For all businesses, big and small, bookkeeping is one of the day-to-day tasks that helps you to run an efficient, profitable business. Good bookkeeping can save money, as well as time.
No matter how simple your business’s accounts are – even if they’re held on one workbook in a spreadsheet – it’s a good idea to get advice from an accountant or bookkeeper on the best way to keep your business’s financial records in order. It’s wise to get your accountant or bookkeeper involved at an early stage, as it can help them do their job more efficiently when the time comes to prepare the year-end accounts. Even if you are a small business running as a Sole Trader, you should make sure you keep your financial records in good order – it may help you if you are trying to raise finance from a bank or new investors and could be essential if you get picked for an HMRC inspection.
Keeping track of expenditure is important. The expenses of the company need to be recorded accurately and you want to be able pay your suppliers the correct amounts at the right time. Any expense claims submitted by employees must be according to HMRC guidelines; VAT returns and tax returns may need to be completed, and of course you will want to make sure you are sending your customers bills or invoices on a regular basis. You’ll also need to keep copies of the documentation underlying all these things – either for audits, VAT or tax inspections.
Financial year end and reporting requirements
At the end of each financial year, your ‘books’ will be used by an accountant or bookkeeper to prepare an end-of-year summary of your accounts, often known as the financial statements. If your business is an LLP or a Limited Company, you’ll have to file a copy of your financial statements at Companies House, and the financial statements may need to be audited.
Many businesses do not need to have their accounts audited – for example sole traders and partnerships as well as small LLPs and limited companies (providing they have taken the necessary steps). A solicitor or an accountant will be able to advise you what the reporting obligations are for your particular business, what date is best to pick for your financial year end - and whether or not you need an audit. If your business is a small limited company or LLP they will also be able to help you decide whether or not you should opt out of annual audits, and how to pass the necessary resolutions of the company to opt out.
Your accountant or bookkeeper can use your financial records to produce financial statements if required. These are formal reports which summarise the business’s income and expenditure and its assets and liabilities.
The way that they are set out is defined by law (the Companies Act 2006 etc) and regulation (United Kingdom Generally Accepted Accounting Standards – or UKGAAP). The financial statements will include a statement about your income and expenditure (in most cases called ‘profit and loss’ or ‘P&L’); the balance sheet which summarises assets (such as office furniture, factory equipment and cash) and liabilities (like bank loans and suppliers you owe at the date of the year end); a cashflow statement which explains movements in income and expenditure; and reports from the board of directors (or partners) and from the auditors, if they have been audited. There are also notes which cover a variety of subjects – like how depreciation is calculated, the estimated tax liability for the year, information about how much employees and directors cost the company and the value of the company’s fixed assets.
Your accountant is likely to be the one who puts the financial statements together, and then if they are to be audited, the auditor will review them and make sure they are backed up by the financial records. In most cases the auditors will be from a different firm than your accountants.
The audit does not check that every single transaction was correctly recorded but instead involves reviews of the financial processes of your business (to make sure that there are ‘internal controls’ in place to protect the business against fraud and unnecessary loss) and testing of a sample of transactions to make sure your records appear to be correct. As well as looking at your books and records the auditor is likely to sit down with you, the business owner / manager, at some point and ask how you process financial transactions and why various elements of income and expenditure have gone up or down in the year.
Once the auditors are satisfied, they will sign off your accounts – and if they are not they may issue what’s called a ‘qualified opinion’ which means they are not completely satisfied that the financial statements present a ‘true and fair view’ of your business. But if you have been working closely with your accountant or bookkeeper during the year you should not find yourself in this situation.
Questions you might like to ask your bookkeeper or accountant…
- Can you prepare monthly management accounts for me?
- How long will it take to prepare my year end financial statements?
- Will I know when I need to put money aside for tax and how much?
- Can you prepare my business’s and my personal tax returns?
- How much do you charge for each of the services you can provide?
- Do I need to get my business’s accounts audited?
- If I need an audit, who will do it and how much will it cost?
- Is there bookkeeping software you suggest I use? Why do you recommend that package?