Posted: Wed 21st Jul 2021
When you're busy running your day-to-day business operations, it's easy for accounting tasks to get sidetracked.
Losing or forgetting invoices becomes more common, or you may store them in some folder on your computer which is hard to trace. Daily business chores, including making strategies and holding client meetings, take up a lot of time – so much so that you don't have time to focus on fixing your accounting process.
However, with a little effort, you can manage and improve your accounting. In this blog, we've shared some practical tips that should make your accounting processes much better.
Why is checking my accounting accuracy so important?
It helps you:
comply with HMRC's rules
manage your allowable expenses
find legal ways to reduce your tax liabilities
prepare year-end financial statements more quickly
maintain accounting books more accurately, which lets you make important business decisions
run your business more confidently
Identifying your revenue sources
To improve your accounting process, it's important to identify how you're receiving your revenue. This includes the following:
Transaction-based revenue: John sells ice creams and lemonade from his stall at the Borough Market.
Project-based revenue: Emma has just started working on a new solar energy project for one of her clients.
Service-oriented revenue: Mark provides accounting services to various clients.
Recurring revenue: Sally rents out the ground floor of her office space to another business.
Now, you might think: 'Why is it so important to identify revenue sources?' Well, the answer is revenue sources are the bloodline of your business, and they are also important for your accounting accuracy.
Before sending accurate financial statements to HMRC, you first need to identify all your revenue sources. To pay the correct amount of tax (and avoid penalties), you must make sure that you identify and include in your financial reports all your sources of revenue.
Simply put, identifying and properly managing your revenue sources is the key to your business making proper progress. And updating reports on your revenue sources is one of the steps to running a profitable organisation.
Tracking all the invoices and receipts
This is crucial for your business's cash flow. Keeping invoices and receipts in order can help you reduce the taxes you owe, and claim deductions.
Benefits of tracking invoices and receipts
Pay less tax
Tracking all the invoices and receipts will give you an accurate figure of your receivables and payables. It will help you follow up with clients to collect selling prices, and pay your bills on time. In turn, you'll be able to make sure your accounting is accurate.
Also, when your invoices and receipts are in order, an accountant can help you lower your VAT and corporate tax. Having a valid invoice can help you claim the amount as input VAT and get to pay reduced VAT. Even for reclaiming the VAT that you paid for a transaction, you need to show your invoice.
Recover your allowable tax deductions
Tracking invoices and receipts can get you all allowable deductions back. It means you don't have to pay for business costs that aren't taxable.
Also, you'll be able to comply with the HMRC rules of declaring all your business income on your financial statement. On top of it, maintaining invoices and receipts will help you monitor your earnings and expenses so that you can manage them properly.
You can save a lot of time
Keeping your invoices and receipts up to date will save you time collating them. Missing invoices and receipts can be frustrating. You can use a software application to store and manage all the invoices.
Ways to track invoices
You can use a cloud-based accounting software application, which will allow several users to save invoices securely in one place daily.
When it comes to managing invoices, some best practices will be handy. For example, make sure the description on the invoices is detailed and with due dates. Also, double-check the invoice amounts for accuracy.
Tracking business expenses
Some business-related expenses are tax deductible (these are sometimes called 'allowable expenses'). It means if you buy materials or goods to run your business, you can get deductions in your tax bill.
During the last financial year, Jacob's online store generated business worth £500,000. However, he had to spend £150,000 on business expenses on technology upgrades, employee salaries, and accounting fees. It means Jacob's business is liable to pay tax on only £350,000 of the total revenue.
If you track all of your deductible expenses, your business can reduce its tax burden. It means tracking your deductible expenses will not only reduce your corporate tax bill, but improve your operating margins significantly. It may even be helpful for improving your cash-flow planning.
Preparing financial statements
The actual financial health of your business will reflect on your financial statements for the past financial year.
The statements will show the earnings of your business in a certain period, the financial liabilities, liquid/fixed assets, cash in hand, and others.
How to make financial statements
Your business's financial statement has three major components:
Balance sheet: An overall summary of your company's assets and liabilities (including shareholders' equity, if any).
Income or profit and loss statement: This statement gives a broader picture of your company's revenues and expenditures during a financial year. An income statement is different from a balance sheet, as it gives the total account of revenues generated in a certain period against the expenses, and will get your net profit figure.
Cash-flow statement: This is an overview of the cash flow of your business during a financial year.
After preparing your balance sheet, income statement and cash-flow statement, you can send them to HMRC. It's vital to submit these statements on time. If you don't, you'll be fined or receive another penalty (such as prosecution), according to HMRC's regulations:
The financial year
The financial year of a company is 12 months long, except the first year when the financial year will be counted from the date of forming the company to the end of the same month next year. It means if a company was set up on 1 January 2020, its financial year would be until 31 January 2021.
If you're running a private company and filing its statements for the first time, the submission will be due within 21 months of the date that the company was formed. If you have a public company, the statement submission is due within 18 months of the company formation.
Submitting financial statements is not only mandatory, but they also give you a clear picture of your business's financial health.
Filing for tax returns
Filing for tax returns in the UK can be confusing for small businesses. There are several deadlines to meet and rules to follow.
If you have an in-house accountant, they would have some heavy tasks at hand in terms of meeting all the deadlines and complying with the rules to pay the accurate amount of taxes. Missing deadlines or not paying enough tax will result in your business being penalised.
Companies in the UK have to file these tax returns along with their annual accounts:
Value added tax (VAT)
Income tax/corporation tax
This tax is added to the prices of products or you sell. Once your business earns more than £85,000 through sales in the UK, you should register your company for VAT.
This is the common threshold and can be different if your company trades with a business in the EU. The rate for VAT also varies, though 20% is the standard.
The deadline depends on the accounting period of your company. It could be monthly, quarterly, quarterly, or yearly.
This is the tax on your business profits. The higher the profit, the higher the rate of tax. However, there are allowable deductions to reduce your taxes.
The deadline is nine months and one day from the end of the applicable accounting period.
This includes PAYE and employer's and employees' national insurance contributions.
These taxes are calculated and collected from employees' salaries during every pay cycle. Your company needs to submit reports to HMRC stating your gross and net salaries to employees and the amount of taxes withheld. You need to submit to HMRC either on a monthly or weekly basis.
Although many business owners think they have a year to get their tax returns ready, it's better to start the process sooner for timely tax filing and to avoid penalties.
Essentially, this is submitting your financial statements to Companies House. The deadline is 12 months from your company's accounting period.
Get professional help from an accountant
Small business owners often manage their accounting and taxes by hiring a part-time accountant to prepare financial statements, manage payroll processes, file taxes, and more.
Ideally, you need an accountant who is familiar with all the accounting and tax obligations in the UK, along with tax benefits, penalties and all other relevant information.
A professional accountant can help you manage the following aspects of your business:
Help you identify the ideal company structure to meet your specific needs, whether it's a sole trader or a limited company
Prepare all the financial documents you need as part of your business plan
Help you open a business bank account
Manage the payroll process
Identify your tax obligations and allowable deductions and prepare your tax returns
Close your year-end books and create the annual report
Handle any tax audits
Hiring an accountant who is an expert in UK accounting and tax processes can help you manage all your financial documentation.
Get smart with your accounting to grow your business fast
The tips listed in this post will help your business comply with all the accounting and tax-related obligations in the UK efficiently. By paying your business taxes correctly, and maintaining your accounting process accurately, your business can have an ideal financial standing, and plan better for the next financial year.