Accountancy Bodies 202
Details Required on the Self Assessment Tax Return 205
Useful Computer Software 208
Tax Rates 214
Glossary 216
Index 221
List of Illustrations
1. A simple business accounts system 16

2. Types of record keeping 22
3. Key components of record keeping 23

4. The simplest cash book 24
5. An expense voucher 29
6. Sample page from an analysed cash book 40
7. A simple daily cash summary 42
8. A cash transaction record 43
9. Example of invoice register 46
10. Simple cashbook ruling for use on spreadsheets 48
11. Spreadsheet style invoice register 50
12. Sage tool bar to control bookkeeping software 56
13. Sales invoice entry form 58
14. Aged debtors list 60
15. VAT book - how to record output tax 73
16. VAT book - how to record input tax 74
17. Cash accounting for output VAT 77
18. The flat rate VAT scheme 78
19. 'T Accounts - Sales ledger entries 95
20. ‘V Accounts - Fixed asset entries 95
21. The structure of the nominal ledger 99
22. Wages calculation 111
IX
X List of Illustrations
23. Payroll summary 118
24. Employee payslip 120
25. The profit and loss account 127
26. The balance sheet 128
27. Notes to the accounts 129
28. The trial balance 133
29. Profit and cash are not the same 154
30. Specimen cash flow forecast 155
31. Simple operating summary 159
32. Illustration of adjustments to accounting profit 165
33. Writing down allowances and annual investment

allowance 168
34. Capital allowances treatment for cars according to

emission levels 171
35. Outline of taxation for companies 175

36. Accounting entries for hire purchase 185
Preface
to the Eighth Edition
Some people seem to take to bookkeeping and accounts like ducks to

water. Others dread the prospect of 'doing the books' and looking after the
paperwork of a business or other organisation. However you feel about it,
do remember that accounts are just as important as any other aspect of a
business, and can be crucial to its prosperity and even survival.
In 'doing the books' you will be at the very heart of the business with your
hands on the controls. You will be involved in the management of its assets
and liabilities, its expenses and its profit margins. The more control you have
over these, and the records and figurework on which they are based, the
better you will be able to control the business.
In recent years there has been a move away from keeping handwritten
records towards using computers running spreadsheets or bookkeeping
software although some still prefer pen and paper. There is now a huge
variation in the way that business owners choose to tackle their business
records.
However you choose to keep the records of your business this eighth
edition of this book has been revised so that it is there to guide you. There
have also been updates to reflect the changes in business taxation and
other tips to assist you in your record keeping.
Peter Taylor
XI
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1
Why You'll Need Proper
Business Records
How YOUR ACCOUNTS WILL HELP YOU
Bookkeeping can sometimes seem a chore - especially if you feel like

getting on with other things such as production or sales; but it's worth
remembering that there are several reasons (and advantages) for keeping
good business records, and many of them are a real advantage to you:
■ to help you agree (and perhaps reduce) your tax liabilities
■ to control VAT - collecting it in and paying it out
■ to show you where you stand financially
■ to help you make important financial decisions
■ to discuss your financial position with other people
■ to help the audit of your business in certain cases, and keep the
auditing costs down.
Let's consider them in turn.
Agreeing your tax liability

For small businesses this is probably the most important reason to keep
proper business records. If the business seems to be 'running' itself you
may not feel you need information to make financial decisions (although
you could probably run the business even better if you did). But unless
you keep your records in order you (or your accountant) will be unable to
1
2 Chapter 1 • Why You'll Need Proper Business Records
produce accurate figures on which to calculate your taxation liability. Under

self assessment you are required by law to maintain proper accounting
records and you can be fined up to £3,000 if you fail to do so. If you don't
keep on top of the situation you could soon lose out in several ways:
■ fines imposed by HM Revenue & Customs
■ loss of tax allowances you might be entitled to
■ much wasted expense in getting your accountant in to sort out the

details
■ wasted time that could have been better spent on production or sales
■ annoyed customers through mix-ups on their accounts, causing loss

of business
■ aggravation, spoiled plans and sleepless nights.
'We seemed to spend the whole of November and December trying to

sort out the wretched problem - and when the accountant sent in his bill
it was more than double last year's and I think the Revenue have made
me a marked man.'
Rate Yourself
I know: Exactly Roughly No
idea
What allowances I can claim 2 1 0
How much tax is due 2 1 0
When it is due 2 1 0
When my Self Assessment form is due with the 2 1 0
HM Revenue & Customs
How much my accounts fees will be 2 1 0
Score
10 You've got the message
7-9 You can identify the information that you

need
4-6 Time to give yourself a serious talking to
1-3 You have been warned
0 Should you be in business?

Chapter 1 • Why You'll Need Proper Business Records 3
Accounting for VAT

Except in certain cases (see page 67) your business will have to register for
VAT. You will have to keep proper records so that you can account for the
correct amount of VAT to HM Revenue & Customs. You will usually need
to charge 20% VAT to your customers and pay 20% VAT to your suppliers.
There is no way round this (unless you run a crooked business) and you
need to keep right on top of it each month or quarter - as Revenue &
Customs most certainly will. If you get behind, they'll soon be after you
with final warnings and penalties. But since you collect VAT, it can actually
be a benefit to your cash flow. VAT is dealt with more fully in Chapter 4.
Knowing where you stand financially

Without proper business records you will never know what your real
financial position is. Not all businessmen and women, particularly when
running small businesses, want to produce detailed financial statements
every month, but it is very useful to be able to work out:
■ how much money you have at the bank
■ how much is owed to you by your customers
■ how much you owe to your suppliers.
If you know that the money owed to you is enough to pay off your creditors
and the bank, then you should certainly be able to sleep at night. (Do you
know your current financial position?)
Suppose you suddenly find yourself short of £3,540 to pay a pressing

supplier. You decide to telephone your bank manager to see if he will
grant you some temporary help to tide you over.
Business manager. 'Hello Alan, I wonder if you can help me? I urgently need
to find £3,540 to pay off a supplier who's threatened to stop an important
delivery of new materials unless I pay. Can you help?'
Bank manager. 'Yes, I should think so. What's your overdraft at the moment?'
Business manager. 'It's only about £4,000 and we already have a limit agreed
at £6,000. So I reckon that we will need another two grand ...'
Bank manager (checking on his computer). 'Yes, but hold on - I see that
there are some more debits in today and those cheques that you paid in
yesterday haven't cleared yet. I make it £5,819.89 at present.'
Business manager. Nearly six grand? Good heavens, are you sure? I'd no
idea.'
Bank manager. 'Well, you should have! How much is owed to you by your
customers? If it's a lot, we may be able to sort something out.'
Business manager. 'I don't think we've got an exact figure - it must be about
five thousand. The papers are all over the place at the moment.'
Bank manager. 'Look, why don't you get your accountant in, and get the
exact figures, then we can meet and see what can be done.'
Business manager (groaning). 'That's going to take ages and cost money -
isn't there anything else we can do?'
Bank manager. 'Well, we've got to have the facts first'
The business manager needs help, and the bank manager wants to give it
- but not just on a wing and a prayer. What would you think of your bank
manager if he was sloppy with key figures?
Could you answer the above questions about your own business? Broadly
speaking, if 'what we've got' is more than 'what we owe' the business
is solvent. If not, it is insolvent and probably should not go on trading.
However, it should be kept in mind that some of the assets ('what we've
got') are not in a form that can be used to pay the bills. The vehicles and
equipment, etc. (collectively called fixed assets) are for the long-term
benefit of the business and are not readily turned into cash. You should
therefore also consider the situation without taking account of these items.
But these are basic questions, and are only the beginning of gaining a real
understanding of your business as a financial entity. If you can't find the
answers to these questions fairly quickly and accurately, you will certainly
need this book.
Making financial decisions

Armed with an up-to-date statement of your financial position and recent
trading you can start to make real financial decisions. Can you afford to
replace the delivery van? Is it worth taking on an extra salesman? Do
you need a partner? Without business records to provide you with the
necessary facts you will not be in a position to make such decisions.
Let's take some examples:
Decision Information needed Business records
1 Buy a new van? Exact cash position? Cash book or bank balance
from computerised
bookkeeping records.
General liquidity Sales and purchase ledgers;
position? cash flow forecast or similar
information from your
computerised bookkeeping
application.
Enough profit to Management accounts
cover?
2 Take on new Wages and NI costs? Wages records

staff?
Afford? Profit forecast from
management accounts; cash
flow forecast
3 Extra credit to Can I finance it? Cash book or bank balance

main customer? from computerised
bookkeeping records
Profit forecast from
management accounts; cash
flow forecast
'We got a great new account - lots of new business - but had no idea
what giving them so much credit would mean. If only we knew what our
trading margins had been, and had had a proper cash flow.' Director of
insolvent engineering company.
'I desperately needed a partner to help the business and put in more cash,
but I just couldn't prove to him that we're getting a good return on our
money.' Proprietor of a catering firm.
'Our customer had several different invoices from us. He paid part of
the third one, none of the first two and queried part of the seventh. We
completely lost track of the account, and ended up having to write it off.'
Housewife running a wholesale crafts business.
How my business stands financially
What we've got
Vehicles plant, equipment, buildings etc £

Value of our work in progress £
Value of our stocks £
Money owed to us by customers £
Cash at bank and in hand £
What we Owe
To the bank £
To our suppliers £
On HP or other finance £
To anyone else £
Difference £
Auditing your business

If your business is a limited company its accounts may have to be audited
(checked) each year by an independent qualified auditor. However most
small businesses are exempt from the requirement for an audit (see
Chapter 7).
The auditor, if required, usually a chartered accountant or certified

accountant, has to go right through your records and satisfy himself
that your accounts give a 'true and fair' view of the company's financial
situation and of its profit or loss for the period. He must then give a report
(which is appended to the accounts) to say that he has examined the
records and to state his findings. This is required under company law.
If the auditor is not happy about the accounts he may qualify his report
(include a note of warning or caution). A company has to file its audited
accounts each year at Companies House, where they are open to public
inspection for a small fee.
In addition various other legislative and professional requirements have

made an audit necessary for certain classes of business. For example,
solicitors' accounts need to have a specific report submitted to the Law
Society and the Financial Services and Markets Act 2000 requires an audit
of businesses that do investment advisory work.
Without proper business records the auditor won't be able to do his work
and the business won't be able to meet the requirements of an audit. What
then?
■ you will have to pay an accountant possibly large fees to sort out your
books
■ you may ultimately be prosecuted under company law.
However, once you do have the audited accounts, you should have an
accurate picture of the financial position of your business. Indeed, you'll
probably be chasing your accountant to get them out as soon as possible,
so that you know exactly where you stand.
Discussing your financial position with other

people
From time to time you may need to give other people an up-to-date
financial picture of your business. In particular, if you are relying on bank
finance then the bank may ask you to provide regular information about
your debtors (customers owing you money) and creditors (money owed
by you to your suppliers) so that they can monitor the healthy progress of
the business. And you may need facts and figures to discuss with:
■ any co-directors, partners or senior staff
■ a possible outside investor or partner in your business
■ a major supplier (for example, if you are hoping to get extended credit)
■ any major creditor who is unhappy about the way your business is
going, and the risk he is taking.
Some horror stories

Some typical comments from bankruptcy proceedings:
'The company was flying by the seat of its pants. It simply had no idea
whether it was trading at a profit or loss each month.'
'None of the partners knew what bills the other partners were running
up. There were no proper records, and none of them seemed to appreciate
that each was individually liable for all the debts of the partnership.'
'Didn't you ever sit down and do a cash flow forecast?'
'You left it all to your accountant? Are you saying he was actually a director
of the company?'
'They never bothered to do a bank reconciliation statement and didn't

seem to realise their cheques would bounce. No wonder the bank
foreclosed. They had been pretty patient.'
'They didn't know what all that gear was really costing them - not just
the repayments, but interest charges, service costs, let alone depreciation
which seemed to take them by surprise.'
'The receiver couldn't collect any money from customers, to speak of. The
firm didn't keep a sales ledger or even issue statements.'
They seemed to think they'd never actually have to send in a PAYE

return.'
Hard to believe? Yet the failure to keep proper business records is given
time and time again as the main reason why an otherwise promising
venture eventually failed.
What records will i need?
The type of records you will need will depend on several factors. For
example:
■ Is the business large or small?
■ How much bookkeeping work does the proprietor want to do?
■ What kind of business is it - sole trader, partnership or limited

company?
■ What type of trade is conducted by the business?
Let's consider each in turn.
The size of the business

There can be no hard and fast categories for the size of a business. But
obviously a national chain store such as Marks & Spencer will have a
more sophisticated accounting system than a local trader with a market
stall. The point at which you need more complicated records will also
depend partly on the type of trade. However, here are some guidelines to
get you started;
■ If you are owed money by more than about 15 customers then you
should consider starting a sales ledger system. Although this could
be handwritten it may be easier to use a computerised bookkeeping
package (see Chapter 3).
■ If you have more than about 15 purchase invoices a month you should
consider starting a purchase ledger system. Again a computerised
system may be the easiest route (see Chapter 3).
■ If you have more than about five cash payments a week you should
think about starting a cash record system independent of your bank
records.
How much work does the proprietor wish to

undertake?
There is no point in becoming a slave to bookkeeping. Unless you are
going to use the information from a comprehensive bookkeeping system,
there is little point in doing more than the minimum in writing up your
records. Clearly you will need enough records to run the business but
there is normally no need to keep a full set of double entry records.
You might, however, be forced to keep a sales and/or purchase ledger to
administer the business and, for example, to help control your cash flow.
The type of entity conducting the business

There are three main types of entity commonly found running a business.
These are:
■ Sole traders
One person owning the business which he is running in his own

right, e.g. Joe Bloggs trading as Swanhampton Glazing Services. Since
the person is trading in his own right he is personally responsible
for any debts his business incurs. Even if he uses a trading name the
customers and suppliers are still trading with him as an individual.
■ Partnerships
A group of people owning and running the business, e.g. Arnold

& Woodward, Estate Agents - a business run by Mr Arnold and
Miss Woodward. As with the sole trader, it is the individuals in the
partnership who are responsible for the partnership debts. Solicitors,
accountants and other professionals often trade as partnerships, but
in general anyone can do so.
■ Limited companies
A business which is owned by one or more people who may or may

not also be involved in the day-to-day running of the business. The
owners (or shareholders as they are better known) have a limited
personal liability for the debts incurred by the company which is itself
a separate legal 'person' or entity. The day-to-day running of a limited
company is entrusted to its directors. The directors of a company may
also be the shareholders. Note: in theory the shareholders' liability
is limited to the amount (if any) outstanding by way of payment for
their shares. In practice a bank will often ask the major shareholders
to personally guarantee the company's overdraft; that is, to repay
the overdraft if the company is unable to do so, and to use their own
assets as security.
In addition there are limited liability partnerships but these are not very
common. Limited liability partnerships (LLPs) are a relatively new type
of entity having been available since 2001. They are a cross between the
ordinary partnership as outlined above and a limited company. The LLP
has the organisational flexibility of a partnership and is taxed in the same
way as a partnership but in other ways it is similar to a limited company.
It is a separate legal entity like a company and enjoys the limited liability
status. It must also file its accounts with the Registrar of Companies and if
the turnover is large enough it must have its accounts audited.
If you are starting a business, it is wise to discuss with your accountant

which approach will suit you best.
Type of trade
Some types of trade need more records than others. For example, a small
engineering company may well need a sales ledger system to keep track
of its credit sales to customers. On the other hand, a clothes shop which
does not allow credit to customers will only need a simple record to keep
track of its takings.
Choosing what records to keep

Unless the owners decide otherwise, there is no legal need for an annual
audit of the records of a sole trader or a partnership. There is, however,
a legal obligation for an annual audit of the accounts of some limited
companies. An audit is a formal check of all the accounting records; the
modern auditor has to certify that they have examined a company's
records and that the balance sheet gives a 'true and fair' view of the state
of affairs of the business, and that the profit and loss account accurately
reflects the profit.
But the auditor can only audit the accounts if there are proper records for
them to check. A company has a legal obligation to keep proper records
and if it doesn't the auditor must say so in their report. A copy of their
report has to be filed with the Registrar of Companies, where it is on
public record. If you're not sure what records to keep, discuss things with
the company's auditor.
Unless you have a limited company it's best to keep your records as simple
as possible. You'll save yourself unnecessary work which will make
bookkeeping a chore and even lead to inaccuracy and other problems.
Distinction between a business and its owner

Before writing up any business records you need to understand the
distinction between the business and its owner. This may seem odd,
particularly as we said that the owner of a sole trader business or
partnership is himself legally responsible for the debts of the business.
Whilst this is true, there is no need for the business records to contain all
the personal expenditure of the individual, assuming it has no bearing
on the business. For example, the records of Arnold & Woodward, Estate
Agents, should not record how much Mr Arnold has paid to the butcher
for his Sunday roast at home. It's of no concern to the business.
Recording business expenses

There will be some expenses which are partly for business and partly
for private purposes. For example, when Miss Woodward buys petrol for
her car it is partly a business expense and partly a private expense. The
car will be used on business, such as when she visits clients' houses in
connection with her estate agency business. But if she takes her friends
out for pleasure the car is being used for private motoring. In such cases,
you should:
■ record the whole of the cost of the expense
■ disallow part for taxation purposes (see Chapter 9).
Drawings
A subject which can cause problems is that of drawings taken from a
business. From time to time the owner may want to draw money out of
the business for his own private use. As this expenditure will in some way
affect the business it must be recorded in the records. If Mr Arnold draws
£500 from the partnership bank account for his own use then this must
be recorded by the business, otherwise the bank account would not agree
with the bank statement. But it's of no concern to the business how Mr
Arnold spends the money: all it has to record is 'Mr Arnold - drawings -
£500'.
The situation differs in the case of a limited company. This is because the
company is a separate legal entity and whenever it makes a payment to
its directors it must operate PAYE. The directors of small businesses quite
often have loan accounts with their company (because the directors have
lent money to the business). If at the end of the year the company has
made a good profit it may want to grant a bonus to its directors. However,
it might want to keep the cash inside the company to help its liquidity.
If so, the company has to operate PAYE in the normal way on the bonus
payment; but instead of paying out all the cash, the net amount of the
bonus is placed to the credit of the director's loan account. The director
can then withdraw from the loan account as he needs to.
A company must not, however, lend money to its directors (except in

very special cases) and so the directors must never 'overdraw' their loan
accounts. They must always stay in credit.
Money may also be distributed to the shareholders by way of dividends

- see Chapter 9.
Profits and drawings are not the same

There is often confusion between 'profit' and 'drawings' for sole traders or
partnerships. Many people believe that they will be taxed on the amount
that they actually withdraw from the business, and that if the money is
left within the business they will not pay tax. This is not the case.
There is no direct connection between the 'paper' profits and actual

drawings for a small business. If the business makes more profit than
the proprietor withdraws then there is more money in the business
bank account. If the business does not make enough profit to cover
the drawings it will eventually go bust! This is the only ultimate
connection.
When the business has made a profit, the profit is credited to the
proprietor's capital account. This could be likened to an employee paying
his salary cheque into his bank account. When he makes withdrawals
these are debited to his capital account rather as an employee might write
cheques for housekeeping or to pay the mortgage. There is no direct link
between the amounts that the employee receives and pays out (except of
course that his bank manager will write to him if he becomes overdrawn,
or his bank balance will increase if his expenditure is less than his
earnings). The same applies to the proprietor of a small business.
We've already seen that a small business is just the 'business side' of the
owner's personal financial affairs. If the business side earns a profit it
doesn't matter whether the proprietor takes the profit out of the business
bank account or not. Since in one way or another it is all his money, it
is still his profit available for him to spend even if it is still within the
business.
Outline of records
The records that you will need are described more fully in Chapters 2
to 5. You may choose to keep handwritten records or prepare computer
spreadsheets to record the information. On the other hand, you may
choose to use a computerised software package either running the
application on your own machine or as a cloud application. More details
of the options are given in Chapters 2 and 3.
However, you decide to keep the records your system must:
■ keep track of the cash being received and paid out by the business and
be able to reconcile to the banking transactions
■ keep copy sales invoices (of what you sell) or some other record of
sales and if you have copy invoices then you will need some way of
filing them
■ keep the original purchase invoices (of what you buy) and have some
way of filing them.
Depending on your business you may also need:
■ a cash book to record the cash transactions of the business
■ some sort of wages system to calculate the wages and record the
information
■ a system for your sales so that you know who still owes you money
■ a system for your dealing with your purchases so that you can establish
how much you owe to suppliers.
We'll see how to operate these later on.
Bank
Statement
Fig. 1. A simple business accounts system.

Summary
■ You will need to keep proper business records in order to operate

efficiently and to fulfil your legal obligations.
■ Larger businesses will generally need more complex records than

smaller ones.
■ There are differences between sole traders, partnerships and limited

companies, and between the records they need to keep.
■ The requirement that accounting records must be kept is laid down

by law.
■ Your accounts should show all expenses, even if part of a particular

item was for personal use. This part should then be disallowed for tax
purposes.
■ All money drawn from the business by sole traders and partners must
be shown in the accounts.
2
How to Keep Your
Accounting Records
We've looked at why you need to keep business records: now we'll
consider how those records might be kept.
Questions to be asked
First, you need to ask yourself;
■ How large is my business?
■ What information do I need from my accounting records?
■ Do I want to use a computer to keep the books or would I prefer to

keep handwritten records?
The answers to these questions should help you to decide the best way
for you to keep the records. Let us consider each of these matters in more
detail.
How large is my business?

Even if your business is quite small then you will still need to keep
records. However you do not need a sledgehammer to crack a nut and in
the same way your business records need to be suitable for your business.
If the business is small then it may be satisfactory just to list the amounts
received and paid out during the year.
18
Chapter 2 • How to Keep Your Accounting Records 19
However, if there are more transactions than this minimal amount then
you will need to use a more sophisticated record system to produce the
information set out in the next section.
What information do I need from my accounting

records?
This may partly be a matter of choice but if the information is needed to
complete your self assessment tax return then it will be best if your records
give you this information without a lot of additional work. If you also
have to account for VAT then this is dealt with in more detail in Chapter 4.
There are two versions of the self employment pages of the self assessment
tax return. There is a short version that can be used if your business
income is less than £70,000 and a more detailed form for businesses with a
higher turnover. For more details about the actual taxation matters, please
refer to Chapter 9.
The headings of the self assessment tax return are set out in Appendix 4
but they include items such as:
PROFIT & LOSS ACCOUNT
Income
■ Business turnover
Expenditure
■ Purchases of goods for resale
■ Wages and salaries
■ Motor expenses
20 Chapter 2 • How to Keep Your Accounting Records
■ Premises expenses (rent, rates, heat and light)
■ Office costs (telephone, stationery etc)
■ Bank charges
■ Depreciation
BALANCE SHEET
Assets
■ Equipment and vehicles
■ Stock
■ Trade debtors (money owed to you by customers)
■ Bank balances
Liabilities
■ Trade creditors (money owed to your suppliers)
■ Bank loans
Capital Account
■ Money owed to you by the business
Don't worry if some of the terms seem unfamiliar - they will be explained
later.
Even if you are running a small limited company and therefore do

not need to prepare an income tax self assessment return, this same
information will make a good basis for preparing the company accounts.
The company will need to prepare accounts to be submitted to Companies
House.
If you have arranged your records to create this information for you it
will be much easier for you to produce your accounts at the end of the
year.
Other information that you might want from your business may include:
■ knowing how much is owed by each of your customers
■ knowing how much you owe to each of your suppliers
■ accounting to HM Revenue & Customs for VAT
■ being able to make informed financial decisions about your business
■ being able to discuss your business affairs with others (for example if
applying to the bank for a loan).
A CHOICE OF SYSTEMS
Perhaps the first question to ask is 'Do you want to use a computer or
would you prefer to keep handwritten records?'
For some people computers are an agony and are to be avoided at all
costs. Others love them. Which category do you fit into? It should be
mentioned that HM Revenue & Customs now require that all VAT returns,
employers' PAYE returns, and company tax returns and accounts must be
filed online. This does not mean that you have to keep your accounting
records on a computer - after all you can always ask your accountant or a
computer savvy friend to attend to these matters for you. However it may
have some influence upon your decision.
Fig. 2. Types of record keeping.
The choices of keeping your records are:
■ a handwritten system
■ a computerised system using spreadsheet software
■ a computer bookkeeping application to look after the records.
Each of these is considered in more detail later in this chapter.
The complexities of modern business mean that computers are sometimes

a necessity but many small businesses keep perfectly adequate records by
hand.
Although it is possible to change from one system to another you will not
want to do that too often. Try to settle on one system and continue to use
it until you have outgrown it or there is some other need to change.
Remember that the system you choose has to be right for you. It has to
provide the information that you need and it must not be a chore or the
books won't get written up.
Handwritten Spreadsheet Computerised

Bookkeeping
Package
Simple record of business X X

receipts and payments
Analysed record of receipts X X X

and payments
Simple system of tracking X X

who owes you money
Full ledger system to enable X

you to track debtors and
creditors and to produce
management accounts
Reconcile records to the X X X

bank account statements
Prepare VAT Returns X
Fig. 3. The key components of record keeping.
A handwritten system
For the very smallest businesses with few transactions, then a simple
handwritten system may be perfect for you.
Amount
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This might be using a simple cash book like the one shown in Figure 4.
Alternatively, it may be a more sophisticated analysed cash book. These
will be described in more detail in Chapter 3.
A computerised system using spreadsheets

Although modern spreadsheet software is very powerful, there would
be little point in writing a full bookkeeping application to run on the
spreadsheet software. There are many bookkeeping programmes
available at a modest cost, so if that was what you needed, you would
be better to buy the software and invest your time in building up your
business.
However simple spreadsheets are a very useful tool and for many will be
the ideal method of keeping the business records. More details of these
are given in Chapter 3.
Using a computer bookkeeping package

There are many computer bookkeeping packages available and each has
its own advantages and disadvantages. The systems range from very basic
systems to very sophisticated systems incorporating job costing, stock
control and point of sale transactions.
Typically the bookkeeping package will:
■ allow you to maintain a record of your bank transactions and reconcile

them to the bank statement
■ provide you with a full analysis of receipts and payments from your
business
■ help you prepare invoices for your customer
■ keep track of money owed to you by customers and also money owed
to suppliers
■ help you to prepare your VAT return
■ prepare management accounts to help you monitor your business.

26 Chapter 2 ■ How to Keep Your Accounting Records
More details of using computerised bookkeeping packages are given

in Chapter 3. The final choice of software must be a personal decision
but there are the details of some suppliers for you to consider listed in
Appendix 5.
A common approach
Whatever system you adopt there are some matters that will be common
to your business and we will discuss them first and we will look at the
actual writing up of the records in Chapter 3.
Handling banking
Keeping a separate bank account

It would be wise to open a separate bank account for your business. This
will in itself form a useful permanent record of your business. It will help
settle any queries from the Revenue & Customs or other government
agencies. Also, by separating the business banking transactions from your
personal banking transactions you'll help yourself (or your accountant) to
produce your year-end accounts. The bank will provide you with weekly
or monthly bank statements, debit cards, paying-in books and cheque
books.
Running your bank account

If you already have a personal bank account you will know how to
operate a bank account. But it will pay for you to open a second account
for use by the business. To open your business bank account, visit your
local bank for a chat. However, there are some matters you should think
about before you go:
1. What name is the account to be in? This could be your own name
but if you have a trade name you might want that to appear on your
cheques. For example, Mrs C. Dyche running a livery stable might want
her business bank account to be C. Dyche t/a Christine's Equestrian

Centre. T/a just means 'trading as'.
2. If you don't already bank with the particular bank they will ask for
proof of your identity. This may be in the form of a passport and a
utility bill. They may also ask you for the names of people they can
approach for references. This is so that they can establish that you are
of good character. Do ask the people that you name before you give
their details to the bank.
3. Decide who is to sign cheques and how many signatures you will
need on the cheques (e.g. both partners? two directors?).
4. Decide how often you need bank statements to be issued to you:

generally once a month is about right.
5. Do you want on-line banking so that you can check on your account
using your computer and also make payments to suppliers and staff
using internet banking?
Handling cheques and paying-in books

A cheque is a simple means of making payments out of your bank account.
Do always record details of the payment on your cheque stubs so that you
can write up your cash book later on. This might seem obvious but it is
surprising how often people forget. In the same way, use your paying-
in book to pay money into your bank account. Once again the details
from whom the money was received and why (e.g. sales) should be noted
on the counterfoil. Unfortunately some banks don't make provision for
recording the details on the face of the counterfoil: if so write the details
on the back.
Transfer the information from your cheque book and paying-in book to
your cash book on a regular basis. We will explain how to write up your
cash book in Chapter 3 or you can enter the details into your bookkeeping
package if you are using a computerised system. Some people do this once
a week, others once a month. It depends on how many transactions there

are. It's best not to leave it too long, and certainly not more than a month.
You should be able to pick up the details of debit card payments, internet
banking transactions and BACs credits from your bank statements.
Drawing up a bank reconciliation statement

Each time you receive your bank statement, check the entries on the
statement against your cash book. This will bring to light any payments
from the bank account that you haven't recorded, and any errors you may
have made. It will also highlight the rare occasions where the bank may
have made a mistake.
■ Bank charges and standing order payments can easily be overlooked

and omitted from your cash book: write them in as soon as you
discover their omission.
Having checked that you have recorded everything, it's a good idea to
agree (reconcile) the balance on the bank statement with the balance
in the cash book. Using Figure 4 let's suppose that when you checked
the items from the bank statement against the cash book you found
that the payments to A. Durose on 26 May and to Z. Ingram on 31 May
were not shown on the bank statement. These are not an error: it is just
that there hasn't been time for the items to pass through the banking
system (it generally takes about three days for the item to appear on your
statements). In order to agree the balances you'll need to make allowance
for this, and write a simple reconciliation statement like this:
Bank reconciliation statement
£ p
Balance as per bank statement - 31/5/201X 1503.29
Less unpresented cheques 100.00
325.72 425.72
Balance per cash book 1,077.57
Of course, there may also be some items that you have paid into the
account that have not been recorded on the statement. Appropriate
adjustments should then be made. Keep all the reconciliation statements
you have written out. They will be useful if any queries arise on the bank
account, and will help your accountant at the end of the year.
Dealing with cash payments

Most of your business expenses are best paid by cheque or by BACs
transfer through internet banking. In this way you will keep a permanent
record. However, there will be some payments you need to make in cash
(window cleaner, postage stamps, car parking, etc.). The simplest way to
record these is to:
■ pay them out of your own pocket and
■ make out a corresponding expense voucher (see Figure 5).
Expenses - May 201X
4 May Car park 1.30
6 May Window cleaner 5.00
10 May Lunch with supplier 14.32

Car park 1.30
12 May Stationery - envelopes etc. 3.27
18 May Car park 1.50

Telephone 0.20
24 May Postage stamps 10.40
Cheque 37.29
Fig. 5. An expenses voucher.

Any receipts that you can get (e.g. car park tickets) should be clipped to the
expense voucher. At the end of the month (or when it totals a reasonable
amount) you should write a cheque on your business bank account (or
make a transfer via internet banking), to yourself personally to reimburse
yourself. File the expense vouchers on your paid purchase invoice file to
match the payment that the business has made by cheque.
Handling invoices
Unless you are using a full ledger system (see Chapters 3 and 5), then you
will need a simple system of dealing with invoices.
So far we have dealt with receiving and paying out money for your
business. But of course you will need to know how much to pay for your
purchases and others will need to know how much to pay you. This is
where invoices come in. An invoice is a simple document listing the goods
or services provided and stating how much is due to the supplier. Your
business will receive invoices for its purchases and you in turn will have
to issue invoices to your customers for sales you make to them.
The invoices will thus be two sorts: purchase invoices and sales invoices.
Receiving purchase invoices

You will receive purchase invoices, not only for goods that you buy but
also for services such as telephone charges and rates. Until your business
outgrows the system you can keep track of the purchase invoices by
accumulating them in an unpaid invoice file until you are ready to pay
them. When you pay them mark them 'Paid' and record the date of
payment and ideally the cheque number or the fact that you have paid
them by internet banking. You should also transfer them from the unpaid
invoice file to a paid invoice file. For the unpaid invoice file use the pocket
or box type; for the paid invoice file use a lever arch or ring type available
from most stationers. The paid invoices should be filed according to date
of payment.
Issuing sales invoices

The type of sales invoice that you issue to your customers will depend on
the nature of your business. Suppose you run a shop: all your sales are
cash (no credit allowed). In this case youTl only need to issue a simple
receipt to your customers, if asked. But if you sell goods on credit you'll
need to issue invoices to your customers, to tell them how much to pay.
There are several ways you can issue your sales invoices:
■ by using a duplicate invoice book obtainable from stationers
■ by getting a supply of blank invoices specially printed up (e.g. like

business letterheads)
■ printing them on your computer from a word-processing package (e.g.

Word) or a spreadsheet package (e.g. Excel)
■ printing them from your bookkeeping software.
Using a duplicate invoice book

The easiest way of using the duplicate invoice book is this:
1. Write the invoice out making a copy with the carbon paper provided.
Give the top copy to the customer and keep the carbon copy in the
invoice book.
2. When the customer pays, mark your copy of the invoice in the book
with the date and amount paid. If it is paid in full, fold the top right-
hand corner of the invoice over.
3. At the end of each month any invoices not folded over remain unpaid.
You should then normally send a statement to the customer of the
amount still owed to you.
Using other invoices

If you want something a bit smarter, then printing the invoices by one of
the other methods might be the answer. It will look more impressive to
your customers (and perhaps encourage them to pay!).
A system for these invoices might be as follows:
■ Prepare your invoices (handwritten or typed) in duplicate, using

carbon paper. Note: the second copy (which is for your use) could be
on plain paper. If you have prepared your invoices on a computer, just
run off a second copy.
■ Send the top copy to your customer and put the second copy in an
unpaid invoice file.
■ When the customer pays mark your copy invoice with the date and
amount paid, and when fully paid transfer it from your unpaid invoice
file to a paid invoice file (lever arch or ring-binder).
■ At the end of each month the invoices in the unpaid file represent
the customers who still owe you money. You should chase them for
payment!
Remember that there are certain details that you should show on your
invoices. These include:
■ your business name and address
■ the date (it is surprising how often it gets forgotten!)
■ the name and address of your customer
■ a unique invoice number. These numbers should be in one sequence -

it is not good practice to use a separate sequence of numbers for each
customer
■ a description of the goods or services involved
■ details of the amount to be paid

■ details of when payment is due - often 30 days from the date of the
invoice
■ if you are VAT registered then you must show:
• your VAT number
• the amount of VAT charged
• the rate of VAT.
Work plan
There are no hard and fast rules about the way in which you should
approach the task of writing up your business records. However the
following may be a useful aide memoir of what need to be done:
■ Daily
• Write up the cash records - daily cash sales, cash expenditure etc.
• Bank cash and cheques (remember to write the details onto the
stub of the paying-in-book so that you know what the banking
was).
■ Weekly
• Prepare the sales invoices - actually it might be better to do this

more frequently - you won't get paid until you send the invoice.
• Make the relevant entry for the sale in your records (sales register
or entry into computer bookkeeping application).
• Enter the purchase invoices into your records.
■ Monthly
• Complete the recording of receipts into the bank account - if using

accounting software then make sure that you allocate (match) the
receipts against the invoices on the sales ledger.
• Complete the recording of payments from the bank account. In

particular remember to record items that have gone straight from
the bank account such as bank charges and direct debit payments.
• Reconcile the bank - check that the entries in the accounting

records record all of the items on the bank statements.
• Reimburse out of pocket expenses.
■ Quarterly
• If registered for VAT then prepare and submit your VAT return.
■ Yearly
• If you are maintaining full double entry records (probably

through a computer bookkeeping package) then make the year
end adjustments for items such as depreciation and changes in
stock levels. Alternatively ask your accountant to do this bit of the
task for you.
■ As necessary - probably weekly or monthly
• Prepare the staff payroll and arrange payment.
• Make the necessary entries to record the payroll transactions into

the main records of the business.
• Monthly or quarterly - make payments of PAYE to HM Revenue &

Customs.
Summary
■ You should open a business bank account.
■ The records that you keep will depend upon the size of your business.
■ Don't overburden yourself with a more complicated system than you

need. Your bookkeeping should work/or you not against you.
You can choose to use a computer to help you with your bookkeeping
if you wish.
If you employ staff then you will need to keep a record of the wages
- see Chapter 6.
Decide what sort of sales invoices you need for your business and set
up an appropriate system to monitor them.
3
Starting Your Record
Keeping
As mentioned in the previous chapter there are perhaps three main ways
in which you could keep your records. These are:
■ a handwritten system
■ a system using computer spreadsheets
■ a commercial computerised bookkeeping package.
Towards the end of this chapter we will discuss the considerations of

using a computerised bookkeeping application but first we will look at
the other two methods of recording your business transactions.
In many respects computer spreadsheets are like an electronic version of

a handwritten paper record so many of the same basic considerations will
apply. We will deal with the differences and advantages of spreadsheets
later in the chapter.
Primarily such systems will concentrate on recording the cash and bank
transactions (a cash book) and perhaps extend to some sort of invoice
register to record the sales and help you keep track of who owes you
money.
Normally the cash and bank transactions are recorded in separate

books although more complex systems are sometimes used to combine
these into one book using separate columns for each. For anyone new to
bookkeeping this combined book can be confusing and it's best avoided
if possible.
36
Chapter 3 • Starting Your Record Keeping 37
Figure 4 on page 24 shows the typical ruling of the simplest cash book.
In this example the book is only used to record the bank transactions: a
simple way to incorporate cash transactions is described on page 29. Here
are a few simple rules to follow when writing up the cash book:
■ By tradition, your receipts should be on the left and your payments

on the right. Technically the left page is called the debit whereas the
right-hand payments page is called the credit. But you don't need to
remember these names.
■ Do remember to enter the year at the top of the date column. It can
sometimes be quite difficult, when looking back, to work out which
year you are looking at!
■ When you enter the items in your cash book, as well as the name
associated with the transaction, it is useful to record, as in the example,
what items are for. That brief note will help you (and your accountant)
when checking back to see what expenses you paid.
■ If you take money out of the business for your own use, or pay for
some private items from the business bank account, then this should
be recorded as drawings. Likewise if you put your own money into the
business it should be recorded as a receipt marked Capital Introduced
and its source (e.g. your name) written beside it.
■ If you receive money for sales in the form of cash (notes or coins) then
unless you pay the amounts into your bank intact, without keeping
any back for your drawings or to pay other bills, then you will need to
keep both cash and bank records. The banks charge for handling cash
and therefore it can make economic sense to use some of the cash to
pay wages or bills even though it makes your record keeping slightly
more complicated. We will explain what you need to do a little later.
Each month check out the amounts received and paid against your bank
statement. This process is termed reconciling the bank. You may need
to add into your record any amounts that have been paid by direct debit
38 Chapter 3 ■ Starting Your Record Keeping
or taken in bank charges and also any amounts that you have received
into your bank account by BACs credits from customers. When you have
recorded all of the transactions you can add up both sides of your record
and record the difference between your receipts and payments. This
should represent the amount of money that you have in your business
bank account. If the receipts (including the balance brought forward
from the previous month) exceeds the payments, then you have cash in
the bank; in this case the balances should be 'carried down' as shown. If
on the other hand your payments exceed the receipts you'll have a bank
overdraft and the balance should be entered at the start of the payments
column for the following month.
If you are using spreadsheet software then you would probably adopt
a slightly different layout (see Figure 10) but it would give the same
information. The advantage is that it would calculate a running total of
the bank balance.
Expanding your records as your business grows

Using an analysed cash book
As your business grows you may start wanting some elementary
management information from your records. For example, 'How much
have I spent on advertising so far this year?' or 'What sales are each of my
products bringing in?'
This information will also be useful when you (or your accountant) are
putting together your year end accounts.
Without getting into too much extra work this information can easily be
obtained by adding a few analysis columns to your cash book, so that it
becomes an analysed cash book. Of course, it can only be a guide at this
stage as it doesn't quite give the full picture. It does not, for example, allow
for amounts that you still owe for the materials that were delivered last
Friday. But it is a good starting point towards management information.
How to keep the book

Figure 6 shows an example of a page from an analysed cash book. The
example is for the credit side of the book (payments), but you can make
a similar analysis for the receipts side. With this type of book, as well as
recording the amount of each payment in a Total' column a second entry
is made in one of the analysis columns. You can adjust the headings of
these columns to suit your own business. Depending on how you claim
VAT input tax, for instance, you can enter the amounts in the analysis
columns either gross or net of VAT. If you are using the cash accounting
(or cash book accounting) methods of recording VAT then just add a VAT
column next to the total column, and you can analyse your expenses net
of VAT. This is described more fully in Chapter 4 about VAT.
By analysing the payments as shown in Figure 6 it is easy to see how

much, for example, has been spent on telephone charges during the
month (£75.63).
Tip
the last column is a sundries column to mop up anything that
doesn't fit neatly into any of the other columns. Your regular
payments should each have a column of their own; only items
such as the purchase of a new machine or other occasional 'one
off' payments should be entered in the sundries column.
It can also be useful to add small amounts of narrative (i.e. a few words)
to some of the items, to remind you later what some particular expense
was for.
There are two final points to make:
1. In the example on 16 June a cheque for £662.90 was written out to

the insurance brokers; this was to pay for both van insurance (motor
Fig. 6. Sample page from an analysed cash book.
expenses) and office insurance. In a case like this put the appropriate
amount into each of the analysis columns just as in the example.
2. When you add up the page at the end of the month it is vital that you
check that the sum of the total of all the analysis columns does in fact
equal the sum of the total column. This is cross addition (because you
are adding across the page). If the totals don't agree then there's a
mistake somewhere and you'll have to recheck your work.
To summarise:
■ An analysed cash book is the first step to providing management

information.
■ Each entry is made both in the total column and also in an analysis
column.
■ At the end of the month when the book is added up it must cross add.
Recording cash transactions

As your business expands you may have more cash transactions in notes
and coins and the system for dealing with them described on page 29 may
no longer do. An alternative system is to keep a special book to record
these cash transactions separately from the bank transactions. You will
also need to keep a cash float from which to make your payments.
Unless you pay all your takings into the bank without keeping any money
to pay expenses in cash, you will need to keep some sort of record of your
sales. You may use a till that automatically records the sales as you make
them, but more likely in a small business you will just use a cash box for
the takings. This is fine but you must make sure that you can establish the
correct amount of sales. The easiest way is to use a daily cash summary
like the one shown in Figure 7.
42 Chapters • Starting Your Record Keeping
DAILY CASH SUMMARY
Friday - 6 May 201X
SALES
Cash in till 821.27
Add expenses 228.75
Less float brought forward * 423.42
Sales 626.60
EXPENSES
Wages Jenna 57.90
Alex 63.26
Window cleaner 5.00
Coffee A milk 2.59
Drawings 100.00
228.75
RECONCILIATION
Float brought forward * 423.42
Sales 626.60
Cash from bank Nil
1050.02
Less
Expenses 228.75
Cash to bank 746.27 975.02
Float carried forward 75.00
* from yesterday's reconciliation
Fig. 7. A simple daily cash summary.
During the day you put the money from your sales in the cash box. If
you have to pay any amounts in cash you take the money from the box
but you make sure that you put a note into the box to record how much
has been taken out. At the end of the day you list the expenses that you
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44 Chapter 3 ■ Starting Your Record Keeping
have paid out and you also record any money that you have taken out for
your own drawings. Then by adding the expenses to the figure of cash in
the box at the end of the day and adjusting for the opening float you can
calculate the true figure of sales. Each day you will need to transfer the
figures to the cash record book (as shown at Figure 8).
You should note the following;
■ Record your takings (sales) each day from the daily summary list or till
list. Note; it's best to treat all sales the same way regardless of whether
the customer has paid by cash or by cheque. If, for this purpose, you
include cheques in the total of takings, it will simplify your records.
■ Record the expenses as they are incurred. File the invoices for cash
payments on a separate file from bank payments. Keep the invoices
in date order.
■ Periodically, say once or twice a week, pay any excess money in your
float into the bank. When writing up the record of cash transactions
you should treat it as a payment since the money is being paid out of
the float. In your record of the bank transactions (your cash book)
you will record this as a receipt since the money is being received
into the bank account. Confusion can arise on this point, but if the
cash transaction is thought of as quite separate from the bank receipt
transaction then all should become clear.
If you bank the takings intact you won't have to record them all separately
in your cash book. You will, however, need to draw money from the
bank to pay cash expenses, and these transactions should be recorded as
follows. Treat the money drawn from the bank as;
■ a payment in the bank records, and as
■ a cash receipt in the cash records (using the words 'Cash from Bank').
Once again, if you think of cash transactions paid from the bank, and
cash received into the cash float, quite separately, then the treatment of
the transactions in your records should become clear.
It is relevant to mention that bank charges for handling cash (notes and
particularly coins) are more expensive than other types of transaction.
You may therefore choose to hold some or all of the cash funds to pay
expenses rather that paying the money into the bank account. However
if you do then it is vitally important that you maintain accurate detailed
records because there will be no other record of the transactions to act as
backup if you need to verify any details.
Recording your sales
As your business grows you will need to have a system so that you know
which customers have paid you and which have not. You may think that
you will be able to remember but as the business expands that will become
impossible. You need a system!
So far, you have controlled which customers have paid you, and which
have not, by handling the individual invoices. You have filed your copy
invoices in a separate file until they are paid, or 'flagged' them in your
duplicate sales invoice book until they are paid.
This is fine as far as it goes, but you'll probably find it has two main
drawbacks:
■ First, you'll have to thumb through all the unpaid invoices, adding
them up as you go, to work out how much you are owed altogether.
■ Second, you can't tell very quickly how much a particular customer
owes you. They may owe you for several invoices and the invoices may
not be in sequence. And they may have only sent you part-payments.
A better way to keep track of your invoices is to prepare an invoice register.

An example of this is shown at Figure 9. As you will see it is a list of the
invoices that you have issued but it is also a bit more than this. It will help
you to keep track of the invoice numbers (a requirement for HM Revenue
& Customs) and it also records when the payments have been received.
Invoice Invoice Date

Number Date Name <& details Value Paid
201X
1045 6 May S Kelly Car service € 165.00 18 May
1046 8 May S Griffiths Repair brakes € 287.00 27 May
1047 12 May A Jones Gearbox £ 550.00 15 May
1048 18 May P Smith 2 tyres £ 110.00 27 May
1049 24 May C Wathen Bodywork £ 743.00
1050 28 May S Kelly MOT £ 50.00 28 May
1051 29 May L Holmes Car service £ 183.00 29 May
1052
1053
Fig. 9. Example of invoice register.
The left column is a list of the invoice numbers. Next are the date and the
name of the customer together with a note of the work (if relevant). Then
there is the value of the invoice followed by a note of when it was paid-
You will see from the example that it is easy to see that Mr Wathen has not
yet paid his bill so you will know to chase him for payment. On the right
you can add an extra column for notes (not shown). You might use this to
record if someone has part paid an invoice or when you need to record
other details of the transaction.
Although this is not a substitute for a complete ledger system (see Chapter
5 on double entry) it will be suitable for most small businesses.
Using computer spreadsheets
Computer spreadsheet software such as Excel, Open Office or LibreOffice

can be a very powerful and useful business tool.
When using a spreadsheet the screen usually displays a two-dimensional

matrix or grid consisting of rows and columns. Each square on the grid
is referred to as a cell and can contain alphanumeric text, numeric values,
or formulas.
The columns of the grid are normally identified by letters A, B, C etc.

and the rows across the grid by numbers 1, 2, 3 etc. By this means it is
possible to identify any particular cell. You probably used this system of
referencing cells when you were playing Battleships at school!
The whole grid is referred to as a worksheet and it is normally possible to

have multiple worksheets in one file that make up a workbook.
If the cell contains a formula it defines how the content of that cell is to be
calculated from the contents of any other cell (or combination of cells) each
time any cell is updated. The use of spreadsheets can cut down on your
time because of their ability to re-calculate the entire sheet automatically
after a change to a single cell is made. Compare that with a paper system
when you had to rub-out the totals and add up the figures again each
time you made an alteration.
The formula that you use in the cells can refer to other cells (or groups
of cells) on the worksheet. A cell on one sheet can also reference cells on
other, different sheets, whether within the same workbook or even, in
some cases, in different workbooks.
There are many different formulas that you can use in the cells of the
spreadsheet. Some will add a range of cells (=SUM(C5:C17), whilst others
will just copy the contents of another cell (-I-F16). And you can perform
calculations within the cell formulas. For example, +B3*20% would
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calculate the VAT (at 20%) on the value of goods contained in cell B3.
There are rounding functions (=ROUND(C7/9,2) that will ensure that
you do not end up with fractions of pennies when you have calculated
values in your spreadsheet.
You can use the conditional function TF' to conduct tests on values
and formulas and give one result if true and another if false. There are
also many other functions built into the software to make it a powerful
reporting tool. This book does not pretend to be a tutorial on spreadsheet
software but a little further on in this chapter we will include one or two
pointers to help you on your way.
The simple record of bank or cash transactions

If you are using a spreadsheet to record your cash book transactions then
an alternative ruling might be better for you. Because the spreadsheet
takes the effort of all of the maths from the record keeping it is easy to
calculate the balance on each line. An alternative ruling is shown at Figure
10.
The formula to calculate the first value after the brought forward line is
shown on the sheet. This takes the value from the line above (cell F3),
adds any amount received shown in cell D4 and subtracts any payment
recorded in cell E4. The result which is the revised balance is shown in the
balance column. By this method you can use the power of your computer
and the spreadsheet software to take away the drudgery of adding up the
columns.
Sales invoke register

This can be very similar to the handwritten system used above except that
you can benefit from the power of the computer to keep a running total
of your debtors (money owed to you by your customers). To do so then
you need to add some extra columns and add some simple formulas. See
Figure 11.
Fig. 11. Spreadsheet style invoice register.
Tips for using spreadsheets

■ When you prepare a spreadsheet such as the one in Figure 10,
remember that you do not need to type the formula into each cell of
the sheet. Having typed the formula into cell F4 and pressed return
if you now highlight that cell again it will have a black border around
it but in the bottom right corner of the border there will be a small
rectangle. If you put the mouse cursor over that rectangle the cursor
will change. You can then left click on the mouse and drag towards
the bottom of the column. When you release the mouse you will find
that the formula has been copied into all of the cells that you dragged
over and on each line the reference to the line number will have been
incremented by one. Incidentally if you do not want a formula to
increment when copied then put a dollar sign ($) in front of the item
in the formula (e.g. F$4).
■ One other quick tip for using spreadsheets that novices sometimes
overlook is the SUM function. The easiest way to use this is to use
the Z button from the toolbar at the top of the sheet. Click on the cell
where you want the answer to appear. Then click on the Z button and
then highlight a range of cells with the cursor. When you release the
mouse button the sum of all of the relevant cells will be shown in the
answer cell. This is great for adding up columns of figures.
■ As we have mentioned, part of the power of spreadsheets is that they

can recalculate the whole sheet after each entry. This means that
you can perform some additional maths to make error finding easier
without much extra effort on your behalf. The work is done for you by
the computer.
Thus, for example, you can add a check total column to a sheet to
ensure that you have made the entries correctly. Consider the example
of an analysed cash book page like the one in Figure 6. If you prepared
a similar document using spreadsheet software then you would know
that for each line of the cash book the amount recorded in the total
column should also be entered into one of the analysis columns. But
52 Chapter 3 • Starting Your Record Keeping
it is easy to overlook the entry in the analysis column or mistype the

value. When you add up each of the analysis columns and check that
the total of those columns is equal to the sum of the entries in the total
column you may find that there is an error.
An easy way to identify just where the error is relies on the power of
the computer. If you introduce an additional column on the right of
the page you can enter a formula into the first cell as follows:
=+D4-SUM(E4:L4)
Where D4 is the total column and E4 to L4 are the analysis columns.
You can then copy this formula down the column against each line
on the sheet. As you copy the formula down the row numbers will
increment. For each line the formula takes the value from the total
column and then deducts the sum of all of the values in the analysis
columns. The result should of course be zero. If it isn't then it is easy to
spot which lines need to be checked.
You should try to build this sort of checking into your spreadsheets to
verify their accuracy.
■ If you have a lot of entries on your spreadsheet then you may find
that it is too big to print onto one sheet of A4 paper. Faced with this
some people turn to the sellotape but there are better solutions. If the
sheet is wider than high you can try changing the page orientation.
Go to File/Print preview on the menu bar. Then choose Setup and try
changing the orientation from portrait to landscape. Click OK and
see if that has done the trick. If it still does not fit you can click on
Setup again and this time use the scaling. Experiment with the 'Fit to'
command.
An introduction to computerised bookkeeping
For some people a computerised bookkeeping application will be the

answer to their record keeping needs. Such a system will help you to:
■ record your bank transactions
■ reconcile your bank statements
■ keep track of your purchase invoices
■ prepare your sales invoices and keep track of who owes you money
■ complete your VAT Returns
■ prepare management accounts and year end accounts
■ keep a record of all of the financial transactions of your business.
There are cut-down' versions of some software that provide some, but not
all, of the facilities listed above.
The basic record keeping is generally achieved from routines opened with
just a few clicks of your mouse. For some of the more detailed adjustments
then you should have an understanding of double entry bookkeeping
(see Chapter 5) but of course you can always leave these matters to your
accountant.
Bookkeeping software has been around for many years but recently it has
become much more user friendly. There are many packages around but
they fall into two main groups:
■ those that run on your own computer (or across a small local network)
or
■ those that run across the internet - cloud computing.
You will no doubt be familiar with software that runs on your own
computer be it a PC or a Mac. You probably use programmes such as Excel
or Word. However, recent developments and the improved speed and
reliability of the internet have made it possible to use remote applications
through a browser on your computer. The actual programme and number
crunching is carried out on a remote computer so that your own machine
is just a terminal to enable you to input the data and obtain reports. This
is cloud computing. You don't know where that remote computer is — it is
just somewhere out there on the cloud that is the internet.
So which system will be right for you? Well here are some of the advantages
and disadvantages of cloud computing.
Advantages of cloud computing:
■ No up-front cost of purchasing an expensive software package.
■ Data should be securely backed up by the cloud service provider.
■ Ease of software upgrades. There is no need for you to install any

upgrade to the software. This is done for you by the service provider
so that the new or revised routines appear automatically as you run
the application.
■ The application will normally be independent of the operating system

so it can be used equally well on a machine running Windows, Mac
OS, Linux or Android.
■ The accounting data can be accessed from more than one place. You
can do part of your bookkeeping at the office and then complete it
when you get home.
■ Most systems will be multi-user meaning that two people can be

working on your books at the same time.
■ You may be able to give your accountant access to the system so that
he or she can prepare the year end accounts without disturbing you.
Disadvantages of cloud computing:
■ There is an ongoing subscription cost. The software is never yours so

you must keep paying the monthly subscription to be able to access the
data. Often the subscription is geared to the number of transactions
and rises in steps. This means that you may be forced to pay more as
your business expands.
H If your internet connection is not working you cannot access your

bookkeeping data.
■ Integration with other office systems can sometimes be more difficult.
® It is sometimes difficult to make a local backup of your data — you are

reliant on the continuing links with the service provider.
® There is the potential to lose all of your bookkeeping records if your

service provider goes bust!
So what can I expect from a computerised

accounting system and how do I use it?
Regardless of whether you have opted for a cloud-based system or you
are running the software on your own machine, then the software will
be basically the same. Each programme has its own quirks that you
will need to get used to so that you get the most from the application.
Some programmes will have pretty icons to click upon, some will have
coloured menus but at the end of the day they are doing the same task -
bookkeeping.
There are some applications such as VT Cashbook which are cut down
versions (in this case from VT Transaction-1-) and have a restricted range
of processes. In this case you cannot run sales and purchase ledgers or
produce sales invoices from the software. It does accommodate multiple
bank accounts and will keep track of your VAT on a cash accounting
basis. However, this is not necessarily a bad thing. If you do not need the
omitted features then VT Cash Book might be just what you are looking
for (and it is free!).
Figure 12 illustrates a typical toolbar to control the input of information to

the programme. This illustration is taken from Sage. The top row of icons
are for accessing routines for customers (sales), suppliers (purchases), etc.
Here we have clicked on the bank icon which shows a second row of icons
to access the features relating to the bank accounts. Further options are
available from the menu bar via pop-up menus.
View Modules Settings Tools Favourites Window Help
Fig. 12. Sage toolbar to control bookkeeping software.

When you run these applications then, in most cases, behind the
scenes, the software will be completing the double entry bookkeeping.
Double entry bookkeeping is the internationally recognised set of rules
for recording financial transactions of a business. A full description of
double-entry bookkeeping is given in Chapter 5. For the majority of the
time you can forget about the double-entry and leave it to the software to
look after things.
However there are a few transactions that need to be entered at this basic
level if you want to be able to extract accurate management accounts
from your bookkeeping system. This will include transactions such as the
entries for depreciation. These transactions will be dealt with through the
journal routines built into your software and we will describe the debits
and credits in more detail in Chapter 5.
Creating your sales invoices

For day-to-day transactions you can access the routines from the icons or
menu bar. For example if you want to send a sales invoice to a customer
you would click on the Sales icon.
If you have not already set up details of the customer then you will need
to enter their details. Typically this will consist of:
■ the customer's name
■ their address
■ contact phone numbers etc.
■ their account code for your records
■ if the goods are to be delivered to a different address from the invoice

then the delivery address may need to be entered.
Some bookkeeping packages require that you set up product descriptions.

These product descriptions can save you a lot of typing because once set
up you only need to enter a short code or select from a drop down list in
order that a lengthy narrative description can appear on the invoice.
You then select the Invoice routine and you will be greeted with an input
screen of the type shown in Figure 13. Choose which customer you are to
invoice and select the products sold to them. If you have entered standard
prices for your products these details will automatically appear on the
entry screen. When all of the product details have been entered click
print then save. Job done!
The invoice will be printed in accordance with your selected template

which controls its appearance, and at the same time all of the accounting
entries will automatically be made in your financial records.
Fig. 13. Sales invoice entry form.

Keeping track of money owed to your business

When you created the invoice, the accounting package will also have
updated the relevant ledger accounts and so recorded that the customer
now owes you money. The ledgers are groups of similar types of record,
thus the sales ledger is the grouping of all of the customer accounts.
The name, ledger, derives from the fact that financial information used to
be recorded using pen and ink in paper books - hence 'bookkeeping' and
that these books were called journals and ledgers (hence sales ledger, etc.).
Even though the records may now be kept on a computer the traditional
name has remained to describe this collection of financial information.
Even though the information from the software is held within your
computer it may be easiest to think back to the paper origins of the ledgers
to visualise what is going on. In a paper record system the details of the
transactions for each separate customer are recorded on a separate page
of the book. The separate page records are each an account and together
they are contained within a ledger.
On each account (page in the book) is noted the details of the invoices sent
to the customer and also the amounts of money that have been received
from them. In this way it is easy to establish how much is owed to you (the
account balance) at any given time. We will look at the mechanics of the
entries in more detail in Chapter 5 on double entry bookkeeping.
On a computerised system you can easily view a customer's account and

see the transactions that have taken place. You can also see how much
they now owe you.
As well as establishing how much is owed by each customer, the

computerised system will be able to list out the amounts owed by all of
your customers — a debtors list. This is useful in order to establish how
much you are owed in total. However the computer can also produce a
more useful variation of this list - an aged debtors list.
On an aged debtors list not only is the total owed by each customer
shown, but it is then broken down to show how long the debt has
been outstanding. This is generally achieved by having extra columns
which show the debts up to 30 days old, those that are between 30 and
60 days old, those 60 to 90 days old and those that are over 90 days
old. This type of debtors list helps you to focus in on the bad payers
so that you can chase them to pay their bills. An example is shown at
Figure 14.
Swanhampton Consultants Ltd

Age Analysis - Customers
At 31 March 201X
Name Total Mar-201 X Feb -201X Jan-201 X Dec-20 IX
Arnold & Blue Ltd 1,633.35 756.00 877.35

Hendry & Douglas 480.00 480.00
Ingram & Scott 416.50 358.00 58.50
John Allen 421.00 421.00
John Templeton 212.00 212.00
Marriott Enterprises 465.00 465.00
R Wilson & Son 2,172.00 821.00 632.00 213.00 506.00
T Sutton & Co 695.72 695.72
Total 6,495.57 3,301.00 2,475.57 213.00 506.00
Fig. 14. Aged debtors list.
This aged debtors list could of course be achieved on a manual system but
it would take you much longer!
Other tools and reports from a computerised

SYSTEM
So far we have looked at the preparation of sales invoices and the recording
of the customer accounts. However in the same way as the computer
software was used to track the sales details, it can also be used to track the
purchase details. These transactions are recorded in the purchase ledger.
There are two more useful routines that are sometimes available
when using computerised bookkeeping software. One (particularly
incorporated into cloud systems) is a bank import tool. This downloads
the transaction details from your bank via online banking and presents
them to you for entry onto the system. At this stage the transactions have
not been incorporated into the actual bookkeeping records but with a
few clicks of the mouse to advise the software of the actual nature of
the transaction then the details are recorded. This has the advantage of
accuracy and speed of entry.
Another useful tool in most computerised bookkeeping software is the

bank reconciliation routine. This routine allows you to electronically tick
the entries on the bank account against the entries on the bank statement
so that you can ensure the accuracy of the records.
If you enter transactions directly from your bank statements, then the
bank account balance per the software should agree exactly with your
last bank statement. However, many businesses enter transactions into
the software as soon as they incur them. There may then be some delay
before they appear on a bank statement. This is especially true for cheques
sent to suppliers as there may be a delay before these cheques are banked.
Another time that the system gets out of line with the bank statement
is when items appear on the bank statement but they have not yet been
recorded in the accounting records. These may be BACs credit receipts that
have been paid directly into your bank account by customers or payments
out of the account such as bank changes. In these circumstances, you
should use the bank reconciliation procedure in the software to agree the
balance. Some reconciliation routines are better than others. Generally
they are fast and easy to use and provide you with a list of the entries you
have made in the application that have not yet gone through your bank
account.
Reconciling your bank account is a vital step in ensuring the accuracy of

your accounts, and also highlights any mistakes made by your bank.
Some of the reports that can be generated from the software will be:
■ The Trial balance - a list of the balances on all of the accounts

contained within the accounting system.
■ A Profit & Loss Account - which shows how much money you have
made (or lost) in the accounting period.
■ A Balance Sheet - listing the assets and liabilities of the business at the
end of the period.
Don't worry if you do not understand all of these terms yet - they are
described more fully in Chapters 5 and 7.
Computers in accounting
Regardless of whether you have chosen to keep your business records

using a spreadsheet or a computerised accountancy package running on
your own computer, it is vitally important that you backup your data on a
frequent, regular basis. Depending upon the number of transactions this
might be daily or weekly. If you are using a cloud computing application
then, of course, there is no need for you to make the regular backups: that
will be done for you by the service provider.
Computers can be great when they work but there is nothing more
frustrating than a machine that has died in front of you. Modern computers
are far more reliable than their predecessors but from time to time events
can happen that render the data on your machine useless. This might be
due to a computer virus and perhaps a hard-disk failure in the machine.
It is now relatively easy to take a backup of your data. You can use:
■ writeable CDs or DVDs
■ USB memory sticks
■ A USB external hard drive.
If your system fails or the data file has become corrupted then it may be
necessary for you to reinstall your data from your backup copy. It may
then be necessary for you to re-enter your recent data but if you have taken
regular backups then you should not need to enter too much information.
There are a few points that should be mentioned about the backup. Firstly,
if you are using USB memory sticks for the backup you should not rely on
just one stick. Memory sticks can fail without warning. More concerning
is that when you have the memory stick plugged into the computer then
if the computer fails it may well cause the memory stick to fail also. This
means that you will not only have lost the data on the computer but also
the backup copy. It is much better to use two or three sticks in rotation so
there is always at least one copy of your data that is not actually attached
to your computer.
Secondly, from time to time, you should test that you can actually reinstate
the data from your backups. It is no good making backups of your data if
you cannot access them when it is needed.
One further application to mention is Dropbox. With spreadsheets and

some bookkeeping applications it will be possible to store the data file in
a special folder on your computer that is then backed up automatically
using cloud storage. As well as providing the safety of an automatic backup
this also has another advantage. The files are backed up securely on a
computer somewhere remotely on the internet. This means that you can
then retrieve that information from another computer elsewhere. Thus
for example you can enter some information at your place of business.
Then when you go home you can continue to do some more work on
your accounts. Your home computer will then send the updated file back
across the internet ready for you to use at work the following day. Once
installed the Dropbox software does all of the file synchronisation for
you. Of course if you are using a commercial bookkeeping package then
you will need to check on the licensing agreement to ensure that it is in
order for you to run two copies of the software.
Summary
■ You can keep your business records either handwritten, by using a

computer spreadsheet package or using a computerised bookkeeping
software.
■ For the smallest business you can just record your business receipts
and payments in a cash book.
■ As the business grows you can start to obtain management information

by using an analysed cash book.
■ You may need to keep a separate record of your cash transactions.
■ Spreadsheets take much of the drudgery out of preparing the records.
■ You should keep an invoice register to track the sales that you make.
■ Computerised bookkeeping systems offer a lot of advantages but you

will still need to understand a little about double entry bookkeeping
(see Chapter 5).
■ If you use a computer to keep the records make sure that you keep a
backup of your data.
■ It is possible to use cloud computing applications for your bookkeeping

which mean that you do not have to worry about software updates or
backup but instead it does present other problem areas.
4
Accounting for VAT
Almost everyone running a business will come up against value added

tax (VAT). This chapter explains what it is, how it will affect you, and
what records you will need to keep and why.
What is value added tax?
Value added tax (VAT) is a tax on consumer spending. It was brought in

on 1 April 1973 to replace the old purchase tax system; it went part-way
towards harmonisation with taxes charged by the countries within the
EEC (now the EU). The tax is administered by HM Revenue & Customs
(HMRC).
VAT will affect many aspects of your trading, and you'll have to decide
whether to register the business for VAT purposes and, if so, how to
handle the extra information in your accounting records. This chapter
therefore gives a general introduction to VAT so that you can get an idea
of what's involved.
How does VAT work?

Under VAT, every business is in effect a tax collector. The tax is a charge
on the sale of goods or services by a business which is registered for VAT.
(Certain transactions are exempt from VAT or are charged at a zero or lower
rate; details of these are given on page 84.) On most other transactions the
rate of VAT is currently 20% of the price of the goods. These transactions
are called taxable supplies and the VAT which you must charge on your
65
66 Chapter 4 • Accounting for VAT
sales is called output tax. On the other hand, when a registered business
purchases goods (or services) from another registered supplier it must pay
to that other business the VAT which that business charges. This tax on
purchases coming into the business is called input tax.
A business registered for VAT has to pay to the HMRC the amount of
output tax minus the input tax. If the input tax is greater than the output
tax you can get the difference back from the HMRC.
Example
Suppose a shop purchases a radio for £90 wholesale; it has to pay the
wholesaler an additional £18 input tax. When the shop sells the radio to
a consumer for £120 it charges a further £24 output tax and the customer
has to pay the shop £144:
Net
Goods VAT
Sale £120.00 £24.00 Output tax

Purchase £ 90.00 £18.00 Input tax
Difference £ 30.00 £ 6.00
The shop must therefore pay to the HMRC the difference of £6.00. As you
can see, there has been an increase in the value of the radio at the shop
of £30. This is the Value added' bit. The net effect of paying tax (on the
difference between the output tax and the input tax) is to tax the value
added by the business - £30 x 20% = £6.00. It is this idea that gives the tax
its name.
Chapter 4 • Accounting for VAT 67
How VAT AFFECTS YOUR BUSINESS
Do I need to register my business for VAT?

It depends on your turnover. If you are in business making taxable
supplies (i.e. not exempt from VAT) then the total value of these supplies is
called your taxable turnover. Note: supplies exempt from VAT, or outside
its scope, do not form part of the taxable turnover, but supplies that are
charged at a zero rate are included.
If at the end of any month:
(a) the value of your taxable turnover during the past 12 months has
exceeded £77,000, OR
(b) you have reasonable grounds for believing that the value of the tax
able supplies you will make in the next 30 days will exceed £77,000
then you must register your business for VAT purposes.
You must notify the HMRC VAT Office that your business has exceeded
these limits within 30 days of the end of the month. The registration will
then take effect from the first day of the second month following that
date (e.g. if your taxable turnover in the last 12 months up to the end of
January is over the limit, your date of registration will be 1 March).
If you take over an existing business then you must take account of the
level of taxable turnover under the previous owner when calculating the
date that you need to register. If the previous business was registered
for VAT then the date of registration will be the day the business was
transferred.
If your turnover is below the limit for compulsory registration you can still
apply to register for VAT if you think it will be an advantage. For example,
you may be selling to other businesses which are themselves registered
for VAT. By registering your own business you will be able to get the input
tax back on your purchases and although you'll have to charge VAT to
your customers they will, of course, be able to get it back, too. If you are
buying and selling only zero-rated goods you can still register, so as to
reclaim the input tax charged on your expenses (e.g. motor expenses,
telephone, professional fees, etc.)
The easiest way to notify HMRC is to use the online service available at:
www.hmrc.gov.uk/vat. In order to register for VAT using this service you
must first register for the HMRC online services. You are going to need
to undertake this task as all VAT return details must now be submitted
online.
If you are not confident with computers then a friend may be able to
attend to the registration (and the quarterly returns - see later) for you.
Alternatively your accountant may deal with this for you. They will
generally have an agents registration so they can skip the need for the
online service registration and process your application for you. However
you will have to authorise them to act as your agent once you are registered
before they can submit your quarterly returns for you.
Instead of registering online you can use the National VAT Helpline. The
number is tel: 0845 010 9000. They should then be able to issue you with
the relevant forms so that you can complete them and submit them by
post.
You should note that it may take a little while to process your application.
If you have not received the registration documents by the date that your
registration is due to start you must nevertheless start to charge VAT.
What if I have more than one business?

Remember that it is the 'person' who is registered for VAT and not the
individual business. For this purpose the term 'person' includes sole trader,
partnership and limited company (a company being treated as a 'person').
If you run more than one business, even though they are dissimilar, and
the taxable turnover of all the businesses together exceeds the prescribed
limits then you must register for VAT. All the businesses are covered by
one registration; and you cannot register them separately.
Once I have registered, what records must I

keep?
It will depend partly on the kind of business you run. There are various
different methods by which you can account for VAT and each has its own
particular quirks in terms of record keeping and these are discussed in
more detail later in the chapter.
Under the standard method of accounting for VAT the records must
enable you to show details of the following:
■ the value of output tax on sales
■ the value of input tax on purchases
■ the amount of total sales excluding VAT
■ the amount of total purchases excluding VAT.
How often do I need to advise the HMRC of my

transactions?
The details of the transactions are not notified to the HMRC individually
as they take place: they would be swamped with information. Instead,
you accumulate the figures for a three-month period and then advise
them as to totals for the period on a VAT return which must be submitted
to HMRC online. The details which must be submitted are shown on
page 70.
In order to spread the flow of work over the year, registered traders are
split into three groups. These are called stagger groups and each group
makes up returns to a different date.
Group 1 Group 2 Group 3
31 March 30 April 31 May
30 June 31 July 31 August
30 September 31 October 30 November
31 December 31 January 28 February
These quarterly periods are referred to as VAT accounting periods. The

HMRC will tell you which group you'll be in.
Exceptionally the HMRC will let a registered person make returns

monthly instead of quarterly. This can help if your trade gives rise to
frequent VAT repayments. You can also ask for the accounting periods to
be adjusted to match the financial year of your business. For more details
contact your local VAT office.
How long do I have to complete the VAT return?

You must complete the VAT return and submit it to the VAT Office within
one month of the end of the VAT quarter. If you are late you will be in
default and you will get a surcharge liability notice. This will warn you
that if you are late again you may have to pay a penalty surcharge. Each
time you default the penalty rate rises to a maximum of 15% of the VAT
that you owe. This penalty threat then remains in force until a full year
has passed without default.
How do I complete the VAT return?

When you complete the form you will see that there are a series of boxes
where you enter the values. The boxes are numbered 1 to 9.
■ Box 1 is for the VAT output tax on sales. You must also include VAT
on goods taken from the business for your own private use, the motor
fuel scale charge (see page 86), and on sales of assets (e.g. machinery
or office equipment).
■ Box 2 is used to record the VAT due on imports from other EU

countries.
■ Box 3 is the sum of boxes 1 and 2.
■ Box 4 shows the VAT input tax on your purchases.
■ Box 5 is the difference between boxes 3 and 4. It represents either the

VAT due to the HMRC (if box 3 exceeds box 4) or the sum you reclaim
from them (if box 4 exceeds box 3).
The figures in boxes 6 to 9 are used by the VAT office to prepare statistics
and to check figures declared in the other boxes on the form.
■ Box 6 shows your total sales excluding VAT.
■ Box 7 shows your total purchases for the business excluding VAT and
certain other expenses such as wages.
■ Boxes 8 and 9 are used to record trading with other EU countries.
More details on the completion of the return form are given later in the
chapter.
Which method of accounting for VAT should I

adopt?
As mentioned above there are several different ways in which you can
account for VAT. These include:
■ invoice basis (the standard way of accounting for VAT)
■ cash accounting (a simplified method available to smaller businesses)
■ flat rate scheme (another simplified method)
■ retail schemes (used where it is not practical to analyse the VAT

content of sales at the point of sale).
We will consider each of these in turn.

The standard invoice basis - the tax point system
The normal way of accounting for VAT is on a time-of-supply or tax point

basis. The time that you have to account for VAT is normally fixed by the
time of supply, or the tax point as it is known. VAT must be accounted for
in the VAT period in which the goods or services are provided. Of course,
this may not be the same as the time when they are paid for if a credit
period is involved.
Output tax and sales

There are two aspects to recording VAT on sales:
■ the information you need to put on your sales invoice (see page 82)
■ the information you need to record in your books of account.
Generally you will need to keep a separate record of your sales so that
the VAT output tax can be calculated. An example of this is shown in
Figure 15. Once again, until your business outgrows the system, a simple
spreadsheet or even an exercise book should do to record the transactions.
Enter the details into it from your copy invoices on a regular basis. Points
to note:
■ You are obliged to give each of your invoices a unique reference

number and this should be recorded in the records. You should also
keep a copy of the invoices that you issue to customers. The reference
number will help you identify each particular invoice.
■ Record the net, VAT, and gross amounts. These amounts should be
clearly stated on your invoice. The net amount is the value of the
goods before the addition of VAT; the gross value is the value inclusive
of VAT.
At the end of the VAT period add the columns up in order to get the
figures for your VAT return. Subject to any adjustments (page 86), the
total from the 'Net' column should be entered as the 'Value of Outputs' in
box 6 of the VAT return. The total of the VAT column should be entered as
'VAT Due' in box 1 of the VAT return form.
Invoice
number Date Name Net VAT Gross
201X
379 2 May I Rowley 390.00 78.00 468.00
380 5 May C Williams 458.72 91.74 550.46
381 6 May D R Duff 163.00 32.60 195.60
382 6 May 5 Hancock 279.50 55.90 335.40
383 7 May P Grainger Ltd 597.80 119.56 717.36
384 9 May C Hammond & Co 564.85 112.97 677.82
385 11 May P Whitaker 2.32 0.46 2.78
386 13 May C Hollins 298.25 59.65 357.90
387 14 May B Hunt 599.85 119.97 719.82
388 16 May C Ashmore 112.51 22.50 135.01
389 19 May P Whitaker 597.69 119.54 717.23
390 21 May C Hammond & Co 36.32 7.26 43.58
391 23 May I Rowley 301.77 60.35 362.12
392 26 May A Ardron 185.17 37.03 222.20
393 28 May C Hollins 452.23 90.45 542.68
394 30 May P Grainger Ltd 526.03 105.21 631.24
5,566.01 1,113.19 6,679.20
Fig. 15. VAT book - how to record output tax.
Input tax on purchases

Generally, the VAT book for recording the VAT input tax on purchases is
very like that used for sales (see Figure 16). It is, however, useful to add a
description of the expense (purchases, telephone, motor expenses, etc.), as
this will help when preparing your accounts at the year end.
The total of the 'Net' column is used to complete box 7 (Value of Inputs)
on the VAT return. The total of the VAT column is then entered in box 4
(VAT Deductible) on the form.
Note: certain items should not be included in boxes 6 or 7 as they fall

outside the scope of VAT, and so should not be written into the VAT books.
These include:
■ wages and salaries
■ PAYE and National Insurance contributions
Invoice
No. bate Name Details Net VAT Gross
201X
139 1 Sep G C Woodward Purchases 300.52 60.10 360.62
140 3 Sep G Derbyshire Ltd Purchases 112.51 22.50 135.01
141 3 Sep R Cotton & Co Purchases 335.76 67.15 402.91
142 7 Sep M Pepper Purchases 301.91 60.38 362.29
143 7 Sep Shepley Ins Brokers Insurance 152.45 0.00 152.45
144 9 Sep A Boyes PLC Purchases 570.42 114.08 684.50
145 10 Sep British Telecom Telephone 150.05 30.01 180.06
146 14 Sep G Derbyshire Ltd Purchases 598.68 119.74 718.42
147 17 Sep R Campbell Autos Motor Exps 184.58 36.92 221.50
148 17 Sep K Johnson A Co Stationery 147.78 29.56 177.34
149 22 Sep T Chaplin Ltd Motor Exps 73.82 14.76 88.58
150 24 Sep R Cotton A Co Purchases 264.34 52.87 317.21
151 24 Sep S Hancock Ltd Stationery 2.17 0.43 2.60
152 29 Sep N-Power Electricity 130.72 6.54 137.26
153 29 Sep C Hollins A Co Purchases 299.39 59.88 359.27
3,625.10 674.92 4,300.02
Fig. 16. VAT book - how to record input tax.

Chapter 4 ■ Accounting for VAT 75
■ taxation payments
■ money put into or taken out of the business by the proprietor
■ insurance claims or compensation payments
■ loans. Stock Exchange dealings, grants or gifts of money.
Cash accounting basis

The cash accounting basis is available to traders whose annual turnover is
less than £1,350,000.
What it means
On the tax point system the tax falls due at the time the goods or services
are provided. On the cash accounting basis tax is due at the time the cash
transaction takes place. This means that when you sell goods and give a
period of credit to your customers you won't have to account for VAT until
you are actually paid for the goods. But it also means that where you buy
goods on credit you cannot reclaim the VAT until you've actually paid for
them.
You therefore need to work out if this will be advantageous to your cash
flow. It will be advantageous if:
■ you make sales on credit and your debtors (money owed to the
business) are likely to exceed the money owed to suppliers.
It will be disadvantageous if:
■ you do not allow credit on sales
■ you make mainly zero-rated sales.
However it does make the record keeping very much easier and this may
have a value to you that only you can assess.
If you do not take credit on purchases and do not allow credit on sales
then it will make no difference since the tax point will be the same as the
cash transaction in each case.
Even if you use cash accounting, you must still account for VAT using
standard VAT accounting when you:
■ buy or sell goods using lease purchase, hire purchase, conditional sale
or credit sale
■ import goods or acquire goods from other EU states
■ issue a VAT invoice that isn't due to be paid for six months or more
■ issue a VAT invoice in advance of providing goods or service.
Records for cash accounting

In this system you will need to add extra columns to your spreadsheet
or cash book (see Figure 17). In addition to the total value you will then
be able to record the VAT content of each transaction and you would
generally also record the net (VAT exclusive) value of the transaction.
At the end of the VAT quarters the totals from the VAT columns are used
to arrive at the figures of VAT input and output tax.
Of course if you are using a computerised system then the software will
look after this for you. On most systems, you are required to match off
the payment (or receipt) against the relevant invoices. This allocation or
matching of the payment is useful for keeping track of which invoices are
still outstanding but it also advises the system of the VAT content of the
payment or receipt. These figures will then be automatically included in
your VAT Return details.
Flat rate VAT scheme

As an alternative to keeping the conventional records outlined above, it is
possible for small businesses, with a turnover of up to £150,000 to opt for
the flat rate scheme. Under this scheme, the business may then dispense
Bank Receipts Amount

bate Name Details Total VAT Ex-VAT
201X
1 Sep Mrs H Prior Sales 40.61 6.77 33.84
2 Sep G Mills A Co Sales 134.76 22.46 112.30
7 Sep I Rowley Sales 680.36 113.39 566.97
7 Sep P Steel A Son Sales 432.52 72.09 360.43
9 Sep Sill Derbyshire Sales 191.95 31.99 159.96
12 Sep Mrs H Prior Sales 84.60 14.10 70.50
12 Sep C Hollins (Staffs) Ltd Sales 484.57 80.76 403.81
15 Sep A Eagle Partnership Sales 173.47 28.91 144.56
16 Sep P Grainger Sales 476.14 79.36 396.78
18 Sep W b Antrobus A Co Sales 496.94 82.82 414.12
21 Sep Chloe byche Sales 310.36 51.73 258.63
23 Sep K Johnson PLC Sales 547.60 91.27 456.33
26 Sep C Ridley Ltd Sales 321.09 53.52 267.57
26 Sep F Marriott A Co Sales 567.05 94.51 472.54
28 Sep P Whitaker Ltd Sales 343.94 57.32 286.62
30 Sep A Ardron Sales 128.66 21.44 107.22
5,414.62 902.44 4,512.18
Fig. 17. Cash accounting for output VAT.
with the recording of the input VAT on each individual purchase. This
may be an administrative saving for some businesses although they will
still need to record the gross value of purchases for income tax purposes.
The trader still charges standard rate VAT (20%) to his customers but he
actually accounts for and pays over a lesser figure to the HMRC.
The difference in VAT between the two rates is kept by the trader. This is
in place of the input tax that would otherwise have been claimed under
the regular VAT schemes, and would have reduced the VAT payment to
HMRC.
The actual rate of VAT payable to HMRC is dependent upon the nature of
the trade. This recognises the fact that certain types of business will incur
more input tax than others. Examples of the rates are given in the table
on page 78:
Output tax on sales
Charged to Flat Rate

customers at VAT paid
20% to HMRC
say -11.5%
Fig 18. The flat rate VAT scheme.
Trade or Activity %
Architect, civil and structural engineer or surveyor 14.5
Catering services including restaurants and takeaways 12.5
Computer and IT consultancy or data processing 14.5
Estate agency or property management services 12
Hairdressing or other beauty treatment services 13
Management consultancy 14
Pubs 6.5
Repairing vehicles 8.5
Retailing food, confectionary, tobacco, newspapers or children's clothing 4
Retailing vehicles or fuel 6.5

These are only a selection of the rates: for full details you should refer to
the HMRC VAT Notice 733 entitled 'Flat rate scheme for small businesses'
or go to the HMRC website.
Although these rates may at first look very attractive you should note that
they are applied to the gross turnover after VAT has been applied at the
standard rate. Thus the standard rate of VAT applied to a sale under this
system would be:
20% = 16.7%
120%
Viewed in this way some of the rates look less favourable and you should
give careful consideration before you decide to apply for this scheme.
Care must also be taken if you are making zero-rated or reduced-rated
supplies. The Flat Rate VAT percentage is applied to your total turnover -
it does not exclude zero and reduced rated items. Thus if you are making
zero-rated supplies (perhaps on exports to the USA, for example) you
will in effect still have to pay VAT to HMRC even though you have not
collected the VAT from your customer.
Obviously from time to time your business may incur a large expense
on which, under the standard VAT scheme, you would have been able to
reclaim a substantial amount of input tax. Examples of this might be the
purchase of a new delivery van or some expensive production machinery.
To allow for such special circumstances under the flat rate scheme, you
are permitted to reclaim the VAT on the acquisition of capital assets that
cost over £2,000.
One final point to mention is that if you are using the flat rate scheme
then when you issue invoices to your customers you should show the full
standard rate of VAT (unless the sales are zero rated) and your customers
will be able to reclaim all of the VAT (if appropriate) even though you are
paying a lesser rate to the VAT Office.
Retail VAT schemes

When using one of the retail schemes, the amount of output VAT on sales
you enter on your VAT return is not normally calculated for each individual
sale; instead it is calculated from the total sales. The exact details that you
will need to record will depend upon which retail scheme you are using.
If all your sales are at the standard rate of VAT (20%), then you must keep
a record of your daily takings. The VAT content can then be calculated
as l/6ths (20/120) of the total amount at the end of the VAT period. The
actual form of record can be quite simple being a list of the gross daily
takings. VAT input tax on purchases should then be worked out on the
'normal method' or cash accounting method outlined above.
If part of your sales are exempt, or zero-rated, for VAT purposes then
you'll have to work out the amount of output tax on sales in proportion to
your purchases of goods for resale. The exact calculation will depend on
which scheme you are using, but in all of them you'll have to identify the
value of goods purchased for resale which are chargeable at the different
rates of VAT.
All the retail schemes require you to record the value of your retail sales. In
most schemes you work out the VAT output tax on your sales by applying
the VAT fraction (see page 81) to the appropriate proportion of your sales.
There are several different schemes including:
■ The Point of Sales Scheme. The sales are analysed between the
different VAT rates at the time of sale using an electronic till. This is
the most accurate but requires a more expensive electronic till and
staff who know how to operate it. The main problem encountered
with this scheme is that inexperienced staff can 'ring in' sales at the
wrong VAT rate. This can be overcome if you are using bar codes on
an EPOS (electronic point of sale) system.
■ The Apportionment Schemes. There are a few variations of these

schemes. For example, under one of these schemes sales are
apportioned in the ratio of purchases. Thus if 40% of your purchases
are zero rated, then 40% of your sales are treated as zero rated.
■ The Direct Calculation Schemes. Again there are a few variations of

these schemes and on one version you work out the expected selling
price of your 'minority goods' and with this figure known it is possible
to establish the standard rated sales chargeable to VAT. Thus if 85% of
your sales are standard rated and 15% are zero rated then you must
calculate the expected sales revenue from the zero rated (minority)
sales. By deducting this figure from the total sales it is possible to
establish the value of sales chargeable to the standard rate of VAT.
For more details of these schemes, you should contact the HMRC.
What is that odd-looking fraction?

The fraction 20 is used to find the VAT content of an amount
100+20
that is stated gross (that is, inclusive of VAT).
Using a 20% VAT rate, the cost of goods plus VAT will be 100% of the net
value (i.e. the cost of the goods) plus 20% of the net value for the VAT.
The total gross value will therefore be 120% of the net cost of the goods
excluding VAT.
If you are trying to find the VAT content it will be 20/120 of the total VAT-
inclusive amount of the goods. (Note: this is not the same as 20% of the
gross amount.)
By simple arithmetic the fraction 20/120 can be simplified to l/6th, which

is an easier fraction to work with. This fraction is known as the VAT
fraction.
Do I need to provide VAT invoices for all my

customers?
Generally, yes; you must give detailed invoices to your customers. The
information that you must show is as follows:
■ an identifying number (it is usual to number the invoices sequentially

so that each has a unique number)
■ the date of supply (tax point)
■ your VAT registration number as a supplier
■ the name and address of the person to whom you are supplying the
goods (or services)
■ the type of supply
■ a description of the goods or services
■ the quantity of the goods or the extent of the services you are supplying
■ the value of the goods (before any discount) excluding VAT
■ the amount of any cash discount
■ the rate of VAT (currently 20% for standard rated items) and the
amount
■ the total amount payable.
If the invoice contains details of goods or services, some at standard rate

and some at zero rate (or exempt), then your invoice must distinguish
between the goods charged at each rate.
However, if you are a retailer you only have to give invoices to those
customers who ask for a tax invoice. In addition, you can provide modified
tax invoices as follows;
■ Where the gross value (inclusive of VAT) doesn't exceed £250, then the
invoice need only show the following:
• the name, address and VAT registration number of the retailer
• the date of supply (the tax point)
• a brief description of the goods
• the total value inclusive of VAT
• the VAT rate charged.
■ Also, if the supply includes items at different VAT rates then for each
different VAT rate, your simplified VAT invoice must also show:
• the total price including VAT
• the VAT rate applicable to the item.
If you accept credit cards, then you can create a less detailed invoice
by adapting the sales voucher you give the cardholder when you
make the sale but it must show the information described in the bullet
points shown above.
■ Where goods exceed £100 then, if the customer agrees, a form of

modified invoice can be issued showing the VAT-inclusive value of
each standard-rated or reduced rate item. The modified VAT invoice
must show separately the total:
• VAT-inclusive value of each standard-rated or reduced-rate item
• VAT payable on those items
• value of those items excluding VAT
• value of any zero-rated items included on the invoice
• value of any exempt items included on the invoice.
From time to time your accounting records will be checked by the VAT
Office to make sure all VAT has been correctly accounted for. To help
their work (and help you get rid of them quicker) it's recommended that
you identify the purchase invoices with your own sequence of numbers.
When the invoices come in, write a number on them corresponding to the
next number from the VAT Input Tax Book or spreadsheet. When you've
paid the invoice, file it away in your number order so that if you need to
refer to it later you can find it easily.
Other key points about vat

If you are registering your business for VAT there are a number of other
points you will need to be aware of. These include:
■ the treatment of zero-rated sales
■ VAT on domestic fuel and power
■ items on which you cannot reclaim input tax
■ adjustment for private use
■ VAT on your motoring expenses
■ VAT treatment of certain second-hand goods
■ the retention of your VAT records.
What are zero-rated sales?

Most sales by registered suppliers are chargeable to VAT at the standard
rate of 20%. However, a few categories of goods are charged at zero rate.
These are still treated as taxable supplies but no tax is normally charged.
The main categories are:
■ food
■ books (but not stationery)
■ some land and buildings (mainly new private dwellings)

■ transport of passengers (that has at least 10 seats, including those for

the driver - taxi journeys will generally be standard rated)
■ certain clothing and footwear (mainly children's).
Except for the fact that no VAT is charged to the customer, the treatment
of these sales should be exactly the same as standard-rate sales.
VAT on domestic fuel and power - Reduced-rate

supplies
An exception to the standard rate of VAT is that the tax charged on supplies
of domestic fuel and power is levied at a reduced rate of 5%. This reduced
rate also applies to non-business charity use. If you make such supplies
you must ensure that your records enable you to account for the VAT on
your sales at the correct rate.
Non-deductible input tax

Input tax suffered by a registered person can usually be reclaimed by
them (or used to reduce the amount of VAT due by them to the HMRC).
However, input tax on certain expenditure can't be reclaimed. This
includes:
■ the purchase of motor cars (but VAT on vans or other commercial

vehicles can be reclaimed)
■ business entertainment
■ goods sold to them under one of the second-hand schemes (see below).
Any VAT suffered on these expenses cannot be reclaimed. Accordingly

you don't have to distinguish the VAT in your accounting records; just
treat the gross payment (including the VAT) as an expense of your business
and analyse it according to the goods or services provided.
Adjustment for private use

VAT input tax may be incurred on goods or services which are partly
business expenses and partly the private expenses of the proprietor. In
these cases only part of the input tax (the tax on the business part) can be
reclaimed. An example might be telephone charges where the business is
run from home. For example, if a telephone bill was received for £90 plus
VAT (£18) and one-third of the expense is considered to be of a private
nature, then:
£18 X 1/3 = £6 input tax would be disallowed.
The easiest way to account for these adjustments is as follows:
1. Reclaim all the input tax in your records.
2. When preparing your VAT return make a deduction from the total
input tax, disallowing for the private proportion of the tax that you
are not entitled to reclaim. Do keep a clear record of how you have
worked out the amount so that you can satisfy any enquiry from the
HMRC VAT department.
Motoring expenses
There is no need to restrict the input tax on repairs and maintenance of a
vehicle which you use partly for private and partly for business purposes;
nor do you have to restrict the input tax on road fuel purchased. But where
a vehicle is used partly for private purposes and the input tax on road
fuel is claimed, you'll have to apply a scale charge according to the CO 2
emissions of your vehicle. If you don't already know the CO emissions

2
you can look up the figure at www.taxdisc.direct.gov.uk and click on

'Vehicle Enquiry' on the left of the page.
Having established the CO emissions figure then you must charge

2
yourself the scale charge for that band. Effectively your business is treated
as if it has sold the fuel used privately by including the figures from the
table in the output tax and sales figures on your VAT return. The VAT fuel
scale charge tables change frequently and so for up-to-date figures you
should refer to the HMRC website.
The only way you can avoid the scale charge is by not reclaiming any VAT
input tax on fuel that you buy, regardless of whether it's used for business
or private motoring. If you decide not to reclaim you must tell your local
VAT office. Depending on how much fuel you buy it can actually work out
cheaper to forego the input tax on purchases and not to apply the scale
charge.
VAT treatment of certain second-hand goods

In general, VAT is chargeable on the full second-hand values of goods sold
by a registered person. However, this can lead to anomalies when dealing
with some goods and it is in recognition of this that the secondhand
schemes were introduced. The classes of goods covered by the schemes
are:
■ motor cars
■ aircraft
■ works of art, antiques, etc.
■ electric organs
■ caravans and motor cycles
■ firearms
■ boats
■ horses and ponies.

88 Chapter 4 ■ Accounting for VAT
What's wrong with the normal method of

accounting for VAT?
As we have already seen the normal method of accounting for VAT is to
charge VAT on the whole of the selling price, deduct the VAT that was
charged to you when you bought the goods and account to the HMRC for
the difference.
However, if the person from whom you purchased the goods was not
registered for VAT then there would be no input tax to deduct and the
amount of VAT payable by you to the HMRC would increase.
This is clearly not the intention of the tax because the amount of the VAT
payable would be related to the selling price of the goods and would have
no relationship with the value added.
The way round the problem

For goods in the categories listed above special schemes are used to avoid
the problem. Although there are minor differences between the schemes
they all work in much the same way. Each item must be separately identified
in the records and the profit on each individual sale is calculated. This
profit is taken as being the VAT-inclusive figure of the Value added' and
the VAT content is found by applying the VAT fraction (l/6‘^).
Retention of records
From time to time VAT representatives will call on you to check your
records. You must by law keep all your business records (including
purchase and copy sales invoices, till rolls if applicable, as well as cash
books and ledgers) for at least six years. Where keeping all these records
creates a serious storage problem, you can sometimes get permission to
keep certain records for a shorter period. However, HMRC approval must
be obtained before you destroy any such records.
Summary
■ VAT stands for Value Added Tax — a tax on consumer spending.
■ The VAT system collects tax on the value added to the goods by each
registered person handling them (e.g. the wholesaler or retailer).
■ You must register for VAT purposes if your turnover exceeds prescribed
limits.
■ If you have several businesses then they must all be included within
one VAT registration.
■ Once registered you must account for VAT on a quarterly basis.
■ You have a period of one month after the end of the quarter to complete
your VAT return.
■ Special schemes are available for retailers.
■ Your sales invoices must set out certain information if you are
registered for VAT.
■ Certain items attract VAT at a zero rate.
■ Certain input tax is non-deductible.
■ Where expenses are incurred for both business and private purposes
then the VAT input tax must be apportioned accordingly and part
disallowed.
■ Special rules apply for fuel provided for private motoring.
■ If your turnover is less than £1,350,000 then you have the option of
using the cash accounting basis.
■ The flat rate VAT scheme is available for small businesses.
■ You must keep your VAT records for at least six years.
5
Double Entry Bookkeeping
'For every action there is always an equal and opposite reaction.

Newton's third law of motion
And so it is with double entry bookkeeping!
As the name implies, there are two entries made to record each transaction.
So, for example, if your business buys a new machine for the workshop,
there will be one entry to record the increase in the worth of the business
machinery and another entry to reflect the reduction in the bank balance.
The pros and cons of double entry
When we have considered handwritten systems or spreadsheets for

recording the business transactions, so far we have been looking at the
'single entry' method. The single entry method of bookkeeping, whilst
adequate for many purposes, will be incomplete and have shortcomings
if your business grows.
By contrast the double entry method of bookkeeping is a complete

method. It overcomes the shortcomings, but it may be more than is needed
by many small businesses. As mentioned in Chapter 3 most computerised
bookkeeping software is built on double entry principals.
These days very few people will use double entry bookkeeping on a
handwritten system because if the records of the business are large
enough to justify full double entry, then the business will most probably
90
Chapter 5 • Double Entry Bookkeeping 91
have adopted a computerised system. But there is no reason why you

should not keep handwritten double entry records if you wish.
Why do i need to know about double entry

BOOKKEEPING?
Even on a computerised bookkeeping system it is as well to know what

is going on behind the scenes so that you can correct errors and make
necessary out-of-the-run adjustments so that your records accurately
reflect the true position of the business.
Double entry bookkeeping has been around for many years; in fact the
first known work on this subject was published in the reign of Henry VII
in 1494. The modern system of double entry bookkeeping was first put
into general use by Italian merchants at a time when Venice and other
cities of northern Italy were Europe's main trading centres.
Drawbacks of single entry

In the single entry method you only need to make one entry to record
each transaction. This system has several shortcomings. A major one is
that it is hard to tell how much was spent on a particular expense (for
example, motor expenses) in a given year. One way partly to overcome
this is to use an analysed cash book as described in Chapter 3, but even
this does not fully deal with the problem. The analysed cash book doesn't
record the amounts owing at the beginning and end of the year, only
those actually paid within the year.
For example, if at the beginning of the year £1,300 was owing for goods
delivered in the last month of the previous year, then the payments that
you make during the year will include this amount. Likewise if at the end
of the year £1,765 is owing for goods this will not have been included in
the payments made. To arrive at the correct figure of expenditure for the
year the figure of payment therefore has to be adjusted.
92 Chapter 5 • Double Entry Bookkeeping
Advantages of double entry

The advantages of a double entry bookkeeping system are:
■ It provides a specific means of making these adjustments.
■ It allows you to make an arithmetical check on your records since the

total of the debit entries must equal the total of the credit entries.
■ Using the personal ledgers, amounts owing by or to each person with

whom you trade can be worked out easily.
■ Double entry records form a stepping stone to producing annual

accounts, and can help to save time and expense at the year end.
■ The financial position of the business at any point in time can be

stated definitely.
■ It can reduce the risk of, and help detect, any errors and even fraud.
Making two entries each time

As its name implies, double entry bookkeeping needs two entries to be
made each time a transaction is recorded. For each transaction you must
record:
■ the receiving of a benefit by one account (the debit)
■ the giving of a benefit by some other account (the credit).
Example
Suppose you buy a photocopier for your business; the entries might be:
Debit Machinery and Equipment Account (the account receiving the

benefit of the new machine).
Credit Bank Account (the credit - payments - side of the cashbook, the
account giving the benefit in that money is flowing from it).
It's worth noting that the cash book is really one of the accounts of the
business: it has a debit and a credit just like any other account.
Confusion can sometimes arise from this. A person might say 'I'm in
credit at the bank' meaning that they have money in their account. So
they assume that the cash received by them should be entered on the
credit side of the cash book - but this is wrong! The reason is that when
you look at the bank statement you are looking at a copy of the account as
recorded in the books of the bank. When you have money invested in the
bank, then, from the bank's point of view, they owe money to you. So the
account has to record the fact that it has to give benefit and it is therefore a
credit in the accounts of the bank. On the other hand, in your own books
it is an account receiving benefit, and so the money received has to be
recorded on the debit (left) of your cash book.
If all this seems a little baffling then remember the following:
Debits (left) Credits (right)

Cash receipts (in cash book) Cash payments (in cash book)
Expenses Income
Assets Liabilities
When you have time, go back and see how this little table fits in with the
rule stated above. Here are some more examples to illustrate these rules:
(a) A shop buys a stock of gents' shirts to resell.
The purchases account is receiving value (receiving the shirts) whilst

the bank account is giving value (making the payment). So the entries
are:
Debit Purchases account with the value of the goods and
Credit Bank account with the payment

(b) The shop sells a shirt to a customer who pays by cheque.
The cheque is paid into the bank account which is receiving value and
the sales account is recording the giving of value (the shirt going to
the customer). So the entries are:
Debit Bank account with the receipt and
Credit Sales account with the value of the sale
(c) A company pays its corporation tax liability.
The payment is made from the bank account which is giving value
whilst the company is benefiting from the reduction in its liability to
pay the tax to HM Revenue & Customs (this reduction in liability is
therefore a receipt of value). So the entries are:
Debit Corporation tax liability account and
Credit Bank account with the payment
'T' Accounts
A useful tip whilst you are getting to grips with double entry is to
experiment with 'V accounts. You can jot these on a piece of scrap paper
and draft in the entries of debit and credit. Then you can metaphorically
step back and review the entries to make sure that they have followed the
rules and achieved the results that you intended.
When you are happy that the transactions are correct then you can
formally enter them into your records.
Examples of‘T accounts are given in Figures 19 and 20. The first of these
illustrates the entries that would be made to record a sale through the
sales ledger whilst the second example details the recording of entries
relating to the purchase and depreciation of fixed assets.
Fixed Assets
Cash Book
Equipment
1. Drilling 2. Dep'n © 1. Paym't for

Machine 790.00 20% 158.00 drilling 790.00
machine
Balance c/d 632.00
790.00 790.00
Balance b/d 632.00
Entries:
1. Purchase of drilling machine
Depreciation (PAL) and payment.
2. Depreciation of machine.
2. Dep'n Note: At the year end the balance of

of equip 158.00 the equipment account has been
brought down ready for the new
financial year.
Fig. 20. 'T' accounts - Fixed asset entries.

So how does the double entry system help?

There are several benefits in a double entry system:
Accuracy - 'balancing the books'

Since every transaction has two aspects (one debit and one credit) it
follows that if you add up all the debit entries and compare the total with
that of all the credit entries, then the amounts should be exactly equal. If
they are not, then you must have made a mistake somewhere! This idea of
cross-checking is a vital part of the double entry system. In practice you
will already have added up each individual account so you won't need
to add all the individual debit entries or all the individual credit entries;
instead you can just work out the difference between the total debits and
credits on each account. This difference is called the balance.
You then list your balances. If all is correct the total of all your debit
balances will equal the total of all your credit balances. Such a listing is
known as a trial balance (see Figure 28 on page 133). The trial balance is a
vital part of a handwritten system to ensure that everything is in balance.
Note - it still might not be correct - you may have made entries to the
wrong accounts!
Even on a computerised bookkeeping system the trial balance forms an

important checking tool. Although theoretically the software should always
ensure that the debits and credits are equal, there can be occasions when
there is a glitch and for some reason the debits and credits of the trial balance
do not agree. If this happens you know you have got problems. On most
software there is a repair command which will attempt to correct matters
for you. If all else fails you will have to revert to a backup copy of the data.
Useful summaries of information

Since all of the transactions relating to one type of expense (e.g. salaries
and wages) are entered onto a single account for that expense, you will
build up a summary of the total cost to the business for that expense for
the year.
Personal and impersonal accounts
So far, as we have seen, all the transactions in double entry bookkeeping

are recorded in accounts. These accounts can be of two sorts: personal
accounts and impersonal accounts.
■ Personal accounts — The first type are personal accounts - those relating
to dealings with customers or suppliers, collected in the form of the
sales ledger and the purchase ledger respectively.
■ Impersonal accounts (nominal ledger also known as the general ledger) -

These are for recording objects owned by the business, or its trading
(overheads) expenses or income (such as interest earned) for the trading
year. These impersonal accounts are normally grouped together in a
single ledger called the nominal ledger. Strictly speaking, the cash
book is one of the nominal ledger accounts, but for convenience, due to
the large number of entries, this account is normally kept as a separate
book or record sheets.
Recording your sales
In the simplest system outlined in Chapter 3, you have controlled which

customers have paid you, and which have not, by handling the individual
invoices. You have filed your copy invoices in a separate file until they
are paid, or 'flagged' them in your duplicate sales invoice book until they
are paid. Alternatively you have perhaps made notes in the margin of the
invoice register. This is fine as far as it goes but as your business grows
you'll need a better system to control how much your customers owe you.
You'll need a proper sales ledger.
As mentioned, the sales ledger together with the purchase ledger are
sometimes referred to as the personal ledgers. This is because they deal
with persons rather than inanimate things such as the bank account
or motor cars. The ledger itself may take many forms. You could use a
bound book, or it might be incorporated into the computer software of
98 Chapters • Double Entry Bookkeeping
your accounting package. It doesn't matter too much; the main thing is
that each page or account is divided into debit (Dr) and credit (Cr) sides.
On the sales ledger the debit entry will record the value of invoices sent
to customers whilst the credit entry will show the money being received
from them to settle their accounts. Of course in your computer software
you will not see it in quite the same form but if you print out a report it
will often have debit and credit columns.
This system has one great advantage: it gives all the information for each
customer on one page. You can easily tot up how much each owes you at
any date. Also, by adding all the balances in the ledger you can work out
how much your customers owe you as a grand total. This totalling is of
course done for you if you are using computerised bookkeeping software.
Your double entry accounts
Before we look at the actual accounts it is important that you understand

the structure of the nominal ledger. There are a number of subdivisions
of the nominal ledger and if you understand how these will eventually
combine together to form the year end accounts then you are well on your
way.
Understanding the structure of the ledger is equally important whether

you are using a handwritten double entry system or you are using a
computerised application. Most computerised systems will let you create
new accounts so that the information can be tailored to your own business.
However, unless you understand the structure you may open these new
accounts in the wrong place within the nominal ledger and this can have
unexpected results when you prepare your accounts.
The first thing to understand is that there are two main sections of the
nominal ledger:
■ Profit and Loss Accounts - these show the trading transactions that
have taken place during the year.
Subdivision of the Ledger Examples of Accounts
Profit and Loss Accounts

Income Sales
Fees
Interest
Rents
Cost of sales Purchases of materials

Movement in stocks
Direct labour
Commissions
Income accounts less cost of sales accounts will show you the Gross Profit.
Overhead Expenses Wages and salaries

Employer's Nl
Rent & Rates
Electricity
Insurance
Telephone, fax and broadband
Repairs and maintenance
Motor expenses
Entertaining
Stationery and printing
Postage
Advertising
Use of home
Bad debts
Bank charges
Interest charges
Accountants fees
Sundry expenses
Depreciation
Loss/profit on sale of FA
Gross Profit less Overhead Expenses will show the profit for the year
Balance Sheet Accounts

Fixed Assets Cost- b/fwd
Cost - additions
Cost - disposals
Depn - b/fwd
Depn - charge
Depn - disposals
Current Assets Stocks

T rade debtors
Prepayments
Bank Current a/c
Bank Deposit a/c
Current Liabilities Trade creditors

Accruals
Net VAT due
PAYE and Nl
Capital account Brought forward

Capital introduced
Drawings
Fig. 21. The structure of the nominal ledger.

■ Balance Sheet Accounts - these show the values of assets and liabilities
of the business.
The importance of this division and the way in which the accounts are
handled is explained in more detail in Chapter 7 concerning the year end
accounts and year end adjustments. However it is worth noting that within
each of these sections the accounts are further grouped as illustrated in
Figure 21. For example the Profit and Loss Accounts are grouped into
income, cost of sales, and overhead expenses. By deducting the sum of the
balances on the cost of sales accounts from those on the income section
you can establish the gross profit. This is one of the key ratios of your
business. The gross profit ratio shows how much profit you have earned
from each pound of sales before you take off the cost of the overheads.
So what accounts do I need?
The actual accounts you need to enter up in the nominal ledger will
depend upon the nature of your business. In summary:
1. Sales (Income) accounts
You may wish to distinguish between different types of sale, and so would
need several 'sales accounts'. Examples:
■ Home Sales Accounts and Export Sales Accounts
■ Head Office Sales Account and Representatives' Sales Account (e.g. to

work out commissions).
2. Sundry income accounts
You may want to keep track of odd items of income such as:
■ interest earned from deposits in the bank
■ commissions received
■ any other special income or fees which you may receive.

3. Cost of Sales - Purchases of products and overhead expenses
(a) Purchases - raw materials or products for resale.
(b) Overhead expenses - for example;
■ wages
■ motor expenses
■ telephone charges
■ heating and lighting
■ rent and rates
■ bank charges and interest.
4. Current assets (more of this in Chapter 7) such as:
■ trade debtors (money owed to you). Note: the accounts maintained in

the sales ledger are your trade debtors.
■ bank account
■ cash account
■ stock and work-in-progress.
5. Current liabilities (more in Chapter 7) including:
■ trade creditors (money owed by you). Note: the accounts maintained

in the purchase ledger are your trade creditors.
6. Fixed assets
■ buildings
■ motor vehicles
■ plant and equipment (including office equipment).

7. Capital
This will depend on the kind of entity trading.
Limited companies:
■ share capital
■ profit and loss account
■ capital reserve (in certain instances).
Sole traders and partnerships:
■ the proprietor's capital account (with separate accounts for each

partner if it is a partnership).
Do I have to write up all of these entries at the

same time?
No. On a handwritten system it is normal to write up one half of each
entry as the transaction occurs and then to complete the double entry at
a later date. Of course on a computerised system both sides of the double
entry will be completed at the same time. The books in which you make
the initial entries consist of:
■ the cash book
■ the purchase day book (or purchase journal)
■ the sales day book (or sales journal)
■ the journal (see below).
These books are collectively called the books of prime entry.
In a computerised system you will not have separate books but nevertheless
these names are often retained to indicate the reports containing that
form of information.
As we have seen, the cash book is really only one of the nominal ledger
accounts, kept as a separate book for convenience.
Strictly speaking, the purchase day book and the sales day book don't form
part of the double entry. They are a memorandum of entries to be made
into the accounting records. In a handwritten system they will probably
take the form of separate books but in a computerised accounting system
they will take the form of reports generated by the software having
already entered the invoice details onto the system.
The day books therefore serve two purposes:
■ They form the initial entry where all the transactions of a certain
type (either purchases or sales) can be summarised, or provide that
summary of invoices entered onto a computerised bookkeeping
system, and
■ On a handwritten system by using analysis columns (similar to the

analysis columns of the analysed cash book), the day books can cut
the number of entries needed to be posted to the nominal ledger
accounts (and so save time). When we looked at the analysed cash
book, we saw how all the entries for one type of expense (e.g. motor
expenses, or purchases) could be summarised to give a total for the
month. Of course the total of the debit entries must equal the total
of the credit entries but there's no reason why several credit entries
cannot be balanced by a single debit entry or vice versa. For example,
instead of posting every single item of motor expenses individually
to your motor expenses account in the nominal ledger, you can just
post the monthly total from the day book. The day book is really a
memorandum, linking the individual entries on, say, the purchase
ledger to the summarised figures posted in the nominal ledger.
The journal
Like the purchase and sales day books, the journal does not form part
of the double entry system as such. But it's only found in double entry
bookkeeping systems - it has no place within a single entry system. The
journal is rather like the two day books, but whereas the day books are
used to record all your day-to-day purchases or sales, the journal is used
to record any other odd transactions and adjustments for which no other
book of prime entry is available.
104 Chapter 5 ■ Double Entry Bookkeeping
Example
Suppose you are unlucky enough to incur a bad debt. Your sales ledger
account might look like this:
Broke Engineering Ltd
201X Dr Cr
5 April Goods 493.72
17 May Goods 151.05
There is a ledger balance of £644.77 that will remain on the ledger for evermore
unless you do something about it. That something is to transfer the balance to a
'Bad Debts' account in the nominal ledger. This is how you do it:
1. Make an entry in the journal (book of prime entry) as follows:
JOURNAL Dr Cr
Bad Debts Account 644.77
Broke Engineering Ltd 644. 77
Being transfer of balance to Bad Debts account following liquidation of customer's

business.
Note: A brief memo is added to record why you made the transfer.
2. You then debit the bad debts account in the nominal ledger with the same
amount of £644.77.
3. Next, you credit the unfortunate customer's account in the sales ledger with the
same amount so that it no longer shows a balance outstanding.
We shall hope that you don't have to post too many entries like this!
Note: The journal is just a memorandum. You are just using its debit and
credit columns to record where the item is to be posted on the various
accounts proper.
It is good practice to bring your books up to date at least each month

and more frequently if there are many transactions. Wherever possible
build in 'controls' to your routines so that you can prove to yourself that
everything has been entered correctly. Such controls will include the
reconciliation of the bank account in your records to the bank statements
and on a handwritten system to extract a trial balance to make sure that
it does in fact balance.
Hints on finding errors
So you have got to the end of extracting your trial balance and it doesn't -
balance that is! What do you do?
Well, after making a fresh cup of coffee, consider the following ideas
which may help you find the error.
is the difference an even amount?

If so it might be that you have posted an item to the wrong side of the
ledger. Divide the difference by 2 and look to see if you can find an amount
for that figure. Why divide by 2? Well, consider the following:
Telephone Charges Account Dr Cr

£ £
Balance brought forward 340
Cheque payment 80
Balance 260
340 340
The payment should of course be posted to the debit of the nominal ledger
account but has been posted to the credit in error. Had the posting been
made correctly, the balance would be £420: a difference of £160 from the
true figure. By dividing by 2 it is possible to isolate the true figure so that
you can double check to make sure that all the postings of £80 are correct.
This type of error will not occur within a computerised system.
Is the difference a round number?

Differences of lOp, £1 or £10, etc. are often errors in additions. So this is
the best place to start looking.
Is the difference divisible by 9?

This is an odd one! The explanation is this. Consider a posting of £36 which
has incorrectly been posted as £63: the numbers have been transposed.
The difference is:
63 minus
36
27
and of course 27 is divisible by 9.
So if the difference is divisible by 9 it might be that you have transposed

two figures. Try checking your postings.
Is the difference just a completely odd figure

(e.g. £1,042.37)?
If so, then you have probably omitted a posting (or the extraction of a
balance).
It is not possible to forecast all the possible ways that errors can be made
and the above suggestions can only be a general guide. Unfortunately if
there are several errors they can be very difficult to find.
Console yourself with the thought that even qualified accountants don't
always balance first time but with practice your accuracy will improve
and there will be fewer errors to look for.
At the end of the accounting year you may want to prepare or draft some
annual accounts, and we'll see how to do this in Chapter 7.
Summary
This chapter has dealt with:
■ the introduction of double entry bookkeeping
■ the reasons for double entry bookkeeping
■ debits and credits
■ the nominal ledger
■ the accounts that you will need
the trial balance.

6
Doing the Wages
Your legal obligations
If you employ any staff at all, you will need some system to record wages
payments. You must by law deduct income tax and National Insurance
contributions from payments made to your employees where appropriate.
You should contact HM Revenue & Customs New Employer Helpline, tel:
0845 60 70 143 or register online at: http://www.hmrc.gov.uk/paye/intro/
register-email.htm. This will then enable you to make the appropriate
deductions and pay the tax and national insurance contributions to the
Revenue as necessary. For 2012/13, if your employee earns more than
£107 per week from you, then you must record his/her pay for national
insurance purposes. However it is not until the wage exceeds £144 per
week that contributions actually have to be paid over to the Revenue.
For a single person with no other employment, tax is payable when
the earnings exceed approximately £156.00 per week. (The exact figure
will depend upon his/her entitlement to personal taxation allowances.)
Consideration should also be given to the National Minimum Wage
regulations (see page 122.)
Online filing
When a member of staff leaves your business you are obliged to prepare
a form P45. It's a record of the pay and the tax that's been deducted from
them so far in the tax year. It shows:
108
Chapter 6 • Doing the Wages 109
■ the tax code and PAYE (Pay As You Earn) reference number
■ the National Insurance number
■ the leaving date
■ the earnings in the tax year
■ how much tax was deducted from the earnings.
A paper copy of the form is given to the employee but the employer must
file the details with HM Revenue & Customs online.
Likewise when a member of staff joins your employment they should give
you a copy of their P45 form and you must register those details online
with HM Revenue & Customs.
Additionally at the end of the tax year (5 April) you must file the details
of the gross pay, tax deductions and National Insurance deductions for
each of your members of staff. This must now be achieved online via the
internet.
From 2013/14, HM Revenue & Customs (HMRC) are planning to introduce

a 'Real Time Information' system which will require even more online
filing. More details are given towards the end of this chapter.
Because of the online filing requirements it is no longer feasible to prepare

your payroll manually. You must either:
■ use payroll software on your own computer or
■ arrange for someone else to prepare your payroll on your behalf. This
may be a computer savvy friend, your accountant or a payroll bureau.
If you are tackling the job yourself you can use:
■ free software from HMRC such as 'Basic PAYE Tools PH Calculator'

downloadable at: http://www.hmrc.gov.uk/paye/payroll/day-to-day/
pH-calculator.htm#3
110 Chapter 6 • Doing the Wages
■ some commercial software such as Moneysoft Payroll Manager (see

http://www.moneysoft.co.uk/payroll-software/payroll-manager.htm)
You should bear in mind that the Pll Calculator isn't a fully integrated
payroll software product. For example, the Pll Calculator doesn't:
■ calculate gross pay from the hours at an hourly rate
■ record pension contributions
■ record any other deductions unrelated to PAYE. These may include

childcare costs, or other payroll adjustments
■ produce payslips
■ produce payroll summaries for the employer's record.
The Pll Calculator is also restricted to a maximum of nine employees.

You may also experience some difficulties using the calculator if:
■ certain director's National Insurance contributions (NICs) category

letters change during the tax year
■ you enter a leaving date for an employee and subsequently want either
to change the leaving date or re-start the employment
■ an employee reaches the age of 16 and becomes liable for NICs (in
order to be able to switch to category 'A' mid-year you need to have
already set them up in the calculator with an 'X' against their NICs
category)
■ you are unable to confirm that you have verified the date of birth
when one of your employees reaches pension age
■ you pay your employees using an interval other than weekly,

fortnightly, four-weekly or monthly.
Most commercial payroll software is far more flexible and will produce
the reports that you need for your records without further work from
Fig. 22. Wages calculation.

112 Chapter 6 ■ Doing the Wages
yourself. The investment in the software will probably pay for itself in
the saving of your time. For these reasons using commercial software is
probably a better option.
Working out the wages

The steps for calculating wages are:
■ calculate gross pay
■ calculate deductions - income tax and National Insurance etc.
■ calculate net pay.
Gross pay
The gross pay of an employee can be worked out in one of several ways.
The most common methods are:
Fixed weekly or monthly amount

The employee works a set period each week/month and is paid at a fixed
rate each week/month. This is commonly the case for office and shop
workers.
At an agreed rate per hour

The employee keeps a record of the hours worked and is then paid at
a fixed rate for each hour that they work. This system is common, for
example, in engineering works. Normally the record is kept by means of
a time clock ('clocking in and out') but a manual system can work just as
well in a smaller business.
At an agreed rate per unit (piece work)

The employee is paid for the number of items that they handle during
the course of the week. An example might be a sewing machine operator
in a garment factory. The employee might be paid 25p for each sleeve
that they sew into a garment during a week. Normally the system works
by using a numbered slip, consisting of a number of perforated tickets.
Each ticket relates to a specific task; for example, cutting the fabric or
sewing the garment. The slip is attached to the cloth as it is laid out for
cutting; as it passes through the various processes each worker collects
the appropriate ticket. At the end of the week the tickets held by each
employee are counted and the wages calculated accordingly.
Deductions from wages
Having calculated the gross pay entitlement, you next need to work out
the deductions (stoppages) from each employee's wage. There are two
main deductions:
■ income tax
■ National Insurance contributions.
You may also need to deduct sums for childcare costs, attachments to
earnings orders from the court, pension scheme contributions, and so
forth.
Income tax
Income tax is collected from employees through the PAYE system, or Pay
As You Earn. The employee's liability to income tax is collected as it is
earned instead of by tax assessment at some later date.
Strictly speaking, PAYE is a method of tax collection, not tax assessment.

However, in most cases the system collects roughly the right amount of
tax. Accordingly the Inspector of Taxes does not normally need to raise
a formal assessment of income tax, but will do if the amount collected
through PAYE is substantially incorrect. If a tax assessment is needed
credit is given for the amounts already collected through the PAYE system.
From your viewpoint as an employer you must:
■ Make the appropriate deductions of tax from your staff's wages.
■ Keep a suitable record of the amounts paid to your staff and the
amounts deducted.
■ Account to the Revenue for the amounts of tax that have been deducted
at the end of each month or quarter.
■ Prepare the returns at the end of the tax year, detailing the payments
made to each of your staff and showing the amounts deducted.
As mentioned above you will most probably use some computer software
or employ someone to work out the payroll for you so that you do not
need to involve yourself in the exact method of calculation. However,
in essence what is generally happening is that the employee's tax code
advises the employer of the amount of freepay that can be paid without
charging tax and then tax is calculated (at 20% or higher rates) on the
balance of the gross pay.
There are a few documents and forms that you will require from time to
time throughout the year: payslips.
■ Under the Employment Protection (Consolidation) Act 1978, you are

obliged to give your employees payslips showing how their pay and
deductions is made up. There is no special format for payslips. Payslips
for commercial software can be obtained from Custom Forms Ltd -
http://www.formfactory.co.uk/
• Payslips must show:
• gross pay
• net pay
• any deductions (stating the amounts of each item and the reason
why the deductions are made).
■ Form P45 - as explained above, this is a leaver's form. There are

theoretically four parts to this form although since compulsory online
filing was introduced the first copy has been abandoned as it is now
always sent over the internet. The other three copies are one for the
employee, and two for the new employer (although again since the
new employer has to file online they actually only need one copy).
■ Form P46 - this is used by employers to notify HMRC of members of

staff joining them if the staff member has been unable to produce a
P45 to them.
■ You may receive form P6 which is the notice advising you of the tax
codes to be used for your staff. The form is now sometimes issued
electronically rather than on paper.
■ At the end of the year you will need to issue a form P60 to each of your
employees. This is a certificate of gross pay and tax for the year. You
can either get blank forms for overprinting with the details or many
payroll packages will print the certificates onto blank paper.
You may also come across references to three other forms, Plls, P14s and
P35s. None of these forms actually exist under the modern online system
but their references have been retained to describe the data that they used
to contain.
The Pll was an employee pay summary on which to record the weekly
amounts of pay, tax and National Insurance deduction. Under the original
manual system the sheet was totalled at the end of the tax year to arrive at
the annual figures. The Pll was retained by the employer for their records.
P14s contained the same information as the year end P60, that is they
showed the total gross pay for the year (taken from the Pll), the total tax
for the year and details of the National Insurance deductions for the year.
These forms were sent to the Inland Revenue at the end of the tax year.
The form P35 was the employer's year end return and it summarised the
totals from the forms P14.
The Pll has of course now been replaced by a computerised version. The
P14s and P35 need to be submitted annually to HMRC but this is now
done online via the internet.
Special tax codes

While the basic system covers most cases, it does need modification in the
case of certain tax codes:
■ Those with a suffix D - used for some higher rate tax payers.
■ Those which are BR - all income is taxed at basic rate (currently 20%).
■ Those with a prefix K - used when allowance restrictions exceed

available tax allowances.
Check the PAYE literature for guidance in these cases. There is one other
case where some modification is necessary. This is where the code number
is suffixed 'Week V. In this instance each week is calculated as if it was
the first week of the tax year. In each of these cases the payroll software
should calculate the correct value once the appropriate code has been
entered.
National Insurance
As well as deducting income tax you must also deduct National Insurance
(NI) contributions. There are three main rates of contribution for NI
purposes:
■ Table A - The most common rate, used in all cases except those
mentioned below.
■ Table B - used for certain married women who can produce to you a
certificate for payment at reduced rate.
■ Table C - used for employees who are over state pension age.
There are also further rates of contributions applicable to workers who

have contracted out of additional state pension.
For Tables A and B there are two aspects to the contributions: the
employee's contribution and the employer's contribution. For Table C there
is no employee's contribution. Your payroll software will automatically
calculate the deductions.
Other deductions or additions

As well as the main deductions for tax and N1 as mentioned above, there
may be other adjustments that you need to make to the payroll. Some of
these deductions may be allowable for tax purposes and reduce the gross
pay on which the tax is calculated. Other deductions will not qualify
for tax relief and must be deducted from the net pay after tax. Once set
up if you are using commercial payroll software it should calculate the
amounts automatically.
Other deductions may include:
■ childcare costs
■ attachments to earnings orders from the court
■ pension scheme contributions.
You may also have to make additions to the pay for various reasons, for
example:
■ the reimbursement of employee's business mileage
■ the reimbursement of professional subscriptions
■ Christmas bonuses.
Swanhampton Engineering Ltd 201X-1X

Employer’s Summary
Week 45 ending Friday 8-Feb-1X
All Employees, Layout; Medium
Total
Tax Total Hourly Total Employee Tax Net Employer

Employee Code Payments Pay Hours NIC Deducted Pay NIC
Alec Maddock 810L 541.05 541.05 46.50 47.41 77.00 416.64 54.80
Charles Dale 212P 562.54 562.54 48.00 104.20 458.34 57.76
Helen Davis 810L 375.00 375.00 37.50 27.48 43.80 303.72 31.88
Suzanne O’Farrell 810L 327.98 327.98 40.00 21.84 34.40 271.74 25.39
Jonathan Greenall 810L 296.00 296.00 37.00 18.00 278.00 20.98
Total 2,102.57 2,102.57 209.00 114.73 259.40 1,728.44 190.81
Employer Totals:
Current
Week
Total Net Pay 1,728.44
TAX:
Tax 259.40
Total Tax Due 259.40
NIC:
Employee NIC 114.73
Employer NIC 190.81
Total NIC Due 305.54
Total Tax & NIC Due 564.94
OTHER PAYMENTS:
TOTAL NET
OUTLAY 2,293.38
Fig. 23. Payroll summary.

What accounting records will i need?
When you pay out wages and salaries to your staff you need to keep a
record of the details of their remuneration. If you are using a commercial
software package then it should provide you with a payroll summary of
a similar style to the one shown in Figure 23. This show the gross pay for
each employee and also the amount of tax and NI deductions. If there are
other forms of deduction or addition, then these will also be recorded on
the summary.
If you are using the free HMRC software then it will not produce this
type of summary. In this case you should prepare your own either as
a handwritten document or as a spreadsheet page. You will also need
to do the extra maths to make adjustments for any other additions or
deductions - the software will not do that task for you.
You will also need to provide your employees with payslips to advise
them how their pay has been calculated. An example of a payslip is
shown at Figure 24. Most commercial software should produce payslips
at the touch of a button. However, once again if you are using the HMRC
software then you will need to prepare each of the payslips separately.
This might be handwritten or you might set up a spreadsheet template to
take some of the work out of this task.
Monthly or quarterly PAYE payments

The money that you have deducted from your employees' wages is money
that you have collected on behalf of the government and periodically you
must pay it over to them. How often it has to be paid depends upon the
amounts that you have to deduct. If the monthly total of the tax and NI
deductions is less then £1,500, then you are entitled to make quarterly
payments but otherwise you must account to the Revenue on a monthly
basis.
Swanhampton Engineering Ltd Alec Maddock 8-Feb-1X
Fig. 24. Employee payslip.

The Income Tax year starts on 6 April and the tax months run to the
5th of the month. Thus the first month of the tax year is from 6 April to
5 May. The tax and NI has to be accounted for (included in the records)
on the date that the payment is made to the employee. Thus any payment
(weekly or monthly) made between 6 April and 5 May would be regarded
as belonging to month 1 of the tax year. The payments of the PAYE
deductions to the HMRC have to be made by 19th of the month, that is to
say 14 days after the end of the tax month.
If you are on quarterly payments the first quarter runs from 6 April to 5
July and the tax payment has to be made by 19 July.
The Revenue now encourage all employers to pay the PAYE monies to
them by electronic means (BACs or internet banking) although it is still
possible to get bank giro slips for you to pay over the counter at your bank.
Statutory Sick Pay and Statutory Maternity Pay

From time to time your staff may become ill. If this happens then it is
initially the employer's responsibility to make the payment of statutory
sick pay (SSP). The rules governing the payment of SSP can be complex
particularly if the employee has already recently had time off through
sickness. Fortunately there is a calculator on the HMRC website to guide
you through the calculation (http://www.hmrc.gov.uk/calcs/ssp.htm).
Alternatively, if you are using commercial software for the preparation of
the payroll then it is likely to undertake these calculations for you.
When SSP is paid to the employee, tax and NI are both applied in the
usual way to the gross SSP amount that you have established from the
website. Because of the relatively low level of sick pay this will often give
rise to a tax refund due to the employee.
As an employer you may be able to recover some or all of the SSP that
you have paid out. The rule is that you can only recover any SSP you've
paid in a tax month that's over and above 13% of your gross Class 1 NICs
liability for that month. Unless you qualify under this rule then you are
not entitled to recover any SSP.
In a similar way the payment of statutory maternity pay (SMP) is initially

the employers responsibility. Guidance can be found at http://www.hmrc.
gov.uk/calcs/smp.htm. Once again most commercial payroll software will
undertake the necessary calculations for you.
Owners and directors
Proprietor's drawings (sole traders and

partnerships)
Sometimes confusion can arise if the proprietor believes that his weekly
drawings are his wage. He is tempted to enter the figures in his wages
records and may even try to operate PAYE on his income. Beware! This is
wrong. Proprietor's drawings are not wages and should not be entered in
the wages records.
Directors
If the business is carried on by a limited company then the directors of
the company are employees. PAYE must be operated on all salaries and
bonuses paid to them although dividend payments fall outside the PAYE
system.
National Minimum Wage

There are National Minimum Wage rates for employees and action can be
taken against employers who pay less than the prescribed rate. The rates
from 1 October 2011 are:
Adult rate (workers aged 21+) £6.08
Development rate (aged 18 to 20 inclusive) £4.98
Aged under 18 (but above compulsory school age) £3.68
Apprentices aged under 19 £2.60
Apprentices aged 19 and over, but in the first

year of their apprenticeship £2.60
For more details contact the National Minimum Wage Helpline on tel: 0800
917 2368 or look at the website at: www.direct.gov.uk/en/Employment/
Employees/TheNationalMinimumWage/.
Summary
■ You must deduct tax and NI from your employees. There are severe
penalties if you fail to make the deductions.
■ You must then account for the sums deducted to the HMRC each
month or quarter - full instructions on this are given in the PAYE
documentation.
■ You need to instigate a suitable system for calculating the amount of

pay that each employee is entitled to, whether it is on a time basis or
on a piece work system etc.
■ If you have several employees then you should keep a wages book to
record the wages that you pay to your employees.
■ The drawings of the proprietor are not wages.
■ PAYE must be operated on directors' salaries.
■ Make sure you pay at least the National Minimum Wage rates.
Future plans for paye
Real Time Information (RTI)

RTI (Real Time Information) is a new payroll reporting system to be
introduced by HMRC during 2013 and refers to the submission of
employee pay-related information at the time of payment rather than
at year end. HMRC's principle aim of the move to RTI is to support the
introduction of Universal Credits in October 2013, a government drive
that is only possible if pay-related information is available in real time.
How will the new RTI system differ from the current system?
The current PAYE system relies on the employer calculating tax, N1 and
other deductions for their employees during the year and then submitting
this information at the end of each year via the online P35 and P14.
Under the new RTI system employers will still calculate the tax and NIC
deductions for each employee (probably using their payroll software) but
instead of submitting this data once a year to HMRC, they will be required
to submit the details at the same time as their payroll run, be that weekly,
fortnightly or monthly. The RTI data will be sent to HMRC either via the
Government Gateway (as now) or via the BAGS system, depending on
how a company pays its employees. End of year returns (P35 and P14) will
become a thing of the past.
When will these changes take place?

The current HMRC timeline proposal is that the live scheme will be rolled
out from April 2013, initially involving large employers (those with 250+
employees) followed by small and medium-sized employers later that
year. It is the intention that all employers will be using the RTI system by
the end of 2013.
This is one of the most radical changes since PAYE was first introduced
in 1944. Full details of just how it will work are yet to be established but
it will almost certainly require that payroll software of some type is used
for the preparation of the payroll.
7
Preparing Your Annual
Accounts
What the annual accounts show

One purpose of keeping records is to prepare the accounts at the end
of the financial year, so that you can see how the business is doing. An
example of the year end accounts is shown in Figures 25, 26 and 27.
As you can see, these accounts consist of two main pages (plus a further
page of notes which give more details). There can be some variations on
the way that non-corporate businesses present their accounts but the
example shows a typical layout.
Year end adjustments

Before we look at the accounts pages in detail it is worth considering how
the figures need to be adjusted at the year end.
The adjustments at the year end can be considered to fall into three main
areas:
■ Adjustments to correct timing differences - accruals and prepayments.
■ Adjustments to allow for matters that are entered into the records on
an annual basis - for example, the depreciation charge, changes in
closing stock levels or writing off bad debts.
■ Adjustments to reflect the way in which the account balances roll

forward from one accounting period to the next.
125
126 Chapter 7 • Preparing Your Annual Accounts
Accruals and prepayments

When the accounts are prepared there should be a matching of the income
and expenditure. So for example suppose that you are running a cafe and
you pay your staff on 15th of the month. When your year end finishes
on say 31 March then your staff will have worked for you for about two
weeks since their last payday but not been paid in respect of the work.
On the other hand, you will have had the benefit of the sales to your
customers.
If no adjustment was made then your profit would be overstated because

you have received the income from the sales but not matched that income
with the cost of the staff that have earned you those sales. It is therefore
only right that an adjustment should be made to match the expenditure
to the income earned in the period. Such adjustments are called accruals.
In a like fashion there may be occasions when it is necessary to adjust for

payments that have been made but which have a lasting benefit into the
next accounting year. An example of this might be an insurance premium.
Say, for example, the same business pays an insurance premium on 1
February for the 12 months to the following 31 January. At the year end
the business will have benefited by two months' worth of that premium
but a further ten months worth of insurance will also have been paid for
and will require adjustment. This type of adjustment is a prepayment.
The way in which these adjustments are recorded in the records of the
business are via the journal (see page 103) or the journal routine of a
computerised bookkeeping application.
For accruals you are recording additional expense and showing a liability
that the business must pay in the future. The entries are therefore debit
the relevant expense account (staff wages in the example above) and credit
the accruals (or creditors) account in the liabilities section of the balance
sheet codes of the ledger.
Page 1
SWANHAMPTON PLUMBING AND HEATING ENGINEERS
PROFIT AND LOSS ACCOUNT
YEAR ENDED 30 APRIL 201X
Current year Prior year
TURNOVER ^ ^
Sales 71,911 70,980
Opening work in progress (3,800) (3,574)
Closing work in progress 2,200 3,800
70,311 71,206
COST OF SALES
Opening stocks 250 500
Purchases 41,025 39,721
Direct wages 3,582 2,999
44,857 43,220
Less closing stocks 275 250
44,582 42,970
GROSS PROFIT 25,729 28,236
EXPENSES
Repairs and maintenance 267 396
Motor expenses 3,824 3,450
Telephone 1,236 1,238
Insurance 737 689
Printing, stationery and postage 242 80
Advertising 1,224 1,347
Accountancy fees 613 600
Depreciation 2,365 958
Loss on disposal of fixed assets 1,873 -
Bank charges 414 342
Loan interest 399 —•
13,194 9,100
NET PROFIT FOR THE YEAR 12,535 19,136
Fig. 25. The profit and loss account.

Page 2
BALANCE SHEET
30 APRIL 201X

Note £ £
FIXED ASSETS 13,404 5,425
CURRENT ASSETS
Stocks 275 250
Trade debtors 3,963 5,093
Work in progress 2,200 3,800
Prepayments 758 -
Cash at bank 9,548 15,530
16,744 24,673
CURRENT LIABILITIES
Bank borrowing 10,562
Trade creditors 5,859 11,364
VAT 2,833 3,637
19,255 15,001
NET CURRENT (LIABILITIES)/ASSETS (2,511) 9,672
NET ASSETS 10,893 15,097
FINANCED BY:
CAPITAL ACCOUNT 2 10,893 15,097
ACCOUNTANTS’ REPORT TO THE PROPRIETOR

In accordance with your instructions, we have compiled these unaudited accounts set out
on pages 1 to 3 from the accounting records and information and explanations supplied to
us.
LEWIS & CO
Chartered Accountants
36 Church Street
Swanhampton
Someshire
Fig. 26. The balance sheet.

29 June 201X
Page 3
NOTES TO THE ACCOUNTS
YEAR ENDED 30 APRIL 201X
1. FIXED ASSETS
Brought Carried
forward Dep’n for forward
1 May IX Additions Disposals the year 30 Apr IX
£ £ £ £ £
Equipment &
Machinery 1,131 271 (211) 1,191
Office Equipment 921 - - (138) 783
Motor Vehicles 3,373 13,446 (3,373) (2,016) 11,430
5,425 13,717 (3.373) (2,365) 13,404
Depreciation has been charged at the following rates:
Equipment & Machinery - 15% on book value

Office Equipment - 15% on book value
Motor Vehicles - 15% on book value
2. CAPITAL ACCOUNT - Mr E Morse

£ £
Balance brought fon^rard 15,097 604
Capital introduced - 7,367
Net profit for the year 12,535 19,136
27,632 27,107
Less: Drawings 16,739 12,010
Balance carried forward 10,893 15,097
Fig. 27. Notes to the accounts.

In order to record prepayments you will be reducing the expense recorded

in the books (as part of it relates to a later year). This prepayment of the
expense is therefore an asset of the business - if the business stopped
at the year end then theoretically this money could be repaid by the
insurance company. The entries to record this transaction would be credit
to the expense account (insurance in the example above) and debit to the
prepayments (or debtors) account in the assets section of the balance sheet
codes.
Year end matters

At the year end you will need to review the accounts in your ledger and
make any necessary alterations. Once again any adjustments that are
necessary will be entered via the journal routines.
Year end adjustments will typically involve:
■ Depreciation - depreciation is the amount by which a fixed asset

has lost value during the accounting year. So, for example, a delivery
van that cost £8,000 at the start of the year may have lost value and
be worth say £6,000 at the year end. This loss of value by £2,000 is
recorded as an expense on the profit and loss account.
In order to achieve this, a debit entry is made to the depreciation

expense account and a credit entry is recorded on the asset account
(thereby reducing its value).
■ Changes on stock levels - rather like accruals, this is a matter of

matching up income and expenditure.
Consider the following. A business buys widgets for £8 each and

sells them for £10 each. In the accounting year the business buys 20
widgets at a total cost of £160 and during the year it sells 15 of them
and receives £150. How much is the profit or loss?
Chapter 7 • Preparing Your Annual Accounts 131
Without a stock adjustment you might conclude that it was a £10 loss
(that is £150 of income but £160 of purchases). But clearly this is wrong
because the business should make £2 on each widget sold.
This is where the stock adjustment comes in. The business bought 20
items but only sold 15 and so has 5 left. These should be valued at 'the
lower of cost or net realisable value' - in this case 5 at £8 which is £40.
So if we now adjust the purchases for the remaining stock we have
£160 less £40 equals a cost of sales of £120. If this figure is used in the
calculation we have sales of £150 less cost of sales of £120 which equals
a profit of £30 (or £2 per item for the 15 sold).
So how do we enter this into the records? Well the closing stock is an
asset to be shown on the balance sheet so this is debited to the stock
account in the current assets section of the ledger. The other end of
the double entry is a credit to a closing stock account in the cost of
sales expenses account.
■ Bad debts - at the year end it is a good idea to review who owes money
to your business. If there is doubt that some of this will be recoverable
then adjustments should be made to cancel the debt. This would be
recorded as a debit to the bad debt expense account and a credit to
the debtor account on the sales ledger to cancel the debt showing up
there.
Rolling forward the balances

The third type of year end adjustment is the rolling forward of the balances
from one financial year to the next. You will recall that the nominal
(general) ledger is divided into a number of accounts for different types
of income, expenditure, assets and liabilities. If you like you can think
of each of these accounts as pots lined up across the mantelpiece each
accumulating details of a particular type of transaction. The final pot on
the right has details of the owner's investment in the business - his/her
capital account.
You will also recall from Chapter 5 that there are two main divisions of
the nominal ledger - the profit and loss items and the balance sheet items.
The profit and loss accounts record the trading activities during the year
- the sales, the purchases and the overhead expenses. In contrast the
balance sheet accounts record the assets and liabilities of the business. If
you total up how much is in each account and then list those balances you
will have created a trial balance.
The trial balance gets its name from the fact that on a handwritten system
the balances would be extracted in this manner and the trial balance
prepared. Of course the sum of the debit balances should equal the sum
of the credit balances and so this exercise was a trial to make sure that it
did. If it did not balance then you knew you had an error somewhere that
you would need to find.
If you look at the trail balance at Figure 28 this has been artificially split
at the end of the profit and loss account balances. Normally the trial
balance would list all of the balances without a break. However if we
are just considering the profit and loss account balances (income, cost
of sales, overheads etc) then the difference between the credit balances
(mainly income accounts) and the debit balances (mainly cost of sales and
overheads) will be the profit.
There may be some confusion with regard to revenue items such as stock
and debtors: although these items are not of a capital nature, the values are
included on the balance sheet as they represent assets held at the end of
the accounting period. (Stock also appears on the profit and loss account
but in this case it is to reflect the change in the level of stock during the
year - opening stock less closing stock.)
In the example the credits total £74,386.21 whilst the debits are £61,851.36
meaning that the profit for the financial year is £12,534.85.
The balance sheet values (the lower part of the trial balance) represent the
assets and liabilities of the business at the year end which will of course
continue into the following year. The final couple of balances on the trial
Swanhampton Plumbing and Heating Engineers
Trial Balance
At 30 April 201X
Sub-Division of Nominai Ledger Account Debit Credit
Income Closing WIP 2,200.00

Opening WIP 3,800.00
Sales 71,911.21
Cost of sales Closing stock 275.00
Direct wages 3,581.82
Opening stock 250.00
Purchases 41,024.81
Expenses Accountancy fees 613.19
Advertising 1,224.00
Bank charges 413.57
Depreciation 2,365.20
Insurance 737.16
Loan interest 398.90
Loss/profit on sale of FA 1,873.00
Motor expenses 3,824.04
Repairs and maintenance 266.91
Stationery and printing 242.43
Telephone 1,236.33
Memo Profit
Difference = Profit 12,534.85 61,851.36 74,386.21
FA - Equipment and machinery Cost- b/fwd 1,330.86

Cost - additions 270.73
Depn- b/fwd 199.86
Depn - charge 210.73
FA - Motor vehicles Cost- b/fwd 3,969.00
Cost - additions 13,446.47
Cost - disposals 3,373.00
Depn - b/fwd 596.00
Depn - charge 2,016.47
FA - Office equipment Cost- b/fwd 1,083.56
Depn - b/fwd 162.56
Depn - charge 138.00
Stocks Stock 275.00
Work-in-progress 2,200.00
Debtors Prepayments 757.59
T rade debtors 3,963.42
Bank Bank loan 10,562.29
Current a/c 9,547.53
Creditors Net VAT due 2,833.28
Trade creditors 5,858.96
Capital account Brought forward 15,097.13
Drawings 16,738.97
Total 115,434.49 115,434.49

Net profit for the year 12,534.85
Fig. 28. The Trial Balance.

balance (the capital account section) record the owner's investment in the
business at the start of the year and also any movements in the owner's
interest in the business during the year.
At the year end there needs to be a resetting of the accounts ready for the
following year. If we come back to our pots on the mantelpiece analogy
then all of the profit and loss account pots are emptied into the owners
pot, the one on the right, so that they start afresh for the new financial
year. Likewise the little pots which are subdivisions of the owner's capital
are tipped into the main (opening balance) pot.
In terms of debit and credit this is achieved by debiting all of the profit
and loss accounts that had a credit balance and crediting all of the relevant
accounts that had a debit balance and putting the resultant net balance to
the owner's capital account. In a similar manner there is a tidying up of
the owner's accounts.
If you are using a computer bookkeeping package then the software will
look after these transfers for you. On some systems you will need to run
an 'end of year' routine whilst other will undertake these adjustments
seamlessly in the background without requiring your intervention.
Two types of expenditure

There is an important distinction to be made at this stage:
Capital expenditure
Capital expenditure relates to the purchase of fixed assets used by the
business and having a lasting effect over several years.
Revenue expenditure
Revenue expenditure, on the other hand, only contributes once to the
earning of profits; except for what may remain as stock, it is wholly used
up in the period the expenditure is incurred. For example, expenditure
Chapter? • Preparing Your Annual Accounts 135
on a new piece of equipment or a new building would be capital: it should

benefit the business for many years. Expenditure on raw materials or
motor expenses will have no long-term benefit so it is regarded as revenue
expenditure.
In the same way income can be classified as revenue or capital. If a factory,

or piece of equipment, is sold at a profit - that is a capital profit. On the
other hand, if stocks are sold, that is revenue income.
The annual accounts
As mentioned at the start of the chapter the annual accounts comprise

the profit and loss account and the balance sheet together with further
explanatory notes. Let's consider each of these in turn.
Profit and loss account
The first page, the profit and loss account (Figure 25) is a summary of
trading income and expenditure for the period. Is the gross profit margin
bigger, or smaller, as a percentage of its sales? Why is the net profit less
when sales seem to be up? Are the overheads under control?
The profit and loss account summarises the revenue income and
expenditure for the year. After allowing for timing differences (debtors,
creditors and stock) it shows the profits and losses of the business. At
the end of the accounting period the various balances on the nominal
ledger revenue account (sales, purchases and overheads, e.g. wages, motor
expenses) are transferred from their respective accounts to the year end
profit and loss account summary.
It's usual to dispense with pence and just to show 'round pound' figures.
Generally, comparative figures for the previous year are shown alongside
the figures for the current year. The layout for the profit and loss account
is split into three sections:
■ The top section is the income or turnover. Often this will only be one
line - sales.
■ The middle section deals with the cost of making those sales. It will
include the purchases of goods and the adjustment for the differing
level of stock at the beginning and end of the year. It may also include
direct wages where wages are directly related to achieving those
sales. Taking the cost of sales from the turnover will reveal the figure
of gross profit.
Together these two sections are referred to as the trading account.
■ The final section deals with the overheads of the business. Deducting
the overheads from the gross profit will give you the net profit
(sometimes referred to as The bottom line').
In some businesses, particularly service businesses such as computer

contractors or surveyors, it will not be appropriate to have a cost of sales
section and there will just be the turnover section and an expenses or
overheads section of the accounts.
Gross profit
The gross profit is the figure of profit directly from the purchase and
sale of the goods. For example, suppose you run a shop and purchase an
article for £10 and sell it for £15; you will have made a gross profit of £5
on the transaction. This would represent a gross profit margin of 33% on
sales.
Gross profit and trading account

It is often useful to compare your gross profit rate either from one year to
another year, or with another business in the same trade. The easiest way
to do this is to work out your gross profit as a percentage. This is normally
related to the selling price. Thus:
Gross profit on sales ' Example
Gross profit sales value £5.00 ^ £15.00 = 33%
The expression 'cost of sales' has been used, rather than 'purchases'. This
is because some of the goods which have been purchased may still be in
stock. They have not yet earned any profit and we have to allow for this
when working out the gross profit. Take the following example:
Example
John starts up in business running a shoe shop. He buys 120 pairs of shoes
at £10 per pair. During the financial year he sells 83 pairs of shoes at £15
per pair and still has 37 pairs in the shop year end. His trading account
would look like this:
£
Sales 1,245
Purchases 1,200
Closing stock (370)
Cost of sales 830
Gross profit 415
His gross profit ratio would then be:
415 /1,245 % of sales = 33%
Overheads and net trading profit

By contrast, any revenue expenditure apart from the purchase of goods is
referred to as overheads. Overheads include:
■ administration costs (office wages, telephone, stationery, etc.)
■ establishment costs (heating and lighting, property repairs, rent and

rates)
■ financial costs (bank interest and charges, hire purchase charges, etc.)
■ other overheads including depreciation (see page 143).
Certain payments of wages may be included as a direct cost of the business,

and thus affect the gross profit. Whether they should be included will
again depend on the type of business. Where goods are simply bought
and resold, then wages will not form part of the cost of the goods resold
and should therefore be included as an overhead. On the other hand,
where a process is carried out on the goods before they are sold (e.g.
manufacture or assembly) then the value of the goods has been enhanced
before they are sold. In such circumstances these productive wages should
be included with the purchase of the goods in the trading account.
After deducting overheads from the gross profit you arrive at the net
trading profit. This is the amount that the business has earned from its
trade during the year after paying all its expenses.
Non-trading income and net profit

Non-trading income is that which arises from activities incidental to the
main trade. The most common sources of non-trading income are interest
earned from bank deposit accounts, and the rental income from surplus
property owned by the business.
After adjusting for non-trading income you finally arrive at the net profit
of the business for the year. In many cases there will be no non-trading
income; if so you don't have to state both the net trading profit and the net
profit, since the figure would be the same.
The balance sheet
The second page, the balance sheet (Figure 26), is a 'snapshot' of the assets
and liabilities of the business at a certain point in time. At the year end,
in this example, the business owned the assets and owed the liabilities as
shown on the balance sheet. You can tell a lot from the balance sheet. In
this one, why has the business taken out a bank loan? Does the business
owe more or less to its trade creditors?
As we have seen the balance sheet sets out the assets and liabilities of
a business at a fixed point in time. However, it does more than just list
them. It arranges them into a suitable order so that the financial position
of the business can be clearly seen.
Except for companies, there is no 'legal' order for the entry of the items
on the balance sheet. However, it is usual to bring out certain figures to
highlight the strengths or weaknesses of the business. In particular:
Total fixed assets

These are items such as property, motor vehicles, fixtures and fittings.
More details about the treatment of fixed assets are given on page 143.
Total current assets

These are items which are either cash, or which can be turned into cash
quite quickly. They include the balances of revenue expenditure not used
up at the date of the balance sheet. For example, if raw materials have
been purchased but not used, they appear in stock at the balance sheet
date. These items are usually listed in the reverse order of liquidity: that
is to say you start with the item that is most difficult to turn into cash and
finish with the item that is easiest, i.e. cash itself.
Total current liabilities

This includes amounts owed to suppliers and can also include short-term
loans, such as overdrafts, which are usually repayable on demand.
140 Chapter? • Preparing Your Annual Accounts
Net current assets

This is the difference between total current assets and total current
liabilities. It's also sometimes referred to as working capital. It shows
the amount of 'ready money' available to the business for its day-to-day
business activities.
Net assets
The net total of fixed plus current assets minus liabilities is referred to as
the net assets of the business. This shows the net worth of the business
(subject to a few matters discussed below).
Proprietor's investment
The net assets are matched by an equal and opposite figure - the
proprietor's investments in the business. This is the amount owed by the
business to its owner. It may include money actually invested into the
business, and profits of the business left in to accumulate.
Comparison with previous period

As well as showing the figures relating to the current date, it is also normal
to show the figures at the previous balance sheet date. This allows the
user to review the business, to assess its financial strength (or weakness),
and see how it has changed during the last financial year.
Notes to the accounts
We have dealt with the balance sheet and with the profit and loss
accounts but some of the figures (particularly on the balance sheet) have
been summarised and shown as one figure for clarity. The 'Notes to the
Accounts' give extra detail to explain the summarised figures. Let's look
again at Figures 26 and 27. The fixed assets (equipment and property
having a long-term benefit to the business) have been shown as a single
figure on the balance sheet. The details of how this is made up are shown
in a note. From the note you can see that the fixed assets include equipment
and machinery, office equipment and motor vehicles used in the business.
The note also shows how these figures have changed from a year ago.
The notes also describe the movement on the capital account for the year.
The capital account shows the proprietor's investment in the business.
When the business makes a profit this is credited to the capital account
and increases the balance on that account (the business now owes more
to the proprietor). On the other hand, throughout the year the proprietor
will withdraw money from the business (drawings) and this reduces the
sum that the business owes to him. The drawings are debited to the capital
account, so reducing its balance.
A STANDARD APPROACH TO ACCOUNTS

Before we leave the subject of the annual accounts there are three other
matters to look at. These are the accounting concepts, the historical cost
convention, and depreciation of fixed assets.
Accounting concepts
There are four accounting concepts in business today;
The going concern concept

This concept states that you should treat your business as if it will go on
trading, unless there is some very clear pointer to say that it will not.
The importance of this is that some of your assets may have a value in a
continuing business, but very little value to anyone else.
Let's take the case of a business taking up a five-year non-transferable

lease on some premises; in addition to the annual rental let's suppose it
has to pay an initial premium of £5,000. As we assume that the business
will continue, we don't need to write off the whole cost of the premium
in the profit and loss account in the year that it is expended. Instead
we would write it off at £1,000 per annum over the period of the lease.
Thus after two years there will still be an asset of £3,000 representing the
balance of the lease premium: although it may have no resaleable value, it
does have a value to the business as a going concern.
Accruals
To 'accrue' means to charge an amount in the accounts for the period
to which it relates which may not actually be when it is due to be paid.
Take the case of a business which pays rent of £12,000 pa for its premises,
six monthly in arrears on 31 March and 30 September. If the business
makes up its accounts to 31 December it will have to make an accrual of
£3,000, being three months' rent (October-December) which has not yet
actually become due for payment, though the business has had the use of
the premises.
The consistency concept

This means that matters within the accounts should be treated consistently
from one year to the next. Suppose, for example, you decide to depreciate
(write off) the cost of a machine over five years by equal instalments:
unless there is some big change in the business to justify altering this
treatment, this depreciation should be consistently applied over the five-
year period.
The prudence concept

Don't assume a profit until it is actually earned! Always be prudent and
err on the side of caution. For example, it may be acceptable to state the
profit on a sale, even though the debt has not yet been settled, but if there
is any doubt over the debt being paid the profit should not be anticipated.
Indeed, if there is a potential bad debt the potential loss must be provided
for in the profit and loss account.
Historical cost convention

One potential weakness of a balance sheet prepared in the way outlined
is that the value of the assets is based on their actual historical cost. In
times of low inflation this may not matter much but when inflation rises it
can lead to their real value being understated in the balance sheet.
Suppose a business purchased a freehold workshop in 1967 for £12,500,

and those same premises are worth £190,000 today. Unless the accounts
are adjusted for inflation the balance sheet would still only show the
original (historical) cost of £12,500.
Often a statement or note will be included to remind the reader that an

historical cost basis of accounting has been used and that the valuation
of certain assets, in particular freehold property, may be in need of some
review.
Depreciation of fixed assets

We have seen that fixed assets are items purchased which will benefit
the business over several years. Whilst some assets such as property may
increase in value, most will lose value as they get old or wear out.
If a business buys a van to deliver its goods it may expect to go on using

it for three or four years before replacing it. But if the van originally cost,
say, £8,000, the business would hardly expect to receive £8,000 when it
sold the van four years later. Suppose instead it receives £2,400 when the
van is sold: if this is put into accountancy terms the motor vehicle account
might look like this:
Dr Cr
£ £
Yr. 1: Bank- Yr. 4: Bank -
Purchase of van 8,000 Sale of van 2,400
Yr. 4: P & L a/c
Loss on sale of van 5,600
8,000 8,000
We have had to transfer the balance on the account (£5,600) to the profit
and loss account; there we will write it off with the other expenses of the
business. However, the above example charges the whole of the loss of
value of the van in the year that it was sold even though it was actually
losing value throughout the whole of the period of ownership.
To overcome this problem it is normal to depreciate assets over their

useful lives; that is to say, to write off part of their value to the profit and
loss account in each year so as to reflect the reduction in value that has
taken place in the year. It's not normally practical (or necessary) to get
valuations of such assets each year. The proprietor of the business will
himself have a good idea of their value and their expected life.
There are two main methods of working out depreciation:
■ the straight line method
■ the reducing balance method.
Either can be used but once started you should not change from one
system to the other (consistency - see above).
Straight line depreciation

This method writes off the cost of the asset, less its expected residual value,
by equal instalments over its estimated useful life. Using the example
above, the van would be depreciated by £1,400 in each of the four years of
ownership. This would mean that there would be an equal charge for the
use of the van in the accounts for each of the four years.
Reducing balance method

Under this system a fixed rate per cent on the diminishing value of the
asset is written off to the profit and loss account each year. The rate should
be such that the depreciation is roughly equal to the loss in the value of
the asset over the period of use. For example:
Van cost 8,000
Yr 1: Depreciation 25% x £8000 2,000
Reduced value at the end of year 1 6,000
Yr 4: Depreciation 25% x £3375 844
This method will result in a higher depreciation charge in the early years
and less in the later years but this is often more in line with the way in
which an asset diminishes in value.
Part exchange of assets

One further point which can cause confusion on annual accounts arises
on the exchange of assets, for example, in the part exchange of motor
vehicles. The simple and correct way of viewing the transaction is not to
try to adjust figures using only the net sum that has been paid, but to deal
with the purchase and the sale as two distinct transactions. Clearly the
consideration for the sale of the old asset is part of the purchase price of
the new asset but, apart from this, if the transaction is thought of as two
separate deals it should prove much easier to record it all correctly.
Summary
■ The balance sheet is a 'snapshot' of the assets and liabilities of a
business at a point in time.
■ A profit and loss account shows how the change in the net worth of
the business has occurred since the last accounts were prepared.
146 Chapter? • Preparing Your Annual Accounts
■ There are the four accounting concepts to keep in mind during the
preparation of the accounts: going concern, accruals, consistency and
prudence.
■ Some fixed assets will have lost value during the year as their useful
life is slowly used up. Such assets need to be depreciated.
■ Accounts are normally prepared using the historical cost basis.
■ The way in which accounts are presented will depend partly on the
nature of the business.
Company accounts
The laws on limited liability companies date back to the mid-nineteenth

century. Since then there have been a number of further Acts of Parliament
governing company legislation. The Companies Act 2006 is the latest
legislation to update and modernise company law but for existing
companies, registered before the new Act was implemented the changes
had little immediate impact.
From time to time the Acts are also amended by Statutory Instruments and
this legislation combines to make the statutory regulation of companies
into a complex topic. Added to this are various rules and regulations set
by the UK and international accountancy bodies and agreed with HM
Revenue & Customs about the content and presentation of accounts.
However, despite this, at their heart the accounts of companies follow
the general layout of accounts for non-incorporated businesses as set out
earlier in this chapter, with a profit and loss account, balance sheet and
notes albeit presented in a more complex form.
Companies can either be public limited companies (PLCs) or private

limited companies. Most smaller companies will be private limited
companies.
Chapter? • Preparing Your Annual Accounts 147
Small companies
Before you prepare the accounts for your company it is important to
consider its size as this has a bearing on the information that you need to
include within the accounts.
There are three sizes of company under current UK legislation - small,

medium and large. Medium and large companies are required to have
independent auditors who will almost certainly be able to advise on the
presentation of accounts. Small companies may be exempt from audit and
could therefore prepare their own accounts without using a professional
accountant. However, as indicated above, the rules and regulations
governing the presentation of the accounts are complex. When preparing
annual accounts, almost all companies use an accountant. As long as you
set up a few simple systems, generating the information the accountant
needs is relatively simple and inexpensive.
Audit
Some companies will be required to appoint an auditor and have their
accounts audited (see below for exemptions). It is the job of the auditor to
report to the members (shareholders) of the company as to whether the
accounts have been properly prepared taking notice of the appropriate
accounting rules. The auditor must also report as to whether the accounts
give a true and fair view of the state of the company's affairs.
In order to arrive at their conclusion the auditor will carry out an

examination of the records on a test basis to ensure that the accounts are
not materially incorrect. This does not mean that the auditor will check
every transaction or that the accounts have to be 100% accurate: just that
anyone looking at the accounts will be able to obtain a fair view of the
state of the company's affairs and will not be misled if they rely upon the
figures. Very often, the auditor will also act as accountant to the company
and they will prepare the accounts and deal with the necessary taxation
matters.
So what is a small company?

A UK company is defined as small if it does not exceed two of the following
three criteria in two successive years or in its first financial year:
1. turnover - £6.5 million
2. balance sheet total (fixed and current assets) - £3.26 million
3. average number of employees - less than 50.
Most small companies are not required to have an audit. To qualify for
total audit exemption, a company must:
■ qualify as a small company
■ have a turnover of no more than £6.5 million
■ have a balance sheet total of no more than £3.26 million.
PLCs are required to have an audit even if they would qualify as small
companies.
Financial statements
To avoid confusion with everyday management accounts, the financial
information in a company's annual accounts is generally referred to as the
financial statements.
There are usually four sections:
■ A report by the directors of the company. In a small company this

generally states the nature of the companies activities and the names
of the directors but little else.
■ A balance sheet, outlining the company's financial position on the

final day of the accounting period (the year end). Essentially, this
shows what the company owns and what it owes.
■ A profit and loss account, showing the trading performance over the
accounting period (usually 12 months). It summarises sales, costs and
expenses, profits (or losses), and any tax provisions.
■ Notes, giving more details about the information in the balance

sheet and the profit and loss account. The notes will also include the
accounting policies which are the set of rules used in the preparation
of the accounts. For example, the basis of depreciation adopted by the
company will be stated.
Where the company is not exempted from audit there must additionally
be a report by the auditor stating that the accounts do give a true and fair
view or alternatively a qualified report stating the matter that they are not
happy with.
The Companies Act sets out how the accounts will be presented for a
limited company, with headings and subheadings. The format should
also comply with UK accounting standards, which dictate how certain
transactions should be treated in the financial statements. For small
companies this will include the disclosures and exemptions set out in the
FRSSE (Financial Reporting Standard for Smaller Entities). It is a director's
duty that the financial statements must give a 'true and fair view' of the
company's financial position.
Who sees the company accounts?

Obviously the directors see the company accounts but there are a number
of others that also receive copies. These include:
■ the shareholders of the company (who may or may not also be the
directors)
■ HM Revenue & Customs so that they can review the figures as part of
their acceptance of the taxation situation
■ Companies House. A copy of the accounts must be filed at Companies

House within nine months of the year end (six months for public
limited companies). However these may be abbreviated accounts for
small companies (see below).
Abbreviated accounts
In addition to the full financial statements which are prepared for the
members (shareholders) of the company and the Revenue, small companies
are permitted to prepare abbreviated accounts.
The abbreviated accounts delivered to the Registrar of Companies must

contain:
■ An abbreviated balance sheet. This is not dissimilar to the balance

sheet prepared for the full accounts.
■ Selected notes about the accounts including:
• accounting policies
• fixed assets (both tangible and intangible) - note that it is not

necessary to give an analysis of the different types of fixed assets as
is required in the full accounts.
• investments (if stated at more than fair value)
• debtors due after more than 12 months
• creditors due after more than five years (or for which security has
been given)
• issued share capital (including amounts not yet paid up)
• transactions with directors (as required by the financial reporting

standards).
For small companies filing abbreviated accounts at Companies House

there is no need to provide either the directors report or perhaps more
importantly the profit and loss account. This means that the accounts that
are on public record do not disclose the company's profit.
Limited liability partnerships

The accounts of limited liability partnerships (LLPs) are prepared in much
the same way as for limited companies (see above) and they have much the
same disclosure regulations. The accounts must be filed on public record
at Companies House within nine months of the year end. If the business
qualifies then it may file abbreviated accounts and it may be exempted
from audit in the same way as a limited company.
Getting professional help

As you will see from the notes above, the preparation of company
accounts which comply with all of the various disclosure requirements of
the Companies Acts and associated regulations, is a highly complex task.
Although the basic profit and loss account and balance sheet are
comparatively straight forward, it is the presentation of the final financial
statements and the claiming of appropriate exemptions that is the
hard task. It is therefore recommended that you consult a professional
accountant to undertake the final accounts preparation. If you have
prepared the basic accounts to a good standard then this will cut down
on their work and should reduce the fees that they charge.
There are notes to help you find a suitable accountant in Chapter 11.
Summary
■ Limited companies are obliged by law to maintain proper accounting
records.
■ The accounts of a limited company have to be prepared in accordance

with a set format laid down by the Companies Act.
152 Chapter 7 ■ Preparing Your Annual Accounts
■ In addition to the requirements of law there are other regulations that

must be complied with (e.g. GAAP (Generally Accepted Accounting
Principles) and FRS (Financial Reporting Standards)).
■ There is a requirement in law for the accounts of limited companies to

be audited, subject to an exemption for smaller companies.
■ A company must file its accounts with the Registrar of Companies

annually.
■ Small companies can file abbreviated accounts with the Registrar of

Companies.
8
How to Use Management
Information
As we have seen, the books and records allow the preparation of annual
financial accounts for a business. However, by the time they are prepared
it is often too late for crucial management decisions to be taken. There are
therefore several things that the small business (or indeed any business)
should do to monitor trade throughout the year.
Controlling the cash position
Profit does not necessarily mean cash

There is often a lack of appreciation that profits do not necessarily mean
cash in the bank. Without close control the additional profits quickly
become locked into non-cash forms: more stock is held, debtors increase,
and possibly the profit gets tied up in capital equipment (see Figure 29).
Such common problems have led to the winding-up of many a small
business.
The cash flow statement

In order to overcome this problem a simple cash flow statement (forecast)
should be prepared. An example of this is shown in Figure 30. The easiest
way to prepare the cash flow statement is to use a computer spreadsheet
programme. Alternatively you can draft it on a piece of plain paper or get
a pre-printed form from your local bank if you prefer.
153
154 Chapters • How to Use Management Information
Fig. 29. Profit and cash are not the same.
■ Decide on the length of time that the forecast is to cover; for example,
one year. The nature of the business may mean using a shorter or
longer period, particularly if it is highly seasonal.
■ Next, decide on the length of the individual periods to be forecast.

Normally this would be months, but again depending on the business
it might be better to prepare the statement by weeks or calendar
quarters.
■ Enter your initial (opening) cash or bank balance.
■ Then forecast the cash receipts for each of the periods. Remember,
if you sell goods on credit the cash may not come in for one, two or
even three months after the date of the sale. Thus if you sell goods in
the first month of the cash flow statement you should enter the cash
received for those goods in the month of probable receipt (e.g. in the
Chapter 8 ■ How to Use Management Information 155
Jan Feb Mar Apr May Jun

£ £ £ £ £ £
Receipts
Trade debtors 22,000 24,000 23,000 21,000 20,000 21,000
Sales of assets 1,500 - . - 200
Others 60 - 120 50 - 100
Total 23,560 24,000 23,120 21,050 20,200 21,100
Payments
Trade creditors 4,000 3,500 3,000 3,200 2,800 3,000
Other creditors 500 800 400 1,000 700 800
Wages & salaries 11,000 11,000 11,100 11,200 11,200 11,200
Heat light & power 500 200 200 500 200 200
Advertising - 2,000 - - 2,000 -
Rates 2,000 - - - - -
Other expenses 1,000 2,700 2,700 1,000 2,700 2,700

Loan interest - - 500 - - -
Tax 10,000 - - - - -
Drawings 2,000 2,000 2,000 3,200 2,000 2,000

Capital outlay “ 1,500 - - 2,000 -
31,000 23,700 19,900 20,100 23,600 19,900
Cash increase (decrease) (7,440) 300 3,220 950 (3,400) 1,200

Brought forward 4,750 (2,690) (2,390) 830 1,780 (1,620)
Carried forward (2,690) (2,390) 830 1,780 (1,620) (420)
Fig. 30. Specimen cash flow forecast.
case of customers taking an average of 60 days credit, then the entry

should be in month 3).
■ Then forecast your cash outgoings. Remember to include such items

as the purchase of capital equipment, the payment of PAYE and any
other tax, and any drawings taken out by yourself. Remember, too,
that you may be able to get credit on goods that you purchase. Thus
goods delivered to you in month 1 may be paid in months 2 or 3
and the entry on the cash flow statement should therefore be in the
relevant month. (Depreciation, as we have seen, is not a cash item, and
so you don't need to include it in your cash flow.)
156 Chapter 8 • How to Use Management Information
■ Next enter the formulas onto your spreadsheet. If you are preparing a
handwritten statement then you need to get your calculator to hand
to help you with the maths. Arrange to:
(a) Add up the total receipts for each period.
(b) Add up the total payments for each period.
(c) Deduct the total payments from the total receipts to arrive at the
cash increase or decrease for the period.
(d) Add the cash increase (or deduct the decrease) from the opening
balance to arrive at the new cash balance at the end of the period.
If the figure becomes minus you need to get an overdraft, or cut
expenditure.
(e) The closing cash balance becomes the opening cash balance for
the next period.
By reviewing the closing balance each month you will be able to estimate
the cash needs of the business. If, for example, your business has a seasonal
Christmas trade you might need overdraft facilities to help you to buy
stock in October and November before the cash comes in from the sales
in December.
You can also add the actual expenditure to this statement each month in
order to monitor the trading results. You might be surprised (or horrified)
at how the actuals compare with your estimates. But you should get more
accurate with experience.
Controlling the credit

In business your main income will be from your customers, but this only
materialises into cash when they actually pay up! Until the customer pays,
you are financing their business.
Suppose you are owed £1,000 by one of your customers who helps
themselves to an extra four months beyond the agreed credit period. The
Chapter 8 • How to Use Management Information 157
cost to your firm in interest charges will be £27 (based on an interest rate
of 8%). This is not only expensive, but lack of cash could jeopardise your
whole business if you are already stretched to the limit on your borrowing
facilities. And problems, like the proverbial number 7 bus, have a nasty
habit of showing up all at once!
You can keep bad debts and the level of accounts receivable to a minimum
by careful credit control procedures. Always check the credit-worthiness
of major new customers, either through a banker's reference or by using
a credit-rating agency.
You should also monitor the time taken by your customers to pay. You can
do this by preparing an aged debtors list (see Figure 14 on page 60). Most
computer bookkeeping packages will do this for you. From the debtors
list you can see at a glance which customers are taking ages to pay.
Remember, the longer an account is outstanding, the less chance there is
that you'll ever get paid.
Don't be afraid of taking legal action to recover debts that are becoming old.
Often, the threat of legal action against a financially unsound customer
(who doesn't want his other creditors to be aware of his situation) will
bring a positive response and your account will jump to the head of the
queue for payment.
Don't worry about upsetting customers who are bad payers. They tend
to be thick-skinned and know full well that you are only trying to run
your business. If you do manage to upset them remember that, with the
additional problems they are causing, you are probably better off without
them.
Finally, whilst on the subject, it is worth mentioning that good credit

management will almost literally pay dividends. On an annual turnover
of £100,000, if your customers take an extra month's credit it is going to
cost you around £667 per annum in finance costs (assuming interest at
8%).
158 Chapters • How to Use Management Information
Managing a budget
What is a budget? Someone once defined it this way; A statement of a

financial position for a definite period of time, based on estimates of
expenditure and proposals for financing them'. This sounds a bit grand,
but it's really quite a simple idea and one that every schoolboy uses. The
schoolboy only sets his budget for a short period, say the afternoon. He
has been given an allowance of £5.00 by his mum when they visit the
supermarket. He could buy a comic at 2.99p or a chocolate bar at 54p, or a
packet of crisps at 49p. And there is also the ice-cream van in the car park
selling cones for £1.50.
He will plan his budget for the afternoon and make his decisions
accordingly. If when he gets to the ice-cream van he finds that the ice¬
cream is on special offer and is only £1.00 then there will be a variation
from the budget resulting in a budget surplus of 50p.
How does budgeting apply in business?

A good budget can be a very powerful tool for management. It will
normally be set for a year in advance, but be subdivided into monthly
periods.
The cornerstone for the budget will be your anticipated sales volume
and revenue for the forecast period. This is not always easy to forecast:
you will have to take into account such factors as past performances,
new products, advertising campaigns, competition, and seasonal factors.
And remember that when you split it into 12 months it may not just be a
question of dividing all the figures by 12. You know the pattern of your
trading best.
As well as sales income your budget should forecast all the expenses of
the business.
Preparing a budget can be a chore, involving a fair amount of detail. But

you'll know more about your business as a result, have a useful tool for
the efficient management of your business, and know what level of profit
(and liquidity) to expect.
Monitoring progress
The budget statement can also be used to monitor the progress of your
business. If you work out a simple monthly operating summary, like
that in Figure 31, you can see how your actual results compare with the
budget you set. A monthly management profit and loss account such as
this will differ from the cash flow forecast because it takes no account
of the timing differences on making payments; it will also make the
necessary adjustments for changes in stock levels and depreciation (non¬
cash expenses).
Month ending March 201X

Month Year to Date
Actual Budget
Actual Budget Cumulative Cumulative
£ £ £ £
Sales 49,728 45,000 149,760 139,500
Direct cost of sales

Materials 14,850 13,500 45,162 40,950
Labour 12,378 11,700 37,488 35,550
Direct overheads 4,050 3,900 12,426 11,700
Total 31,278 29,100 95,076 88,200
Gross Margin 18,450 15,900 54,684 51,300
Expenses
Factory 6,840 6,600 21,162 20,250
Selling 2,250 2,400 7,206 7,020
Technical 1,848 1,800 5,778 5,490
Accounting 1,470 1,440 4,542 4,410
Administrative 2,010 2,070 6,480 6,300
Total Expenses 14,418 14,310 45,168 43,470
Contribution to annual profit 4,032 1,590 9,516 7,830
Fig. 31. Simple operating summary.

160 Chapter 8 • How to Use Management Information
If you find that actual results differ markedly from your budget, you
should be able to identify the reasons and think about what action to take.
You may, of course, need to modify your budget, but either way it will give
you a better insight into the way your business finances actually work.
Performance ratios
There are several key ratios which you can use to measure and monitor
the financial health of your business. Unfortunately, because there are so
many different types of business one can't give any general guidance on
what ratios to expect: they vary so much from one trade to another.
Some of the key ratios to look for are given below and you may wish to
monitor these figures for your business. You could check them monthly,
quarterly, and certainly at the end of each year when you have your
annual accounts, and you'll be able to tell (as will your bank manager!)
where you are going right and where you may be going wrong.
Gross profit rate = gross profit X 100%
sales turnover
Net profit rate = net profit X 100%
sales turnover
Return on capital = net profit xl00%
capital employed
Debtor days = sales debtors X 365 days
credit sales
Stock turnover = materials used per annum
average stock held

Summary
You should now be able to:
■ Prepare a cash flow statement and use it to forecast finance

requirements.
■ Prepare a budgeted profit and loss account statement.
■ Monitor the actual progress of the business against the budgeted profit
and loss account and the cash flow statement and make necessary
amendments to your trading plan.
■ Operate a good system of credit control and chase up the old debts.
■ Calculate the performance ratios: check to see if these are improving

compared with prior years and try to obtain details from others in the
same trade in order to see how your business compares.
9
Taxation and Your Business
You can blame Napoleon for the existence of this chapter. Income tax as we
know it today was introduced to pay for a war against the said gentleman.
That was in 1799. It was so hated that when it was withdrawn in 1816
all the records were destroyed. However, Sir Robert Peel re-introduced
the tax in 1842 and it has been with us ever since. The lowest standard
rate ever charged was 2d in the £ (0.83%) between 1874 and 1876 and the
highest was 10/- in the £ (50%) between 1941 and 1946.
Employees pay their tax by deduction from their wages under the PAYE
scheme. However, self-employed people don't come within the scope of
the PAYE system. Instead they are taxed in arrears on the basis of their
previous earnings.
How your business is taxed will depend upon the entity carrying on the
business:
■ sole traders and partnerships
■ limited companies.
We'll deal first with the taxation of sole traders and partnerships. The
taxation of limited companies is discussed at the end of the chapter.
Sole traders and partnerships
The method of working out the tax liability of sole traders and partnerships
is practically the same, except that in the case of a partnership it's necessary
to work out each partner's share of the total liability.
162
Chapter 9 • Taxation and Your Business 163
The taxes involved

The taxes that may be involved are:
■ income tax - on profits
■ Class 4 National Insurance - on profits
■ taxation on capital gains
■ inheritance tax.
The last two taxes don't normally occur each year. Inheritance tax might
occur on death or occasionally on certain gifts. It can be complicated to
work out the correct allowances and liability and the reader should get
specialist advice if needed.
Capital gains arise on the sale of business (and other) assets. It taxes
the increase in the value of the asset during the period of ownership.
There are several allowances which relieve the effect of the tax. The main
reasons why capital gains could affect a person in business are:
■ the sale of certain equipment at a profit on its original cost, and
■ more importantly, when a business or business premises are sold.
Again it is suggested that you obtain specialist advice as necessary.
Class 4 National Insurance is calculated at the same time as the income

tax liability, and these two taxes will be dealt with together.
income tax
The accounting concepts (Chapter 7) go part way to defining the profit
of the business, but there are some matters still left to the discretion
of the accounts producer which affect the profit disclosed. The rate of
depreciation, for example, is left to the individual. In addition accounts
often include the full cost of running the proprietor's motor car or other
expense, where in practice part of these costs is for his own personal
164 Chapter 9 ■ Taxation and Your Business
benefit. So that the Revenue can apply the taxes on a standardised basis,
a computation is needed to adjust the profit disclosed by the accounts to
that required by the Inspector of Taxes.
Figure 32 illustrates the way in which the adjustments are made to the
accounting profit to arrive at the profit for taxation purposes.
In the computation some of the expenses are disallowed. These include

depreciation (and the loss on the sale of a motor car) and also the private
element of expenses that has been charged in the accounts. In the
illustration the only private expense is the car, but on other occasions it
might include the following:
■ telephone charges (if, for example, the home telephone bills are paid
through the business)
■ heating and lighting where the business is run from the proprietor's
home
This is not an exhaustive list: each case must be considered on its merits.
Where the proprietor uses goods from the business for his own purposes
then an adjustment for this should also be made. If, for example, the
business is a newsagents and the proprietor takes cigarettes for his own
use the appropriate entries should be made. The removal of the cigarettes
without payment changes the profit margin revealed by the accounts, and
so the adjustment should ideally be made on the face of the accounts by
adding those goods to sales (the other balancing entry of the double entry
being included as drawings). However, if the adjustment is not made in the
accounts it should be included as an 'add-back' in the tax computations.
The result of disallowing or adding back expenses to the accounting profit

is to remove the effect of charging them in the accounts in the first place.
The reasons for this should be clear for expenditure that is of a private
nature. Less clear will be the reason for adding back depreciation: it is
done to standardise the depreciation allowance.
Refer to accounts of Swanhampton Plumbing and Heating Engineers

on pages 127 to 129
Profit per accounts 12,535
Add: Depreciation 2,365

Loss on sale of assets 1,873
Motor expenses - private use - 3824 x 20% 765 5,003
17,538
Less: Capital Allowances - see below (13,959)
Adjusted profit for tax purposes 3,579
Capital Allowances
Main
AIA Claim Pool Allowances
Brought forward 2,845
Assets purchased during the year 13,717

Relieved by AIA claim (13,717) 13,717
Disposal proceeds of assets sold (1,500)
1,345
WDA@ 18% (242) 242
Carried forward 1,103
Total allowances 13,959
Fig. 32. Illustration of adjustments to accounting profit.
As well as certain expenses being 'added back' in the computation some of

the income is deducted to remove it from the assessable profit. This is not
because it escapes tax but because the taxation treatment of this income
differs from that of the profits. The main examples of items treated like
this are bank interest received and property rental income.
Having arrived at the adjusted taxable profit there are various allowances
that can be claimed in respect of depreciation.
166 Chapter 9 • Taxation and Your Business
Capital allowances
As stated above, it is up to whoever produces the accounts to set the

rates of depreciation. This is unsatisfactory for the purpose of assessing
income tax; accordingly the Revenue have their own system of allowing
depreciation called capital allowances.
Capital allowances permit you to claim tax relief on certain purchases or

investments that you make on business assets. You cannot directly deduct
your expenditure on those assets when calculating your profits or losses;
instead you can deduct a capital allowance. This applies to businesses run
by the self-employed or through a company.
Unfortunately the capital allowances system has become far more

complicated in recent years. Although there are various different
allowances that can be claimed, the main relief is through plant and
machinery allowance. As well as machines and tools many common
business assets are eligible for capital allowances.
Some common examples include:
■ vans
■ cars
■ tools
■ furniture
■ computers
■ machinery
■ equipment.
It does not matter whether the asset is new or secondhand when it is

purchased by the business; the allowance is still the same.
Types of plant and machinery allowances

There are a number of allowances available for expenditure on plant and
machinery within these regulations. These include:
■ annual investment allowance
■ writing-down allowance
■ first-year allowance
■ small pools allowance.
Looking at these in turn:
Annual investment allowance

In most cases, annual investment allowance (AIA) is a 100% allowance to
write off the whole of the expenditure on qualifying assets if you have
spent £25,000 or less in total on those assets during the accounting year. If
the total you have spent in the period is more than the appropriate limit,
you can claim up to the limit as annual investment allowance and then
claim writing down allowance (see below) for the remaining balance.
Please note that the limit changed with effect from April 2012 - if your
accounting period was before that date or spanned the change then there
are transitional rules to calculate how much you can claim. Additionally
if your accounting period is more or less than 12 months then the limit is
scaled accordingly.
The allowance is available on any new expenditure on plant and

machinery assets apart from these exceptions:
■ cars - see below
■ plant and machinery previously used for another purpose - for

example, a computer used at home and introduced into your business
■ plant and machinery gifted to your business

■ expenditure incurred in the accounting period in which your business

ceases.
Writing-down allowance
Writing-down allowance (WDA) is an annual allowance that reduces, or
'writes down' any balance of capital expenditure on plant and machinery
that you haven't been able to claim under the annual investment allowance
and on the residual balance of expenditure that you have carried forward
from the previous accounting period.
There are two rates of writing-down allowances for plant and machinery.
To calculate them, you first group your expenditure into different pools:
■ the main pool - this includes expenditure on most items - the rate is
currently 18%.
■ the special rate pool - this includes special rate expenditure including
long-life assets, integral features, certain thermal insulation and some
cars - the rate is currently 8%.
Note that before April 2012 the rates were higher and there are special
rules for the transitional period.
An illustration of the way in which the allowance is calculated is shown

at Figure 33.
Main
AIA Claim Pool Allowances
Brought forward 8,592
Assets purchased during the year 28,450

Relieved by AIA claim - restricted (25,000) (25,000) 25,000
Balance to Main Pool 3,450 3,450
12,042
WDA@ 18% (2,167) 2,167
Carried forward 9,875
Total allowances 27,167
Fig. 33. Writing down allowance and annual investment allowance.

First-year allowance
Currently, there are 100% first-year allowances available for expenditure
on certain specific types of asset. This means you can claim the full
expenditure on these assets as a deduction when calculating your taxable
profit or loss for the accounting period. The types of assets that qualify for
first-year allowances include;
■ new cars with CO^ emissions of not more than 110 grams per kilometre
■ certain designated energy-efficient equipment
■ certain environmentally-beneficial (currently water efficient)

equipment.
If an asset qualifies for first-year allowance then the expenditure on that

asset does not need to be included in the total of expenditure used to
calculate the limit for annual investment allowance.
Small pools allowance

If in either the main or special rate pool the remaining balance is £1,000
or less then subject to certain conditions you can claim an allowance for
the whole amount remaining in that pool. The main or special rate pool
will continue to exist, but the balance carried forward to the next year will
be nil.
Allowance for cars

First we must consider the definition of car for capital allowance purposes.
A car is defined as any mechanically propelled road vehicle unless it is:
■ constructed in such a way that it is primarily suited for transporting

goods of any sort
■ not commonly used or suitable for use as a private vehicle.

This means that vans and lorries are not considered to be cars, whereas
motor homes are. However, certain vehicles such as driving school vehicles
with dual control are not treated as cars for capital allowance purposes
although they may be classed as cars for other tax rules. If a vehicle is not
a car, the special rules for cars do not apply to it and the other allowances
may be available.
Certain very low CO emission cars (including electrically propelled cars)

2
qualify for a 100% first-year allowance and do not fall within the special
car rules.
Time of purchase
The rules for claiming capital allowances on cars changed for cars that
were purchased either new or secondhand from April 2009.
For vehicles purchased prior to that date there was no first-year allowance
or initial allowance available but the vehicle was introduced into the main
pool and writing down allowance claimed. The exceptions to this were;
■ that if the vehicle had private use it was kept separate from the
main pool so that a restriction could be applied to the writing down
allowance.
■ if the vehicle had cost more than £12,000 the car was kept in a separate
pool. There was then a restriction on the amount of WDA that could
be claimed which was limited to £3,000.
For cars purchased since April 2009 (either new or secondhand) the capital
allowances you can claim are based on CO emissions, which are shown
2
on your car's V5 certificate. If your car does not have an emissions figure
because it was first registered before 1 March 2001 then the expenditure
is allocated to the main pool, or a single asset pool if there is some private
use - see below.
The table at Figure 34 sets out the allowances that can be claimed on cars.
C02 emissions Capital allowances treatment of expenditure

No Private Use With Private use
Over 160g/kin Goes into special rate pool and Kept in separate pool and allowed
qualifies for 8% WDA 8% WDA restricted for private use
Between llOg/km and Goes into mail pool and qualifies Kept in separate pool and allowed
160g/kni for 18% WDA 18% WDA restricted for private use
llOg/km or less * You can claim up to 100% You can claim up to 100% allowance
allowance in year of purchase. in year of purchase restricted for
Any balance goes into main pool. private use. Any balance kept in
separate pool with 18% WDA.
On Disposal Proceeds reduce pool value but Proceeds are deducted from
there is generally no balancing relevant pool. Remaining difference
allowance or balancing charge is balancing ailowance or balancing
charge.
* note that the first-year allowance for cars in this category will cease from 31 March 2013.
Fig. 34. Capital allowances treatment for cars according to emissions levels.
Private use of cars

If you are self-employed or a partner in a partnership and use a car yourself
partly for non-business purposes, you will have to work out the capital
allowances for each car separately. You do so by adding the expenditure
for each car to a single asset pool and calculating the maximum allowance
available for that expenditure. You must then reduce your claim by the
amount of your non-business use so that only the business use proportion
is taken into account.
Thus if the total allowance available was £1,560 and you used the car
for one third of the time for private journeys then you would need to
restrict your claim by £520 (£1,560 -f- 3) and you would claim £1,040 as an
allowance against your taxable profit.
If your business is run as a company and cars are used by employees

(which include the directors) for private purposes, then cars are treated as
being for 100% business use. However, the expenses and benefits tax rules
for cars provided to employees will apply to the individual.
172 Chapter 9 ■ Taxation and Your Business
Other matters relating to capital allowances

There are three other matters to mention relating to capital allowances:
■ Disposals
When assets are sold the proceeds are deducted from the appropriate
written down value. This may then exhaust the particular pool and
a negative value be obtained. In this case you will already have
obtained more allowances than the loss in the value of the asset since
acquisition. Accordingly the excess is clawed back by giving rise to a
balancing charge. What if the sale is of the last of the assets within
that particular pool? If there is any remaining unallowed positive
value in the pool after deducting the proceeds, it shows that the
annual allowances were not enough to grant relief for the loss in value
since acquisition. Accordingly an additional allowance is given, the
balancing allowance.
■ Private use
As mentioned above in relation to cars where any asset is used

partly for business purposes and partly for private purposes then an
adjustment has to be made to restrict the allowance to the business
proportion of the use. Thus if an asset is used 25% of the time for
private use then the allowance has to be scaled down so that only
the remaining 75% of the maximum is claimed. However you should
remember that the written down value of the asset is reduced by the
full maximum allowance and not just by the business proportion.
■ Low Business Profits
In some cases, where profits are low, it is not beneficial to claim capital
allowances. This is because the tax on the profit will already have been
relieved by personal allowances. If capital allowances are claimed
then no further relief may be obtained but the value of the pool will
be reduced and will therefore restrict allowances available in future
years. In such circumstances it is possible to waive the claim to capital
allowances for the year.
As you may well have gathered capital allowances can be complicated and
confusing. If in doubt you should seek professional help.
Net taxable profit

The adjusted profit (net of any capital allowances) is the taxable profit on
which you must pay tax. This is rather like the gross pay of someone taxed
under PAYE.
Under self assessment the basis period of a year of assessment is the

accounting year ending within that tax year. Thus if a trader makes up
his accounts to 31 December, his basis period for the income tax year
2013/14 (6 April 2013 to 5 April 2014) is his accounts for the year ended 31
December 2013. There are special rules which apply during the first and
last years of the business and there is overlap relief to ensure that the tax
is charged on a fair basis. For more details of these rules you should refer
to your accountant or to HM Revenue & Customs.
Unless your turnover (sales) is less than £70,000 then you will need to
complete a detailed tax return for the Revenue. This form asks for your
accounts to be summarised to reveal the turnover, gross profit and the
overheads analysed under 14 headings. There is also provision on the
form to enter the expenses that have been disallowed in the calculation of
the taxable profit. The actual accounts for your business are no longer sent
to the Inspector of Taxes unless he/she specifically requests them.
The personal allowances available to the individual are deducted from the
taxable profit and the tax calculated at the current rates on the resulting
total. In addition. Class 4 National Insurance contributions are payable
on the taxable profits between £7,605 and £42,475 at a rate of 9% (2012/13
rates). On profits over £42,475 Class 4 National Insurance is charged at
2%. This is paid in addition to the flat rate Class 2 contributions of £2.65
per week.
If the venture incurs a taxation loss, the loss can be relieved against:
■ other income of the same year, or
■ the profits of the same trade in any future year.
If the business is a partnership the profit will have to be allocated between

the various partners. The rules for doing this can be complex but generally
they are split in the profit sharing ratio.
Finally, remember that the legal onus is on the individual to tell the
Revenue of all his sources of income. There are severe penalties for failing
to disclose information. If you start up in business you should notify the tax
authorities without delay. Don't wait for them to contact you. The easiest
way to advise them is online at http://www.hmrc.gov.uk/sa/register.htm.
Alternatively you can contact the Self Assessment Helpline on tel: 0845
900 0444. There is a penalty of £100 if you fail to notify them within three
months of the end of the month in which your business started.
You must also ensure that the information you give is accurate. Under self
assessment the figures from the accounts are received and processed by
the Revenue without any form of review at that stage. The Revenue will
even calculate your tax for you based upon those figures but this does not
mean that they accept and agree them. They have until a year after the
filing deadline in order to review the accounts and raise any queries and
if errors are found (perhaps because you have claimed an expense that
should not have been allowed) penalties may be charged.
If you are in doubt about the taxation of your business then contact the
Self Assessment Helpline (tel: 0845 900 0444), or discuss things with a
qualified accountant. An accountant's fee will usually be money well
spent because they may be able to save you a substantial amount of tax.
Limited liability partnerships (LLPs)

With just a few modifications, LLPs are taxed in the same manner as
ordinary partnerships (see above).
Company taxation
We saw in Chapter 1 that a limited company is a separate legal entity. As

such it is responsible for the payment of its own tax on profits. It is not for
the owners of the business to pay the tax themselves. An outline of the
taxation structure for companies is set out in Figure 35.
In small companies, the owners of the business (the shareholders) are also
often the directors. What the directors get by way of salary or bonus is
taxable as a liability of them as individuals. In most cases the tax is collected
via the PAYE system in the company; the directors don't normally pay the
tax directly to the Collector of Taxes.
Fig. 35. Outline of taxation for companies.
As with any other form of wages, directors' remuneration is a company

expense; it reduces the profit of the company charged to tax.
The profit of the business, after directors' remuneration, is adjusted to arrive

at the taxable profit in the same way as for individuals and partnerships
(see earlier in this chapter). However, the taxation treatment of some
items differs between individuals and companies. When an individual
uses a business asset for private purposes it is normal to disallow part of
the expense charged in the profit and loss account by adding a proportion
of the amount to the profit in the taxation computation. This increases
the business profit chargeable to tax; since it is the responsibility of the
individual to settle the tax liability it means that he/she must pay the tax
on the benefit he/she has obtained.
Clearly, for a limited company responsible for its own taxation liability, it
would not be right for it to suffer an extra liability on benefits provided to
directors. Accordingly the value of these benefits is not adjusted within
the company's taxation computation; instead each director is assessed for
income tax on the value of the benefits received.
Since 1965, the profits of companies have been taxed in two stages:
■ on the company profits for the year (corporation tax)
■ on the distribution of profit to the shareholders by way of dividend.
At first sight this seems to tax the profits twice, but the system is so
arranged that (with certain restrictions) the tax paid on company profits
is not charged again when the profits are distributed to shareholders. ,
Corporation tax
Corporation tax is charged on the company profits for the accounting
year. The rate of tax depends on the size of the profits and whether the
company has any associated companies.
For small companies which are not associated with others and do not
receive dividend income the corporation tax rates for the 2012 Financial
Year (year commencing on 1 April 2012) can be summarised as follows:
Band Rate(%)
On the first £300,000 20
On the next £1,200,000 25
Over £1,500,000 24
Where there are dividends received or the company has associated

companies, the rules become more complicated and you should seek
professional help.
Corporation tax is payable nine months after the end of the accounting
period. So, for example, if the company's year end is 31 January the tax
will be payable on the following 1 November.
Dividends and tax credits

When an individual gets a dividend from a company, it comes with an
associated tax credit. This means that if he/she is liable to tax at the basic
rate he/she won't have to pay any more tax. In other words, the company
has paid tax on the profits earned, so when the profits are shared among
the shareholders via the dividend then they have already suffered tax and
so don't have to pay the tax again.
The rate of tax credit is 10% of the gross value of the dividend. For basic
rate taxpayers this income is assessed at an 'investment rate' of 10% so
there is no further tax due. For higher rate taxpayers the 'investment rate'
is 32.5% and so allowing for the 10% tax credit there is a further 22.5% of
tax to pay.
Note that the tax liability and tax credit are calculated at 10% of the
gross dividend. When the dividend is paid it is the net amount that is
actually paid over. But this sum is treated as if it has already had a 10%
tax deduction made. The gross value of the dividend can be found by the
formula:
Net dividend x 100 / 90
Or more simply:
Net dividend ^ 0.9
Capital gains in companies

Capital gains made by companies are worked out in the same way as for
individuals, but they have to pay corporation tax at the relevant rate. If the
company qualifies for small company relief then its tax rate will be 20%; if
it doesn't it will be 24%. The marginal relief also applies (see above).
The accounting implications of taxation

Since a limited company is a separate legal entity it is responsible for
paying its own taxes. This is not like the sole trader or partnership,
where the individuals running the business are responsible for paying
the tax. The tax on their business profits will depend on their individual
circumstances, such as their tax allowances and their taxable income from
other sources.
Since taxation is an expense of the limited company it must be included

in its accounts. As the liability to pay tax is due nine months after the
company's year end, then corporation tax will normally appear as:
■ a charge in profit and loss account, and
■ a creditor on the balance sheet.

Chapter 9 ■ Taxation and Your Business 179
Summary
■ Companies are responsible for their own taxation.
■ Companies pay corporation tax on their profits.
■ Dividends received by basic rate taxpayers do not attract a further tax

liability.
■ The liability to taxation should be included in the accounts of

companies.
10
Accounting for Loans, Hire
Purchase and Leasing
The DIFFERENT TYPES OF FINANCE
From time to time you may want to buy an expensive piece of equipment or
a motor vehicle for your business. Depending on the financial state of the
business you may need to raise extra finance. One method is to approach
your bank. If you only want short-term finance (up to a year) you will
probably do best to try and negotiate an overdraft facility. But if you need
finance over a longer period then your options are:
■ bank loan (as distinct from overdraft)
■ hire purchase
■ asset leasing.
There are many variations on these options. Your choice will depend
upon several factors:
■ the period of the finance required
■ the nature of the asset to be acquired
■ interest rates, and what they will cost.
If you are buying property then a loan from a bank or other financial
institution is probably the only real option. Of course, you may be able to
rent premises but you will never become the owner.
180
Chapter 10 • Accounting for Loans, Hire Purchase and Leasing 181
For other assets you may be able to use any of the methods of finance. Let's
examine them in turn.
Bank loan (often called a development loan)

The bank makes you a loan so that you can buy the asset. The interest and
repayments can be handled in various ways; for example:
Fixed interest, fixed repayment

The interest rate will be fixed at the start of the loan and will stay the
same for the whole period of the loan. The repayments can also be set at a
fixed amount (e.g. per month).
Fixed interest, reducing repayments

The interest rate is fixed at the start of the loan. The payments then made to
the bank consist of two parts: the repayment of a fixed proportion of the
sum originally borrowed, plus payment of interest at the agreed rate on the
outstanding (and reducing) balance. For example:
Loan £6,000 over 5 years at 8% interest with monthly repayment of capital £100
Quarterly interest Monthly repayments Total per month
£100 £100
£100 £100
1st quarter £118 £100 £218

£100 £100
£100 £100
2nd quarter £112 £100 £212

£100 £100
£100 £100
3rd quarter £106 £100 £206

(and so on)
182 Chapter 10 ■ Accounting for Loans, Hire Purchase and Leasing
Floating interest rate

This system works very like the fixed interest, reducing repayment system
outlined above. But instead of the interest rate being fixed at the start
of the loan it varies throughout the period of the loan. Interest rates are
normally expressed as so many per cent above bank Base Rate. The actual
rate will depend upon the risk involved for the bank in the loan but
typically might be between 4% and 8% above Base Rate.
Hire purchase
Under a hire purchase contract the HP company buys the asset on your
behalf. You can then use the asset but ownership does not pass to you
until the end of the repayment period. At that time you'll have to pay a
small option fee actually to exercise your option to buy the asset. A charge
is made for the finance and you'll usually have to pay this by monthly
instalments along with the repayment of the capital. For example:
New motor van - cost £8,000: £1,000 deposit and balance over 3 years
£
Cost 8,000
Hire charges (finance charge) 1,010
Total HP cost 9,010
Repayments
Deposit 1,000
36 monthly payments of £222.50 8,010
Total 9,010
The accounting treatment and taxation for HP are discussed below. You
should note that for both purposes you are treated as if you acquired the
asset at the start of the agreement, even though from a legal point of view
this is not the case.
Chapter 10 ■ Accounting for Loans, Hire Purchase and Leasing 183
Asset leasing
In a lease the goods never become your own property: they always belong
to the leasing company. The lease will normally be for a period between 2
and 5 years. During this period you pay a rent for the use of the asset. At
the end of the period you can normally continue to use the asset for which
you pay a peppercorn (nominal) rent. These periods are respectively called
the primary and secondary lease periods. For example:
Motor van on lease over 3 years
Primary - 36 monthly rentals of £250.00
Secondary - Thereafter annual (peppercorn) rental of £25.
When you eventually stop renting the asset it is sold by the leasing company
and the proceeds divided between the lessor (the leasing company) and the
lessee (you or your business). If, for example, you use the van for four years
(and so were in the secondary lease period), and the lease then ceased, the
position might be:
£
Proceeds of sale of van 1,000
Kept by leasing company 100

Leasing premiums returned to lessee 900
The exact arrangements would depend upon the terms of the lease,
which you'd have to look at carefully.
184 Chapter 10 • Accounting for Loans, Hire Purchase and Leasing
ACCOUNTING TREATMENT
Bank loans
How do we record a bank loan in a full double entry system? It's relatively
simple.
Example
Dr Cr
Debit the bank account (main cash book)
with the amount of the loan received 6,000
Credit a new bank loan account (to set

up the initial loan transaction) 6,000
Debit the bank loan dilc with the capital 100

portion of the monthly repayments per month
Debit the bank interest a/c with the

interest portion of the monthly repayments 118
or the quarterly interest charge in the first quarter
Credit the bank account with the monthly 100 &
repayments and the quarterly interest charge 118
This records the loan repayments.
At the end of each financial year you'll transfer the balance on your
Bank Interest account to your profit and loss account, and write it off.
Hire purchase
In order to enter hire purchase contracts in your accounts it's important to
keep two aspects in mind:
■ you need to account for the monthly repayments
■ you need to account separately for the hire charges (finance cost).
The accounting entries would be as shown in Figure 36.

o o o o /r 00 (M o
o o o un O CO CD o
C) c> CD c\i CD CO C)
o LO CD T- 1—
o o o CX> o
00 I- CD CD
c:
Cp II c
§
o 0 " $
HIRE PURCHASE CREDITOR ACCOUNT
0 H >k o o
■D
x:
z o 9
■Q
Fig. 36. Accounting entries for hire purchase.

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c 0 o o 0 1- c5
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css 0 o O OJ o
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0
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o X CQ oc 0- CD
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Example
Let's take it step by step.

Dr Cr
Step 1 Set up the accounts for the transaction
Debit the asset aIc with the cost of the asset
(excluding HP charges) 8,000.00
Debit the hire purchase interest a/c with the
total of the HP charges 1,010.00
Credit the hire purchase a/c with the cost 8,000.00
of the asset and the HP charges 1,010.00
Step 2 Record payment of the deposit

Debit the hire purchase creditor a/c 1,000.00
and Credit the bank account with the
payment of the deposit 1,000.00
Step 3 Record repayments made in the year

(7 X £222.50)
Debit the hire purchase creditor a/c 1,557.50
and Credit the bank account with the
monthly repayments 1,557.50
Step 4 Charge the HP finance (interest) costs in

your profit and loss account
Debit the profit & loss account 196.38
and credit the hire purchase interest a/c 196.38
with the proportion of the hire purchase
charges relating to the year (see notes below).
Notes
There are several ways of apportioning the HP charge for the accounting year
(Step 4). Here we have applied the fraction;
No. of instalments paid

- X HP charges
Total no. of instalments
^3^ X £1010 - £196.38

This is not particularly accurate but it does for most purposes. To reflect
the actual interest pattern accurately you'd have to take account of the fact
that the interest would be proportionately higher in the early months of the
agreement when most of the capital is still outstanding.
Leases
The accounting treatment of leases has changed in recent years. In the past
the accounting treatment followed the legal position and the monthly
rentals paid were written off as a charge in the profit and loss accounts each
year.
However, it was felt that outsiders looking at accounts were getting a false
impression of a business; they couldn't tell the value of the assets used by
the business even though they were owned by an independent leasing
company. Accordingly Statement of Standard Accounting Practice 21 now
recommends leases should be treated like HP transactions. This is obligatory
for company accounts but optional for sole traders and partnerships.
Taxation treatment
The taxation treatment of assets acquired on HP or leasing is very
different.
Hire purchase
When you acquire assets under an HP agreement, the Revenue treats you
as owning the assets from the outset. You can thus claim capital allowances
(see Chapter 9) on the cash value of the asset. You can also claim tax relief
for the hire charges (i.e. interest/finance costs) because you have to deduct
them from your profit and loss account. You can also get the whole of the
VAT back at the time of the acquisition (if appropriate).
Leasing
The tax treatment for assets acquired under a lease has changed in
recent years. If you acquire an asset under a lease, you will not be able to
claim any capital allowances (since you don't own the asset and never
will). Instead you can deduct the whole of the amount that you pay to
the leasing company (except the VAT) from your business profits. This,
however, must be averaged over the life of the asset and not just over the
period of the lease as was the case previously.
Thus if a piece of equipment with an expected life of 5 years is acquired

on a lease requiring 24 monthly payments of £250 (excluding VAT) then
the company will pay £6,000 (plus the VAT) to the leasing company over the
2 years. For taxation purposes, however, the company will only be able to
claim tax relief at the rate of £1,200 for 5 years.
VAT is charged on each leasing instalment and so can only be reclaimed

over the period of the lease - not in one lump sum as with HP.
It will be seen that the timing of the tax relief depends on whether the asset
is acquired by lease or HP.
The capital allowances system gives relief on plant and equipment over
a number of years, but the amount of the relief reduces each year. At 18%
writing down allowance the relief is actually as follows:
Year % of cost in year Cumulative % relieved

1 18 18
2 15 33
3 12 45
4 10 55
5 8 63
6 7 70
7 5 75
8 4 79
9 4 83
10 3 86
After 10 years, 14% of the cost is still left unrelieved.
As you will appreciate, the amount allowed each year for an asset acquired
on lease will depend not only on its cost but also on its expected life.
Using the above example it is likely that there will be higher relief in the
early years by using the HP route but in the long term there will be no effect
on your overall tax liability.
Summary
■ There are three ways of financing the purchase of new assets: bank
loan, hire purchase and leasing.
■ The method you choose will depend on the period of the finance
required, the nature of the asset and interest rates.
■ Each method has to be accounted for in a different way.

11 I
Dealing with Your

Professional Advisers
There are several professional people, and potential allies, that you will
need to consult when running your business. These might include:
■ your accountant
■ your bank manager
■ your solicitor
■ your insurance broker.
Dealing with your accountant
Before you start in business it is well worth finding an accountant to

advise you. They will normally:
■ prepare, and if necessary audit, your annual accounts
■ agree your tax liabilities with the HM Revenue & Customs.
They will also be able to help you with:
■ advice on the purchase or sale of your business
■ advice on how to keep the books
■ applications for business finance
■ writing up the statutory books for a limited company (if applicable).
190
Chapter 11 ■ Dealing with Your Professional Advisers 191
Although we looked at the preparation of annual accounts earlier in this

book, in practice few small businesses actually do this themselves. Instead
they keep the day-to-day records and pass them to their accountant at the
end of the year so that he or she can prepare the accounts for them.
Choosing an accountant
When choosing an accountant it's a case of 'horses for courses'. The
following points should be considered:
1. Choose a firm of the right sort of size for your business. If your
business is small with only a few staff then a local accountancy
practice may be best. It will undoubtedly have plenty of experience
of dealing with businesses just like yours and appreciate local trading
conditions. On the other hand if your business is large, or if you need
advice on specialist areas (e.g. the taxation implications of setting up a
subsidiary company in Alaska) then it is probably better to consult one
of the larger national firms.
2. If you choose a small firm, it's best to find one whose partners belong
to one of the main recognised accountancy bodies. There is a list of
these bodies at Appendix 3.
3. Listen to the advice of other local traders (particularly in the same

line of business). They will have had practical experience of dealing
with an accountant and can base any recommendations on personal
knowledge.
4. Finally, the personal factor. Choose an accountant you can really talk
and discuss your problems with. Your association may last many years
and you need someone you feel 'right' with in the good times and the
bad.
Be open with your accountant

Your accountant will prepare your annual accounts and advise you on
your financial affairs. But they can only do so if you give them all the
192 Chapter 11 • Dealing with Your Professional Advisers
facts. If they ask you questions about your finance, it's because they need
the details to help and advise you. They're not just being nosey!
Sometimes, for example when dealing with your tax, they might ask
questions that seem rather searching and even seem to question your
honesty. But it's far better that they ask the questions rather than the
Inland Revenue! If necessary the accountant can then give an explanation
to the HM Revenue & Customs on the Self Assessment Tax Return about
something that might otherwise arouse suspicions and perhaps give rise
to detailed enquiries.
How does an accountant fix their fees?

Most accountants charge according to the amount of time taken to deal
with your affairs. Many use a sophisticated time recording system to keep
track of the time they spend on each client's affairs; for example, office
work, meetings and telephone calls. Different members of the accountant's
staff will be charged out at different rates depending on their technical
ability. A junior clerk will obviously be charged out at much less per hour
than a partner. The accountant will use the most suitable grade of staff to
look after the different aspects of your work.
Clearly, if you present your records to the accountant in a neat and tidy
condition they can keep their time to a minimum and that will reflect
in the fee. But if they have to spend many expensive hours sorting out a
'messy' set of records, their fee will certainly reflect the extra work.
Do make sure that your work on keeping the records will in fact help
your accountant. Some traders spend hours writing up records, but since
they are not in the right form for their accountant much of the time is
completely wasted. Discuss your records with your accountant early on,
so that you can agree the best way of doing things.
Chapter 11 • Dealing with Your Professional Advisers 193
Briefing your accountant

Soon after the year end let your accountant have all your accounting
records. Do make sure that your records are complete for the full year
and in particular the paperwork at both the beginning and end of the
year is included. Often bank statements will cover a period that spans the
year end. If so the accountant will need the statement twice so that it is
available to him for both of the years that he is dealing with.
It will also help your accountant (and save fees) if you provide them with
the following as at the year end:
■ details of your stock valuation
■ details of debtors (money owed to you)
■ details of creditors (money owed by you).
It is also useful to your accountant for you to note any unusual matters
concerning the business that have occurred during the year. All these
matters will help your accountant prepare your annual accounts (and
thereby save you money)!
Dealing with your bank manager
Almost every business needs a bank account to carry on its trade. You
will want a means to pay your suppliers, and need some way of receiving
payments and clearing cheques that you get from customers for sales. The
account will also allow you to make regular payments by standing order
or direct debit and you can receive BACs credits from your customers.
The high street banks all offer much the same services, although from
time to time they bring out new accounts or services, giving them an edge
(until their rivals copy the idea).
Some of the services that they can offer are:
■ regular statements
■ debit cards
■ phone and online banking (online statements and ability to make

online payments)
■ cheque books
■ standing order or direct debit payments
■ business credit cards
■ ATM machines tor cash withdrawals
■ loans and overdrafts.
You need to weigh up which services you might need.
Other matters to consider when deciding upon a bank will include:
■ Fees - check with them how much it is likely to cost to bank with
them. Many banks offer free banking as an introductory offer but
unless you want to keep changing banks then you need to look at the
ongoing charges. Remember free banking is never really free!
■ Location - where is the branch situated? Is it easy to get to? Is there

parking nearby?
■ Internet banks - as an alternative to the high street banks there are

now banks that conduct business over the internet. These have the
advantage of having no premises costs and therefore they can offer
cheaper banking but you will need to consider how you are going to
clear any cheques received from customers.
As with choosing an accountant, you need to find a bank that you can
work with. Often this depends, at least to some extent, on the local branch
manager. If you get on well with them your financial path should be that
much smoother.
Arranging bank borrowing

Sooner or later most small businesses need extra loan finance and in most
cases the best place to get it is their own bank. Knowing how to put your
case to the bank manager can prove to be a major hurdle and by not putting
forward a well-argued case you will hamper your chances of success. The
bank manager can only decide about the loan on the information that
they are given. If this is too little or incorrect theyTl have little option but
to say 'no'.
Remember, the bank manager does not want to say 'no'. Banks make their
profits by lending money and if all propositions were turned down they
would make no profit! On the other hand, a bank must be satisfied that
it's a good lending proposition, and that they will get their money back.
If the proposition is not financially sound the bank will not permit the
borrowing. This may seem hard at first, but in practice it often kills a
scheme at the outset that would in any case be doomed to failure. As well
as protecting their own investment the bank may also be saving yours.
Remember, they have lots of experience of small businesses; the failures
as well as the successes.
Putting forward your case

When you put forward your case to the bank, make sure you provide
the manager with the necessary information. You can use the acronym
R A D A R to remember what is needed:
R = Reason - the reason that you require the loan.
A = Amount - the amount that you wish to borrow.
D = Duration - the anticipated period of the loan.
A = Assets - details of any assets that you can put up as security for the
loan.
R = Repayment - your proposals for repayment of the loan.

If the manager is not familiar with your business (perhaps because you
have only just moved to the bank) you should provide him/her with a
brief typed review of the business and its history. You will be helping
them to help you.
Dealing with your solicitor
From time to time you may need to consult a solicitor to deal with various
business matters, for example:
■ the purchase or sale of your business
■ the purchase, sale or rental of property used by the business
■ disputes between the business and its suppliers or customers, including

debt collection
■ the preparation of partnership or other legal agreements.
Many of the points about dealing with your accountant also apply to
dealing with your solicitor. Remember they are working for you, and you
will get the best from them if you give them all the necessary information.
Bear in mind, too, that they charge for many of their services on a time
basis, perhaps £100 to £250 an hour (probably more in London). Don't
be afraid to ask how much. Be clear in your own mind what you want
them to do for you when you contact them; you can then give them clear,
concise instructions about what is needed. This will save them time and
you money.
Using an insurance broker
Most businesses need some sort of insurance to protect them when things
go wrong. For example:
■ fire at the business premises

■ theft of goods or equipment
■ product failure resulting in a claim from customers
■ liability to employees (and the public) for injury at the business

premises.
Remember, it could only take one disaster to put all your plans - and
perhaps your whole business - at risk. Contact an independent insurance
broker and discuss your needs with them. Ask them for competitive
quotations and take out insurance accordingly. Many types of cover can
often be brought together in one 'business policy' with savings in the total
premiums.
Brokers who belong to the British Insurance Brokers Association (BIBA)

have to meet certain requirements, and this acts as a safeguard to their
clients.
Along with your other professional advisers your broker may also be able
to help you on life assurance and pension plans.
Looking for extra help
A book such as this one can only introduce the main accounting topics,
and there will be times when you want further information.
Who you ask will depend upon what kind of information you need. The
following list may help you;
General accountancy, finance and taxation

matters
Your local accountant. If you don't know one to contact, get in touch with
one of the following professional bodies listed in Appendix 3.
Taxation queries
For various tax queries including VAT and National Insurance, try
contacting HM Revenue & Customs or of course ask your accountant if
you have one. The HMRC telephone numbers are listed in Appendix 2.
Finance
The following may be able to help you. The high street banks - see under
'Banks' in Yellow Pages or on Google. Examples are, Barclays, Lloyds TSB,
HSBC, NatWest, Royal Bank of Scotland, Santander and others.
Hire purchase - see under 'Credit & Finance Companies' in Yellow Pages.
Leasing - see under 'Credit & Finance Companies' in Yellow Pages.
Business start-up and consultancy

There may be many occasions in your business life (particularly when
you are just starting) when you feel you could benefit from getting help
and advice from someone. 'The bloke in the pub' is one source but the
information that you get is likely to be far more reliable if it has come from
an accountant or a professional adviser.
One such source is Business Link which is the government's online

resource for businesses. It contains essential information, support
and services for you and your business - whether you work for a large
organisation or you are just starting up in business.
There is up to date and practical guidance on regulations and to access

government services. It also has a number of useful online tools,
calculators, as well as links for wider support.
Their website can be found at: www.businesslink.gov.uk

And finally:
Remember the other books published by How To Books, including:
Coping with Self Assessment (John Whiteley)
Financing a New Business (Phil Stone)
Mastering Book-Keeping (Peter Marshall)
Preparing a Winning Business Plan (Matthew Record)
Setting Up A Limited Company (Robert Browning)
Starting a Business From Home (Graham Jones)
Starting Your Own Business (Jim Green)
Taking up a Franchise (Matthew Record)
Understanding Financial Accounts (Phil Stone)
Your Own Business (Phil Stone)
Please send for a free copy of the latest catalogue for full details (see back
cover for address).
Summary
■ Find an accountant to advise you on the financial aspects of your

business.
■ Build up a good relationship with your bankers. You don't know when
you might need their assistance.
■ Consult a solicitor as and when necessary. If you use the same solicitor
regularly they will come to know your business and its requirements
which will help to keep fees to a minimum.
■ Do arrange necessary insurance. Discuss your requirements with a

broker.
Appendix 1
Sources of Further
Information
Useful WEBSITES
Name Website address

HM Revenue & Customs www.hmrc.gov.uk
Companies House www.companieshouse.gov.uk
The Charity Commission www.charitycommission.gov.uk
Business Link www.businesslink.gov.uk
DirectGov www.direct.gov.uk
National Minimum Wage www.direct.gov.uk/en/
Employment/Employees/
TheNationalMinimumWage/
The Law Society www.lawsociety.org.uk
The Chartered Institute of Taxation www.tax.org.uk
Accountancy bodies see Appendix 3
Useful telephone numbers
Name Telephone number

HM Revenue & Customs see Appendix 2
Companies House 0303 1234 500
The Charity Commission 0845 300 0218
The Law Society 020 7242 1222
Accountancy bodies see Appendix 3
200
Appendix 2
HM Revenue & Customs
Contact Details
For various tax queries including VAT and National Insurance, try
contacting HM Revenue & Customs or of course ask your accountant if
you have one. The HMRC telephone numbers are:
■ Employees (PAYE and all Enquiry Centre appointments) - 0845 300

0627
■ Tax Credits - 0845 300 3900
■ Child Benefit - 0845 302 1444
■ Employers Helpline - 0845 714 3143
■ Self Assessment - 0845 900 0444
■ Business Payment Support Service (if you are having difficulty paying
your taxes) - 0845 302 1435
■ Construction Industry Scheme - 0845 366 7899
■ National Insurance Contributions - 0845 302 1479
■ Payment Enquiry Helpline - 0845 3667 816
■ Probate and Inheritance Tax - 0845 302 0900
■ VAT, Excise and Customs Duties - 0845 010 9000
Details are also available on the Revenue website: www.hmrc.gov.uk
201
Appendix 3
List of Accountancy Bodies
Accountants
In the UK, anyone can set up and practise as an accountant without having
any formal accountancy qualification (except for audit or insolvency
work). However, to use certain titles and designatory letters requires
membership of the appropriate professional body, thus:
■ Chartered Accountants must be members of one of the following:
• The Institute of Chartered Accountants in England & Wales

(ICAEW) (designatory letters AC A or FCA)
• The Institute of Chartered Accountants of Scotland (ICAS)

(designatory letters CA)
• The Institute of Chartered Accountants in Ireland (ICAI)

(designatory letters AC A or FCA)
■ Chartered Certified Accountants must be members of the Association

of Chartered Certified Accountants (ACCA) (designatory letters
ACCA or FCCA)
■ Chartered Management Accountants must be members of the

Chartered Institute of Management Accountants (CIMA) (designatory
letters ACMA or FCMA)
■ Chartered Public Finance Accountants must be members of the

Chartered Institute of Public Finance and Accountancy (CIPFA)
(designatory letters CPFA)
202
Appendix 3 • List of Accountancy Bodies 203
Bookkeepers and Accounting Technicians

The Association of Accounting Technicians (AAT) (designatory letters
MA AT or FMAAT, standing for 'Member of the Association of Accounting
Technicians' or 'Fellow Member of the Association of Accounting
Technicians', respectively) is the UK's leading body offering a qualification
at a level between that of 'bookkeeper' and that of the accountancy bodies
mentioned above. The AAT is sponsored by the professional accounting
bodies CIMA, CIPFA, ICAEW and ICAS.
Contact details
The contact details are:
■ The Institute of Chartered Accountants in England & Wales
• Telephone 01908 248 250
• Website www.icaew.co.uk
■ The Institute of Chartered Accountants of Scotland
• Telephone 0131 347 0100
• Website www.icas.org.uk
■ The Institute of Chartered Accountants in Ireland
• Telephone 00353 1 637 7200
• Website www.charteredaccountants.ie
■ Association of Chartered Certified Accountants
• Telephone 020 7059 5000
• Website www.accaglobal.com
■ Chartered Institute of Management Accountants
• Telephone 020 8849 2251
• Website www.cimaglobal.com
Appendix 3 • List of Accountancy Bodies
Chartered Institute of Public Finance and Accountancy
• Telephone 020 7543 5600
• Website www.cipfa.org.uk
Association of Accounting Technicians
• Telephone 0845 863 0800
• Website www.aat.org.uk
Appendix 4
Details Required on the Self
Assessment Tax Return
Income
■ Business turnover (takings, fees, sales)
■ Other business income
Expenditure
■ Cost of goods sold (goods bought for resale or materials used)
■ Payment to subcontractors
■ Wages and salaries paid to staff
■ Motor expenses and travel
■ Premises expenses
• rent
• rates
• heat and light
• insurance
■ Repairs to property and equipment
■ Other office costs
telephone
broadband and internet
stationery and printing
205
206 Appendix 4 • Details Required on the Self Assessment Tax Return
■ Advertising and entertaining (note you will need to record each of

these separately as you will need more details for taxation purposes)
■ Interest paid on loans
■ Bank charges
■ Bad debts
■ Accounting and other professional fees
■ Depreciation (see Chapter 7)
■ Other business expenses
Assets
■ Equipment and vehicles
■ Other fixed assets
■ Stocks and work in progress
■ Trade debtors (money owed to you by customers)
■ Bank account details
■ Cash in hand
■ Other current assets (e.g. prepayments - see Chapter 7)
Liabilities
■ Trade creditors (money owed by you to suppliers)
■ Money owed on loans or overdrafts
■ Other liabilities (e.g. accruals - see Chapter 7)
Capital account
■ Money owed to you as owner of the business.

Appendix 4 • Details Required on the Self Assessment Tax Return 207
Most businesses will only have entries under a selection of the headings
listed above. This is not an exhaustive list and if your business has some
special requirements - there may need to be additional headings added
to the list.
Appendix 5
Useful Computer Software
In keeping your books and records you may find some of the following
software to be useful to you. When choosing software it is a bit like
choosing a car - everyone has different priorities and likes and dislikes. If
it was not for that we would all drive the same model of car!
So it is with software. The things that one person considers 'a must' may
be insignificant to someone else. Most suppliers allow a trial period so
that you can try before you buy.
When considering software, remember that with some products there

may be an ongoing cost for maintenance and software support. Keep this
in mind when you are assessing the cost.
Bookkeeping software
Desktop products running on your own

computer
VT Transaction+
This is a simple to use fully featured accounting/bookkeeping package for
Windows. It has an integrated ledger structure that includes a cashbook,
customer and supplier ledgers and is based on double entry principles.
Entries can be easily edited if needed. Many users prefer it to better
known packages. You can download the software and try it for 60 days
before you decide whether to buy.
Telephone 020 8995 1142
Website www.vtsoftware.co.uk
208
Appendix 5 • Useful Computer Software 209
VT Cash Book
This is a cut down version of the above software. It does not support sales
and purchase ledgers but depending upon your business that may not
be a problem. It can handle VAT on a cash accounting basis. And it's free!
Telephone 020 8995 1142
Website www.vtsoftware.co.uk
Sage
Sage is one of the best known accounting software suppliers although it
is not liked by everyone. They offer a range of products from Sage Instant
which is targeted at new and small businesses to Sage 50 which is intended
for small to medium businesses.
Telephone 0800 44 77 77
Website www.sage.co.uk
QukkBooks
Like Sage there are a range of products from their SimpleStart to
QukkBooks Premier. You should check that the software will meet
your needs. For example, the SimpleStart product will only support cash
accounting for VAT and does not produce a list of outstanding payments
due to your business.
Telephone 0808 168 9533
Website www.intuit.co.uk/quickbooks/accounting-software/
index.jsp
Cloud Computing Bookkeeping Applications

One possible advantage to you may be that these online applications
will generally run on a Mac computer whilst other software may not.
Remember that there will be an ongoing monthly cost with most of these
products.
210 Appendix 5 • Useful Computer Software
Xero
A fully featured online accounting/bookkeeping system that is
recommended by many accountants. The cost is dependant upon the
number of transactions and almost anyone in business will be beyond
the basic package. There is a limited free trial period on this software.
Telephone 0800 085 3719
Website www.xero.com
Sage
Sage offer online products aimed at the small business although as yet
these applications do not offer the same range of features that are available
on their desktop products.
Contact details as above.
QuickBooks
Like the desktop products, QuickBooks offer a range of online products
from a basic package that will not handle VAT to a fully featured
application.
Contact details as above.
Payroll software
Because of frequent changes in legislation, most payroll software needs

to have an annual update. Some of these can be quite expensive so you
should keep this in mind when choosing your payroll software.
Appendix 5 • Useful Computer Software 211
Moneysoft Payroll Manager

Payroll Manager is fully featured easy to use software that will calculate
your payroll without fuss. It handles the necessary online filing of
documents and produces payslips for employees in a number of different
formats. Furthermore it is good value for money.
Telephone 08456 444 555

Website www.moneysoft.co.uk
Sage
Sage offer payroll products that can be integrated with some of their
bookkeeping applications.
Contact details as above
Iris
There are a range of payroll products offered by Iris. Look at their website
for details.
Telephone 0844 815 5656

Website http://small-business-software.iris.co.uk
HMRC P11 Calculator

This is not full payroll software in the form that the other applications
listed have been but is an employer database on which you can record
the pay, tax and National Insurance details for your employees. It also
deals with the online filing of the main payroll forms to HM Revenue &
Customs. However it does not produce payslips for your employees, an
employer summary of the pay or deal with any non-statutory deductions.
It is downloadable free from HM Revenue & Customs.
Website www.hmrc.gov.uk/paye/tools/basic-paye-tools.htm
212 Appendix 5 • Useful Computer Software
Spreadsheet software
Excel
This is probably the best known spreadsheet application and it comes as
part of the Microsoft Office suite.
Website http://office.microsoft.com/en-gb/buy
LibreOffice
LibreOffice is a free and open source office suite which is largely
compatible with other major office suites, including Microsoft Office, and
is available for a variety of platforms. LibreOffice Calc is the spreadsheet
part of the suite.
Website www.libreoffice.org
OpenOffice
Like LibreOffice, OpenOffice is another free alternative to the Microsoft
Office suite.
Website www.openoffice.org
Backup/storage
Dropbox
Dropbox is a web-based file hosting service operated by Dropbox, Inc. that
uses cloud storage. It is easy to install and will run on many different
computer operating systems. Once installed the system looks after itself.
There are two advantages of using Dropbox. Firstly, your computer will
automatically back itself up as you are using it to cloud storage in the
internet. This means that if your computer breaks down or is stolen you
can still retrieve your files.
Appendix 5 ■ Useful Computer Software 213
Secondly, if you have more than one computer they can be linked to the
same Dropbox account and the files on one machine will automatically
appear on the other. This is useful if you are using a computer at work
and a different machine at home as your work will always be there and
up to date.
The first 2GB of storage is free but you can purchase more on a monthly
subscription if needed.
Website www.dropbox.com
Appendix 6
Tax Rates
The tax rates apply to the financial year 2012/13
Income tax Income band
Basic rate - 20% £0 - £34,370
Higher rate - 40% £34,371 - £150,000
Additional rate - 50% Over £150,000
Note: there is a starting rate for savings income that may apply to the first
£2,710 of income from savings in certain cases.
Corporation tax
Small profits rate - 20% £0 - £300,000
Marginal rate - 25% £300,001 - £1,500,000
Main rate - 24% Over £1,500,000
Note: these rates apply to companies that are not themselves in receipt of
dividend income.
Capital gains tax
For individuals
Standard rate of CGT 18%
Higher rate of CGT (for higher rate tax payers) 28%
Rate for entrepreneurs 10%
Annual exempt amount (individuals) £11,200
214
Appendix 6 • Tax Rates 215
Value added tax

Standard rate 20%
Reduced rate (domestic fuel and certain building work) 5%
VAT registration threshold £77,000

Glossary
accruals. Accruals are the process by which an expense is estimated and

included in the earlier accounting period so that it is matched to the period
in which it relates rather than the period in which it was paid. Contrast
prepayments.
add-back. Adjustments made in the taxation computations adding non¬
allowable expenditure included in the accounts on to the profit for the year
so that it suffers tax.
analysed cash book. A cash book with additional columns to allow a
rudimentary breakdown of income or expense according to its nature.
It is more common to analyse the credit (expense payment) side of the
cash book as most businesses have only one source or cash receipts (from
sales) whereas they will incur several different types of expenditure
(e.g. purchase of materials, wages, motor expenses, premises rent, etc.)
- also see cash book.
assets. The items of property and equipment owned by the business
together with money owed to the business by the customers, etc.; money
with bankers and cash held by the business. Contrast liabilities.
BACS. The Bankers Automated Clearing Service is a scheme for the electronic
processing of financial transactions in the UK. Under this system, the
payer advises their bank to make an electronic transfer of funds directly to
the recipient's bank account. The system has now been augmented by the
Faster Payments Service to make same day transfers of funds. Internet
banking services regularly make use of these systems.
balance sheet. A statement of the worth of the business at the accounting
date expressed in terms of historical cost.
bank import tool. A routine incorporated into some bookkeeping
216
Glossary 217
software that enables the details of transactions that appear on the

bank statements for the business account to be downloaded via the
internet directly from the bank. This has the potential to save time
and avoid errors in recording the value of the transactions. Having
imported the transaction details into the bookkeeping application the
items must then be explained before they are truly incorporated into the
ledgers of the business. At the point of the import the bookkeeping
software has no information as to the nature of the transaction and
therefore the user must review the imported items and allocate them to
the appropriate business heading.
bank reconciliation. A statement showing the items making up the
difference between the balance per the cash book and the balance on the
bank statement.
bank reconciliation routine. See bank reconciliation,
brought forward. The balance on a ledger account that has been
transferred or brought forward from the previous accounting year. The
term may also be used to record the transfer of a page total in a ledger
at the start of a new page. Contrast Carried forward,
capital gains tax. Tax due on the profit from the sale of a capital asset,
capital introduced. Money (or other assets) introduced into a business by
the proprietor.
carried forward. The transfer of a ledger balance to the following
accounting period. This term may also be used to signify the transfer
of a page total to the following page. Contrast Brought forward,
cash book. A book used to record either bank or cash transactions. Normally
the left page (debit) is used to record receipts whilst the right page (credit)
is used to record payments.
cash float. A sum of money retained by the business to provide change for
future cash transactions and for the payment of some expenses in cash,
cash flow statement. A schedule showing the budgeted receipts and
payments for the forthcoming year. Often there is provision to include the
actual amounts received and paid alongside the budgeted figures which
aids the monitoring of the results.
218 Glossary
cloud computing. In a cloud computing system, local computers no longer

run the software application and instead the network of computers that
make up the cloud (the internet) handles that instead. Hardware and
software demands on the user's side decrease. The only thing the user's
computer needs is a web browser with internet access and the cloud's
network takes care of the rest.
cloud computing. In a cloud computing system, local computers no longer
run the software application and instead the network of computers that
make up the cloud (the internet) handles that instead. Hardware and
software demands on the user's side decrease. The only thing the user's
computer needs is a web browser with internet access and the cloud's
network takes care of the rest.
corporation tax. Tax paid by companies on their trading profits and capital
gains.
credit. An entry made on the right side of an account to record the giving of
some benefit by the account. Contrast debit (see Chapter 5).
debit. An entry made on the left side of an account recording the receiving of
a benefit by the account. Contrast credit (see Chapter 5).
dividends. A distribution of the profits by a limited company to the
shareholders.
drawings. Money (or other assets) withdrawn from a business by the
proprietor.
fixed assets. Property and equipment owned by the business which will
have a long-lasting benefit to the business,
gross profit. The profit earned by a business from trading, prior to the
deduction of overhead expenses. That is to say sales less direct cost of
sales equals gross profit (see also net profit),
historical cost. The original cost, particularly applicable to fixed assets,
without any adjustment for inflation which will have changed the
purchasing power of money.
HMRC. HM Revenue & Customs - the government organisation that
administers the collection of various taxes in the UK. These taxes
include income tax, corporation tax. National Insurance, and VAT.
income tax. Tax paid by individuals on their profits and other income. The
Glossary 219
basic rate of tax for the year 2012/2013 is 20% but the higher rate of 40% is
chargeable when the taxable income, net of allowances, exceeds £34,370.
There is also an additional rate of 50% charged on income over £150,000.
input tax. VAT incurred on purchases which is reclaimable by a VAT registered
trader (or at least set against output tax due to reduce payments made to
the HM Revenue & Customs).
insolvent. The financial state of a business meaning that it is unable to
pay its debts as they fall due. This can be defined in two ways. Firstly,
balance sheet insolvency where the overall liabilities of the company
exceed the value of the assets. Secondly, cash flow insolvency meaning
that there are insufficient liquid funds for the business to pay its debts.
Thus a business may have net assets but because they are tied up on
an illiquid form (perhaps invested in property) it has no cash to pay its
debts. Contrast solvent.
invoice. A document listing goods or services supplied and showing the
price, any VAT and the total amount due.
invoice register. A book or schedule used to summarise the issue of sales
invoices. The document will typically record the invoice number, date,
customer name and value of the transaction. Sometimes it may be
extended to record the date of payment of the invoices to help keep
tract of money owed to the business by customers.
journal. A book of prime entry used to record adjustments and other non¬
recurring accounting entries. It has debit and credit columns but it does
not form part of the double entry: it merely acts as a memo of the entries
to be made.
liabilities. Amounts owed by the business to suppliers, on hire purchase
arrangements, to bankers (loans or overdrafts) or to anyone else. Contrast
assets.
limited company. A business where the owners (the shareholders) have a
limited liability to contribute money to the business. The company is a
separate legal entity. Contrast partnership and sole trader.
National Insurance. A system of insurance run by the government into
which workers and employers make regular payments and which provides
money for people who are unemployed, old or ill.
220 Glossary
There are four classes of national insurance contribution:
Class 1 - Employees/employers - payable on earnings over the minimum

level (£144 per week for employers and £146 per week for employees in
2012/2013). The rate for the employee is 12% on the earnings between
£146 and £817 per week and 2% on the excess above that amount. For
the employer the rate is 13.8% on the excess over £144 per week. There is
no maximum contribution for the employer.
Class 2 - Self-employed persons - a fixed weekly contribution of

£2.65 per week.
Class 3 - Voluntary contributions - used to maintain benefits if no
other contributions are required. Rate £13.25 per week.
Class 4 - Self-employed persons - a further charge on the self-

employed levied at a rate of 9% on the taxable profits between £7,605
and £42,475 and 2% on the excess above that amount (2012/13 rates).
net profit. The profit of a business after taking account of all the
expenses.
NIC. National Insurance contribution (see National Insurance).
output tax. VAT charged on sales by a registered business.
overheads. Money spent regularly to keep the business running. Overheads
include such charges as rent, heat and light, bank interest on overdrafts
and other expenses which are not directly related to the purchase of the
goods or services being sold by the business.
partnership. A business which is owned and run by a group of individuals
with a view to profit. Unlike a limited company the business is not a
separate legal entity from those that own it and the individual partners
are each responsible for the debts of the business. Contrast limited
company and sole trader.
PAYE. Standing for Pay As You Earn this is a means of tax collection from
employees - the tax is deducted at the time of payment of wages by
employers. The employer then pays the tax that has been deducted to
HM Revenue & Customs.
paying-in book. A book of credit slips for paying money into a bank account.
There is normally space to write the source of the money on the counterfoil
which is retained in the book.
Glossary 221
payslip. This can refer to either of two documents. Firstly, it can be a

summary of an employee s pay showing the gross pay and the various
deductions (tax, National Insurance etc.) from that pay so as to arrive at
the net sum paid to the employee. Secondly, it can refer to a document
that is used to accompany a remittance to a supplier or to the Revenue
to explain what the payment is for.
post. To make entries in a ledger to complete the double entry recording of a
business transaction.
prepayments. Prepayments are the process by which expenses paid in
advance are matched to a later accounting period to which the expense
relates rather than the period when the expense was paid. Contract
accruals.
profit and loss account. An account summarising the income and
expenditure of a business for a given period and showing the surplus
income (profit) or deficit (loss).
purchase day book. One of the books of prime entry. It is used in conjunction
with a purchase ledger and to record the purchase invoices received by
the business. The items are then posted to the individual purchase ledger
accounts (the credit entry) and the double entry is made by posting
the summarised figures (normally for the month) to the debit of the
nominal ledger. The book also forms a useful summary from which VAT
information can be extracted.
purchase invoices. Documents received by a business from their suppliers
detailing the goods and/or services provided to them and requesting
payment.
records. A global word to include all the accounting information for the
business. The records would comprise: the cash book and bank statements;
purchase invoices and copy sales invoices; sales and purchase ledgers and
associated day books if applicable; the wages book and the nominal ledger.
retail scheme. The retail schemes are methods of calculating the output VAT
of a business where it is impractical to record the detail of each individual
sale (see page 80).
sales day book. One of the books of prime entry. It is used in conjunction
with a sales ledger to record the sales invoices issued by a business. The
items are then posted to the individual customer sales ledger accounts
222 Glossary
(the debit entry) and the double entry is made by posting the summarised
figures (for the month) to the credit of the nominal ledger. The book also
forms a useful summary of the information needed to complete the VAT
return.
sales invoices. Documents issued by a business to its customers advising
them of the details of goods or services supplied and requesting
payment. The invoice will also detail VAT if appropriate.
scale charge. An adjustment made for VAT purposes by a sole trader
or partner in a partnership when a business vehicle has been used
privately. If the business has reclaimed the VAT on the purchase of
fuel then they must effectively sell themselves some of the fuel that has
been used for their private motoring. This is achieved by charging an
amount from a set scale published by HM Revenue & Customs. This
scale charge is added to the VAT output tax liability of the business for
the quarter.
self assessment. In accounting self assessment will generally be taken to
refer to the completion of tax returns and in particular the return of
income by the self employed (paying income tax) and by companies
(paying corporation tax).
sole trader. A person running a business on his/her own; that is without any
business partner. He/she is responsible for the debts of the business.
solvent. The financial state of a business which permits it to meet its debts as
they faU due. The current assets (stock, debtors and cash at bank) exceed
the current liabilities (creditors, bank overdrafts and loans etc.). Contrast
insolvent.
statement. A summary of a person's ledger account extracted from the books
of account and issued to that person. For example, a statement for a sales
ledger account would be issued to a customer and would summarise all
the invoices that they owed to the business at that time. A bank statement
details the transactions on a bank account and is issued to the customer
periodically so that they can confirm that the final balance shown is
correct.
takings. The receipt of money as a result of sales.
Glossary 223
taxation computation. A schedule showing the adjustments to the accounts

profit in order to arrive at the taxable profit of the business. In particular
some items of expense that have been recorded in the accounts will need
to be 'added back'. See Chapter 9 for more details.
trial balance. A list of balances on the accounts in the nominal ledger
extracted primarily to ensure that the total debits equal the total credits
and the accounting records are therefore correct and in balance. See
pages 96 and 132 for more detail.
turnover. The amount of business done in a particular period. It is generally
expressed as a measure of sales: for example, £10,000 per year would
mean that the total sales in one year amounted to £10,000.
VAT. See Value Added Tax.
VAT fraction. The VAT fraction is used to simplify the calculation of the
VAT amount from within a value that has been quoted as an inclusive
price. Most retailers will quote prices inclusive of VAT and therefore if
you need to know the amount of VAT included you can apply the VAT
fraction. The current VAT fraction (based upon 20% VAT) is 1/6“^. Thus
1/6* of a VAT inclusive price is the VAT and 5/6* represents the value of
the goods.
Value Added Tax. A tax (currently 20%) levied on the sales/supplies made by
a registered trader. Because of the set-off of tax charged to the trader on
their purchases the result is to collect from them tax on the value added
by them (basically their profit). See Chapter 4 for more detail.
Index
abbreviated accounts, 150 use of spreadsheets, 22, 25

accountancy bodies, 202 books of prime entry, 102
accountant, 190-3 budget, 158
accounting concepts, 141 business
accruals, 126,142 records, 15
aged debtors, 60,157 size, 9,18,147,148
analysed cash book, 38 start-up, 198
annual accounts, 125-52 type, 9
annual investment allowance, 167
asset leasing, 183 capital account, 102,140
assets, 4 capital allowances, 166-73
audit, 7,147-8 capital expenditure, 134
capital gains, 163,178
BACs, 28, 61 capital introduced, 37
backup copies, 63 cash book, 36-7
bad debts, 104 cash expenses, 29, 41
balance sheet, 12, 20, 62,100, cash flow, 16,153-6
138-40 cash transactions, 29, 41-5
bank account, 26 cheques, 27
bank import tool, 61 choosing software, 21-3
bank loan, 181,184,195 Class 4 national insurance, 173
bank manager, 193-6 Cloud computing, 53-5
bank reconciliation statement, 28, Companies Act 2006,146,149
61 company accounts, 146-51
bookkeeping system company taxation, 176-8
choice of, 21 computerised bookkeeping, 21,
computerised, 22, 25 52-64, 208-10
handwritten, 22,23 computer software, 208-13
Index 225
consistency concept, 142 glossary, 216

corporation tax, 176 going concern concept, 141
credit, 37, 92-5 gross profit, 100,136
credit control, 156-7
creditor, 8 hire purchase, 182,184,187
current assets, 139 historical cost convention, 142
current liabilities, 139 HM Revenue & Customs (HMRC),
65, 201
daily cash summary, 41
day book, 103 impersonal accounts, 97
debit, 37, 92-5 income tax, 113,163
debtor, 8, 60 inheritance tax, 163
deductions from wages, 113 Inland Revenue, 65,201
depreciation, insolvent, 4
reducing balance, 144 insurance broker, 196
straight line, 144 invoices, 30-2
development loan, 181 details required on, 32
directors, 122 duplicate book, 31
dividends, 14,177 printed, 32
double entry bookkeeping, purchase, 30
90-107 register, 46
drawings, 13, 37,122 sales, 30, 31, 57, 82-4
Dropbox, 63, 212 VAT, 82-4
employees, 108 journal, 102,103

errors, 105-7
leasing, 187,188
financial decisions, 5 limited company, 9,11,146
financial statement, 148 limited liability partnership, 151,
first year allowance, 169 174
fixed assets, 4,139,143-5 loans, 181
depreciation, 130,143-5
reducing balance, 144 management information, 153-61
straight line, 144 monitoring progress, 159
general ledger, 97 national insurance, 109,116,173

226 Index
Class 4,173 revenue expenditure, 134

national minimum wage, 122
net assets, 140 sales, 45
net profit, 137-8 day book, 102
nominal ledger, 97, 98 invoices, 30, 31, 57, 82-4
notes to accounts, 140-1 invoice register, 46,49
ledger, 59, 97
online filing, 108 self assessment, 19-20,205
overheads, 137 shareholders, 11
owner of business, 13 size of business, 9
small companies, 147
Pll, 110 software,
P45,108-9,115 bookkeeping, 52-62,208
partnership, 9,11 payroll, 109, 210
pay; gross, 112 spreadsheets, 47-52,153, 212
PAYE, 14,109,119 sole trader, 9,10
paying-in books, 27 solicitor, 196
payroll software, 210-11 solvency, 4
payroll summary, 119 statement, 5
payslips, 114 statutory sick pay & maternity pay,
performance ratios, 160 121
personal accounts, 97
personal ledgers, 97 takings, 44
prepayments, 126 tax
professional advisors, 190-9 codes, 116
profit, 14,135-8,153 credits, 177
profit and loss account, 12,19, 62, rates, 214
98,135-8 taxation
prudence concept, 142 adjustments, 164-5
purchase day book, 102 company, 176-8
partnership, 162-76
Real Time Information (RTI), sole trader, 162-76
123 trading account, 136
records, 15, 36 trial balance, 62, 96
Registrar of Companies, 12 true and fair, 7
retail schemes, 80-1 type of business entities, 9
Index 227
VAT, 3, 65-89 retail schemes, 80-1

accounting periods, 69 retention of records, 88
adjustment for private use, 86 return, 69-71
basis, 71 second-hand goods, 87
cash accounting basis, 71, 75-6 taxable supplies, 67
domestic fuel, 85 taxable turnover, 67
flat rate scheme, 71, 76-9 tax point system, 72-5
form, 44 zero-rated sales, 65, 84
fraction, 81
input tax, 39, 66, 71, 73, 85 wages, 108-24
invoices, 82-4 wages summary, 119
lower rated sales, 65 work plan, 33
motoring expenses, 86 working capital, 140
non-deductible input tax, 85 writing down allowance, 168
output tax, 66, 70, 72
penalties, 70 year end accounts, 125-52
private use, 86 year end matters, 125,130
registration, 67
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■keeping & accounting for

70 /r\nn-i c -1 /-»<f i
'Compulsory reading for those starting a nei^v
business and forthose already in the eaily stages'
Manager, Nat West Bank (Midlands)
Accounts are just as important as any other aspect of a business, and can be crucial to
its prosperity and even survival. If you're 'doing the books' you will be at the very heart
of the business, with your hands firmly on the controls. You will be involved in the
management of its assets and liabilities, its expenses and its profit margins. The more
control you have over these, and the records and figurework on which they are based,
the better you will be able to control your business.
This thoroughly accessible book is suitable for sole traders, partnerships and limited
companies, and includes:
• Using spreadsheets and computerised bookkeeping software

• VAT and taxation
• Pottble entry book-keeping
• Paying the wages
• Preparfn|gbur annual accounts
• The baghcs^ of keying busi
♦Accounting to
Peter Taylor is a f ellow of the Institute of Chartered Accountants and has many years'
practicaTexperjence of advising small businesses.
This book has been thoroughly revised and updated for its eighth edition.
Cover design: www.mousematdesign.com

£12.99
ISBN 978-1-84528-493-0
Small Business
w/'kTTo www.howtobooks.co.uk

Peter Taylor: Fully Revised and Updated

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Fully revised and updated^ - \

85 INSPIRING WAYS TO MARKET YOUR SMALL BUSINESS

THE SMALL BUSINESS START-UP WORKBOOK

PREPARE TO SELL YOUR COMPANY

WRITE YOUR OWN BUSINESS PLAN

SETTING UP AND RUNNING A LIMITED COMPANY

Write or phone for a catalogue to:

Visit our website www.howtobooks.co.uk to find out

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Read our books online www.howto.co.uk

Fully revised and updated

All rights reserved. No part of this work may be reproduced or stored in an

The right of Peter Taylor to be identified as author of this work

© 2012 Peter Taylor

British Library Cataloguing in Publication Data

ISBN: 978 1 84528 493 0

Produced for How To Books by Deer Park Productions, Tavistock

Preface to the eighth edition xi

1 Why You'll Need Proper Business Records 1

2 How to Keep Your Accounting Records 18

3 Starting Your Record Keeping 36

4 Accounting for VAT 65

5 Double Entry Bookkeeping 90

6 Doing the Wages 108

7 Preparing your Annual Accounts 125

Notes to the accounts 140

Company accounts 146

8 How to Use Management Information 153

9 Taxation and Your Business 162

10 Accounting for Loans, Hire Purchase

11 Dealing with Your Professional Advisors 190

1. A simple business accounts system 16

3. Key components of record keeping 23

11. Spreadsheet style invoice register 50

12. Sage tool bar to control bookkeeping software 56

13. Sales invoice entry form 58

14. Aged debtors list 60

15. VAT book - how to record output tax 73

16. VAT book - how to record input tax 74

17. Cash accounting for output VAT 77

18. The flat rate VAT scheme 78

19. 'T Accounts - Sales ledger entries 95

20. ‘V Accounts - Fixed asset entries 95

21. The structure of the nominal ledger 99

22. Wages calculation 111

23. Payroll summary 118

24. Employee payslip 120

25. The profit and loss account 127

26. The balance sheet 128

27. Notes to the accounts 129

28. The trial balance 133

29. Profit and cash are not the same 154

30. Specimen cash flow forecast 155

31. Simple operating summary 159

32. Illustration of adjustments to accounting profit 165

33. Writing down allowances and annual investment

34. Capital allowances treatment for cars according to

35. Outline of taxation for companies 175

Some people seem to take to bookkeeping and accounts like ducks to

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