Starting a business can be a mind-boggling process. Business ownership is a constant flood of challenging milestones along with expanding to-do lists. With your new venture, you’ll need to get on top of the accounting tasks that come along with running a business.
Accounting can be a daunting subject for a business owner, and to be honest, it’s more than a little boring. When it comes to establishing a business, subjects like increasing revenue and marketing get good press because they are the fun parts but the back-end stuff like accounting can’t be overlooked.
Accounting is an important part of any SME business. However, you don’t have to go get a degree in accounting in order to successfully develop your business. There are a few essentials that you should know though, to ensure that you’re making the best decisions for your small business accounting drill.
This article will guide you through basic accounting knowledge and will give you the confidence to know you’ve covered everything you need to learn about accounting and you will be ready to move on to the next item on your business to-do list.
Accounting and its Importance
Starting a business often requires entrepreneurs to master and accomplish a variety of business objectives. An important business objective when starting a small business is an accounting. Although many entrepreneurs may be fearful of dig up through endless stacks of financial documents. Accounting often provides entrepreneurs with a crystal clear picture of their business’ success. Entrepreneurs must also keep copious amounts of financial records regarding the small business start-up for tax and legal purposes.
Accounting words every business owner should know:
Entering the accounting field can be a little confusing at first with all the new terminology to grasp. Learn these essential accounting terms and master your bookkeeping.
Assets & Liabilities
A Liability is something you owe to someone else. Examples are accounts payable, equipment loans, tax liabilities – basically anything you owe. Unless liabilities exist for a specific or strategic reason, you want to keep them to a minimum. The payment of liability is not deducted on your
Profit & Loss Statement.
To win in the game of business, you want to grow your assets and shrink your liabilities.
Debit & Credits
Every financial move you make affects your Balance Sheet. Double-entry accounting assures that every transaction is completely recorded to maintain balance.
Income Statement (aka Profit & Loss, P&L)
Accounting reports every business owner should use:
A company's financial statements provide various financial information that investors, creditors and analysts use to evaluate a company's financial performance. A great deal of the information conferred in a financial report is required by law or by accounting standards.
Sales Tax Report
Income by Customer
Expense by Vendor
Income Statement (Profit & Loss Statement)
What about taxes:
When you’re running your own business, it’s almost a certainty that you’ll have to pay some kind of tax at some point But with so many complicated tax rules currently in place in the UK, it can be difficult to know exactly which ones apply to you or your business, and which types of tax you’ll actually have to pay to HMRC.
If you run a limited company business, you could pay income tax on any salary or dividends you take from the company. Whether you pay income tax, and how much you pay, depends on how much you take out.
Income tax kicks in on your salary if it’s over £11,850, you’re under 75 and you have no other income. If your circumstances are different, – say, you have another job as well as working for your own company – then you may start paying income tax on your salary sooner.
If you are paying income tax on your salary, your employer, in this case, your own company, will deduct it from your salary under the PAYE (Pay As You Earn) scheme. PAYE isn’t a tax in its own right; it’s a method HMRC use to collect income tax.
Sole traders pay two kinds of NI. If you’re a sole trader, you’ll pay a flat weekly rate of NI called Class 2 NI, unless your business’s profits are under the Small Profits Threshold, which is £6,205. Class 2 NI is £2.95 per week. If your business’s profits are under the Small Profits Threshold, you can still pay Class 2 NI voluntarily, to protect your entitlement to State Pension and other benefits. You’ll also pay Class 4 NI once your business’s profits go over £8,424. Class 4 NI is worked out as a percentage of your business’s profit.
If your business is a limited company, and the company’s paying you a weekly sum of £162.01 or more, then it’ll have to deduct Class 1 employee’s NI from your wages and pay that over to HMRC. The company will also have to pay Class 1 employer’s NI to HMRC unless that’s covered by the employment allowance.
Corporation tax is 19 per cent for all companies, and it’s payable nine months and one day after the company’s accounting year end so, for example, a company with a year-end of March 31st will have to pay its corporation tax by 1st January.
Remember that sole traders do not pay corporation tax.
‘Vatable sales’ mean sales of goods or services that would have had VAT charged on them if made by a VAT-registered business. VAT might be 20 per cent, the standard rate, 5 per cent the reduced rate, or sometimes even 0 per cent.
Some premises are automatically exempt from business rates, such as farm buildings, and others may be entitled to business rates relief.
If you run your business from home, you won’t usually have to pay business rates as well as council tax.
The exceptions are:
- Employing staff who also come and work at your home
- Selling goods or services from your home to visiting customers
- You have adapted your home to work there (such as converting your garage or shed to a dog grooming parlour)
- Your property is part business and part domestic, for example, you run a pub and live above it
What you need to know about VAT
We’re all used to seeing Value Added Tax (VAT) as a common item on many bills and receipts but is VAT relevant for small businesses? Is VAT something that every business needs to charge? What are the pros and cons of VAT registration?
VAT, Value Added Tax, is generally assumed throughout the EU as a percentage charge paid by consumers when they purchasing certain types of goods and services.
Other countries have different names for the same general concept. For example, Australians have the Australian Goods and Services Tax (GST) or in Japan, There is a fixed sales tax ("sales tax"), literally translated from Japanese as a "consumption tax". As we provide accountancy services to UK businesses, we’ll stick with talking about VAT.
Since the beginning of 2011, the VAT rate in the UK has been 20% for most goods and services. There are some exceptions – for example, children’s clothing and footwear attracts a zero rate for VAT.
Rather than focusing on the details of how VAT is charged, we’re going to look at the broad pros and cons about being VAT registered, so that you can understand what really matters for your SME.
It’s assumed that charging VAT is something that all businesses should do, but in fact, that’s not true. Many SMEs do not need to be VAT registered.
Businesses in the UK need to register for VAT only if their annual taxable turnover in the last 12 months or the next 30 days is greater than the VAT threshold. This figure is set and reviewed by the government, with any changes announced in the Chancellor’s regular budget statements.
The current VAT threshold is £85,000 and will be unchanged until 1 April 2020 at the earliest.
If your annual turnover is below the specified threshold, you can still voluntarily register for VAT. It’s completely your call.
You might wonder why you’d want to register for VAT if you’re not legally obliged to.
Registering your business means you have to regularly send VAT returns to HMRC as well as increasing the amounts you charge to your customers. It makes sense that as business owners we want to decrease our paperwork and since it’s a competitive world out there and pricing matters, we certainly don’t want to charge our customers more than we need to.
On the other hand, being VAT registered can make your business more litigable and if most or all of your customers are VAT-registered businesses, the VAT they pay you for goods and services is often reclaimable. Here’s another reason why voluntarily registering for VAT can benefit you. Registering means that your clients and competitors won’t necessarily know what your annual turnover is. However, if you don’t register for VAT, you’re effectively announcing to the world that your annual turnover is less than the VAT threshold.
In many cases, this won’t matter. However, there may be some prospective clients who will feel more comfortable to deal with a VAT-registered business, especially if a big sales opportunity is involved.
We’ve already hinted at the drawbacks of registering for VAT. You’ll need to submit VAT returns to HMRC four times per year and you’ll need to account for VAT on taxable income regardless of who the client is.
If your turnover exceeds the VAT threshold then there are no special exemptions from VAT registration just for sole traders or partnerships. As with limited companies, sole traders have to register for VAT if their annual turnover exceeds the VAT threshold. If your annual turnover falls below the VAT threshold, you don’t need to register for VAT – but you can register voluntarily if you wish.
You can register for VAT via Gov.uk’s VAT registration pages. This applies whether you decide to register voluntarily or whether registration is compulsory because your annual turnover exceeds the VAT threshold.
Once your business is registered for VAT, you’ll gain access to the part of the Gov.uk website that will let you complete your VAT returns. From the VAT point of view, the year is generally split into quarters, meaning that you’ll need to log in to the website four times per year to submit an online VAT return.
You’ll be given a VAT number. You’ll need to include this on all sales invoices you issue from that point onwards. You won’t need to worry about changing or re-issuing any invoices you issued from before the time you were VAT registered. For this reason, it’s important to keep a note of your effective date of VAT registration. As well as quoting your VAT number on your invoices, you’ll need to add the relevant VAT charges to your invoices. In most cases, this means adding 20% to the net charge.
At the end of each quarter, you’ll need to log in to the Gov.uk site to complete your VAT return – that’s the point where the VAT you’ve charged is declared to HMRC.
The VAT return is a summary of your earnings (which includes the VAT you’ve charged for your goods and services) plus your expenses (which includes the VAT you’ve paid for goods and services). The difference between these amounts will determine how much you need to pay or claim in your quarterly VAT return.
The summary above covers the most common way of registering for and running your VAT account. There are other methods of handling VAT, including the cash-accounting method and the Flat Rate Scheme. However, if you need advice on which method may be best suited for your small business, that’s something we can discuss during a consultation call.
Remember that the VAT rules are the same across the UK. Thresholds, percentages, forms – it’s all identical. That’s good because we know that our VAT advisory service can offer you the same even-handed advice regardless of where in the UK your business is based.
What and how to track income and expenditure
At a high level, your financials are the important reports or statements that offer you insights into the fiscal health of your business. It’s important to know what these are and how they are generated so that you’re aware of how your business is performing at any given time.
Sole traders must maintain accurate financial and they must retain yearly records for six years if they own a limited company. Many business owners begin with a simple process using spreadsheets, while a growing number are now use accounting software.
You can manage your cash flow on spreadsheets, like the kind, you can create in Excel which requires a lot of time to create a lot more effort to keep organise and safe or you can go paperless.
Using accounting software to manage and organise your bookkeeping saves time, money and possible human error. Inexpensive software is available to automate record keeping. For example, they can automatically pull transaction records from your bank account so you don’t have to manually enter each transaction.
A superb business reporting solution can take care of all your crucial business information and present it in an at-a-glance view to guide you to make the best decisions. You can customise your reporting depending on your priorities at any needed time. You may want a quick daily overview; dig up to whatever is appropriate that day.
Tracking your income and expenses in real-time is a big time/energy saver. In addition, if you have a smartphone, there are plenty of accounting apps available for easily recording income and expenses while on the go. The best apps have features that make keeping up with the details easy, like saving photos of receipts so that you don’t have to keep paper copies.
Accounting is necessary for any business. As a small business owner, it’s important for you to recognise that the best practices used by successful companies also apply to you. Following basic accounting principles is essential for success in any size business; Recordkeeping and financial analysis is key to not only monitoring your expenses but to discovering new avenues of growth. In addition, it will make sure you stay responsible for tax obligations to the government and to your employees.
So what are you waiting for? Begin to manage your financial records.