Small Business Accounting & Record keeping

Small Business Accounting & Record keeping

Small businesses keep financial records for two main reasons, firstly is for tax compliance and the second is to see the financial progress/status of the business.

Effectively small business accounting and record keeping is organizing and documenting the primary source information (Invoices, Receipts, Bank Statement transactions etc) into a format suitable for the tax and financial reporting.

Business owners will have varying levels of ‘accounting’ knowledge and the method chosen as outlined below will invariably be dictated by this. I will explain from the most rudimentary form of accounting/records preparation to the most complex.

Gather source documents and answer accounts preparer questions

  • The simplest method and one that used to be (Pre internet) generally undertaken by clients was simply put all the invoices and paper documents into a plastic bag and supply their accountant with the check/cheque books and bank statements for the year of preparation. (Clients that put small narratives on the bank statement lines and better explanations in check/cheque book stubs aided more accurate preparation) The accountant would work through the bank statements and check/cheque stubs and prepare the financial statements and tax records subject to clearing any residual questions with the small business owner. The small business owner might prepare any more frequent returns (If their business is simple enough E.g., Sales /Goods & Services/VAT taxes) themselves or have the accountant additionally prepare those.

Accounting knowledge – Nil, other than following and answering any queries on the accountancy preparers client interview checklist. Such as, if you have stock that you have undertaken a stock take, you list your outstanding Debtors and Creditors at balance date and so forth.

Reconciled Cashbook

  • The next level of complexity is a client preparing a reconciled cashbook. Generally, these were prepared on specific paper (hardback ledger book specifically designed) cashbooks. As an example, here is one pictured below. They can be referred to as money column analysis books or similar. If you are familiar with Microsoft Excel / Google worksheets or similar, you can basically create the same electronically.

Column A would be the date: Column B would be the narration for the transaction: Columns C through P are used to portion out Income and Expense items, with the furthest right column being used to keep a running total reconciling to the bank account. This is explained further below.

How do Reconciled Cashbooks work?

In the example below from left to right we start with the date, the narrative of what the transaction is about, and then we start splitting out the Income and Expense types and place (In this case) the VAT attributable to each transaction. It is called a reconciled cashbook because it starts with an opening balance of the bank account and each transaction is listed in alignment with the bank account statement listing and the cashbook always reconciles back to the bank account. You can see the bank account balance for that particular day on the right-hand side which reconciles between the cashbook and the bank account. The most common expense items have their own dedicated expense column and anything outside these are simply placed in the Miscellaneous column. (To a certain degree the Miscellaneous column is used for placing items that the accounts preparer can decide on - Like say an asset is purchased).

For a small business, an accountant can easily take this information and rapidly prepare a set of financial accounts and tax accounts. This should save on fees charged.

Unfortunately, there is a growing tendency for taxation authorities to require electronic filing of all transactional data which forces small business owners increasingly into using electronic accountancy packages which are often too complex for less sophisticated users, it is possible to file electronically using Excel/Google worksheets but this requires additional expertise.

Accounting knowledge – This is limited to what is required with the most basic level indicated previously, the reconciled cashbook effectively aids the accounts preparer by identifying and grouping Income/Expense types saving preparation time.

Online Small Business Accounting Software

  • The next step up is use of an online accountancy package. Some accountancy packages offer less sophisticated versions which once set up correctly can mimic cashbooks. The small business owner though will need to be familiar with online banking and be able to maintain the feeds of transactional information from their business account into the accountancy package.

A lot of smaller businesses now use this method and allow the accountant to access the accounting package to check/prepare any interim filings (Like Sales taxes)

Accounting knowledge – This can be as basic as the lower levels indicated previously. Effectively you simply allow the accounts preparer access to your bank transactions and they prepare everything. However, more can be done including including end of period journals, although clients that don’t really know what they are doing can actually make things worse and create more time cost with the accounts prepare having to fix errors.

Complete preparation of Accounts and Tax returns

  • The next step up from the online accountancy package at a cashbook level of sophistication is for a simple small business to simply prepare the accounts entirely, somebody with a year 10/11 pass in School Accountancy or similar should be able to prepare the most basic of small business accounts I.e. A small sole trader. Using online search they should also be able to cover off any basic queries E.g. Is that parking fine tax deductible? Answer: No (Generally as breaches of the law, punishable by fine, are non-deductible).

Greater Scale / Complexity and Legal format

  • Where the business increases in scale / complexity and legal format (E.g., LLC) then it is logical to use a professionally qualified preparer of accounting and tax affairs. What you may think you’ll save in preparation fees you may well lose multiples considering your time, taxes not claimed and any penalties that a future tax investigation could levy.

Accounting knowledge - None, or a basic understanding of how to use an electronic online accounting package, to post all the basic transactions (Which should save on accountancy preparation fees).

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