Good bookkeeping makes your paperwork — such as VAT and tax returns — easier. It provides a system that tells you — and your accountant — exactly what is going on.
It is worth setting up a computerised system from the outset. A traditional paper-based system will rarely be suitable for many start-ups, as the accounting function will soon start to swallow valuable time. If you start with computerised accounts, there will be no need to go through the time-consuming process of transferring your paperwork onto a computer package at a later date. This briefing covers:
- How to record business income and payments.
- How to use your bank statement to check that you have not made any mistakes.
- Tips for cash businesses such as shops.
1 What do you need?
You have to record all the money coming into and out of your business, both to keep track of your cashflow and for your tax records. An HM Revenue & Customs penalty regime is in force which places a duty of care on businesses, reinforcing the need for good tax records. To do this you will need:
1.1 A record of every sale.
1.2 Invoices or receipts for every purchase.
- Enter invoices into your accounts system.
- For manual records you will need two files: Purchases Paid and Purchases Unpaid.
1.3 Records of payments into and out of your bank account.
- Open a separate business bank account.
- Ask for monthly bank statements.
1.4 Records of payments made by cash.
- Keep receipts for cash purchases in a Petty Cash box.
1.5 A Cash Book for summarising the information. Cash Books come in hard copy and electronic forms.
- Computer accounting software will perform the same functions as a Cash Book.
- An analysis book can be used as a hard-copy Cash Book.
Your Cash Book, whether hard copy or electronic, simply records all the money coming into and going out of your bank account.
Your accountant can help you set up your hard-copy or computerised bookkeeping system.
You need a simple routine procedure to keep track of your sales.
2.1 Every time you make a sale, issue an invoice.
2.2 When an invoice is paid, make a note of how it was paid (cash, cheque, BACs etc). Pay the money into your account, using the paying-in book provided by the bank.
2.3 Once a week, update your Cash Book or software package.
2.4 Once a week check through your unpaid invoices and chase any that are falling due.
- The longer a customer has owed you money, the further back in the Sales Unpaid file the invoice will be.
Everything should match — ie invoices are in the same order as entries in your accounts, which are in the same order as your bank statements.
If an invoice is amended:
- Issue a new invoice.
- Write ‘Cancelled: see invoice no. ‘xxx’ on the original invoice and file it in Sales Paid.
If partial payment is received:
- Enter the amount received against the invoice in your accounts.
- Write ‘part paid’, the date and the amount on the invoice.
- File a photocopy in Sales Paid and keep the original in Sales Unpaid.
- When you update the Cash Book, put P by the invoice number, eg P169.
If you issue a credit note:
- Give the note a number, like an invoice and file it in Sales Unpaid.
- When updating the Cash Book, record the details as usual but put the amount in brackets to show that it must be deducted from the sales total.
3 Non-sales income
3.1 From time to time your business will have other income apart from sales. This might include:
- New loans or grants.
- Interest on your deposit account.
- Equipment disposals.
- Tax refunds.
3.2 You will not receive invoices for all of these, but they will appear on your bank statement.
- Every month enter details of these exceptional transactions into your accounts package or Cash Book.
Choose software wisely
- Mamut offers software designed for small businesses. Mamut Enterprise is a package for the self-employed, while Mamut Accounting is a more fully featured offering for SMEs (visit www.mamut.com/uk/accountingsystems or call 0800 032 5616).
- QuickBooks offers all day-to-day functions, along with customisable invoicing and supplier tracking and an electronic invoicing and payment facility. Three packages are offered (visit www.intuit.co.uk/quickbooks/accounting-software.jsp or call 0808 168 9533).
- Sage Software offers a variety of accounting software solutions for many kinds of business. Five core packages can be augmented with additional modules to suit the individual firm’s needs (visit www.sage.co.uk or call 0800 932 0344).
- Simply Books is designed as an easy-to-use package specifically for very small businesses and sole traders. It offers all standard bookkeeping facilities as well as VAT processing and analysis. It is accredited by the Institute of Chartered Accountants in England and Wales (visit www.simplybooks.net or call 0845 456 0365 for details).
4.1 Every time you make a purchase, ask for an invoice or a receipt.
4.2 When you pay a bill, make a note of the date, supplier and amount.
- If you pay several invoices in one payment, enter each amount and the total.
- Take the invoice out of the Purchases Unpaid file and write the date and how it was paid in the top right-hand corner.
- File the invoice in Purchases Paid in date-of-payment order.
- If you have a receipt, as well as an invoice, staple them together.
4.3 Once a week update your Cash Book or accounting programme.
- Enter the details of the bills you have paid into the Cash Book.
- Check the details against the invoices in the Purchases Paid file as each is entered into your Cash Book.
Again, everything should match — ie invoices will be in the same order as entries in the Cash Book, which will be in roughly the same order as entries on your bank statement.
5 Cash purchases
5.1 Pay the cash out of your own pocket.
5.2 Write details of the purchase on the receipt.
5.3 Keep the receipts in your Petty Cash file.
5.4 Total all the petty cash receipts monthly.
- Pay yourself for the total amount.
- Staple the receipts together and file in Purchases Paid.
5.5 Enter the details in the Cash Book.
5.6 You can treat purchases by personal credit card in exactly the same way.
- Refund yourself the total of all the business purchases when the credit card bill arrives.
- Staple all the receipts together.
- Enter details in the Cash Book.
6 The bank statement
Every month compare your bank statement and Cash Book. After any errors are corrected, both balances should be the same.
6.1 Check each entry in the Cash Book against the entry on the statement.
- If you regularly pay batches of cheques into your bank, you need a ‘bank’ column in the ‘money in’ section of your hard-copy Cash Book. This shows the total value of money paid in each day, which will match the figures shown on your bank statement.
6.2 Payments made by direct debit, BACs or standing order will not yet be recorded in the Cash Book. Nor will bank charges and interest.
- Enter the details in the Cash Book.
- Then tick off the item in the Cash Book and on the bank statement.
6.3 Make sure that every item appearing on the bank statement has been checked.
6.4 Some items will not yet appear on the bank statement.
- Money paid in by you but not yet cleared (eg customers’ cheques).
- Cheques you have sent to suppliers which have yet to be paid into their accounts.
6.5 Calculate the adjusted bank balance.
- The adjusted bank balance is what the bank balance would be if all the money paid in and all the cheques paid out were shown on the bank statement.
6.6 Reconcile the bank statement.
- Write down the adjusted bank balance at the start of the month.
- Add the total sales revenue paid in and other income for the month (taken from your Cash Book).
- Deduct the total payments for the month (taken from your Cash Book).
- This should equal the adjusted bank balance at the end of each month.
When the figures agree, you have successfully reconciled your bank account.
If the figures do not agree, there is an error. You will need to check through the Cash Book to find the error.
If your business registers for VAT you will need to make some changes.
7.1 There will be very few complications on the sales side.
- You must issue VAT invoices.
- You should enter the details of the VAT in a separate column in the Cash Book.
7.2 The golden rule is that you must have a VAT invoice for all purchases.
- For small purchases of standard-rated (20%) goods, you can calculate the VAT paid. Total cost x 20/120 (ie multiply by 1/6).
- Enter the details of the VAT in a separate column in the Cash Book.
- Enter the total under ‘total’ in the Cash Book, enter the total less VAT under the individual heading (eg stationery).
Contact HM Revenue & Customs for free leaflets on every aspect of VAT (0845 010 9000 or visit ).
8 Cash businesses
If, like a shop, you sell for cash — as opposed to allowing customers to pay after a credit period — the basic principles are much the same.
8.1 Shops face two particular problems.
- If you take cash (from sales) and spend it (eg on wages), it is easy to lose track of what is going on.
- The tax office (and the VAT office, if you are registered) will always be more suspicious of cash.
8.2 However, there are simple steps you can take to avoid any complications.