Cloud accounting systems have made huge advances since they first hit the market way back in the mid 2000s. The sophistication of the technology now means that many small business owners can file their year end accounts and the Corporation Tax return directly with HMRC and Companies House respectively from the data that they have entered into the system.
And the best news is that the small business owner no longer needs an accountant to help them. Or do they?
Ignorance of the law is no defence
There are a significant number of rules, regulations and laws that apply to accounting and tax. To become an accountant takes many years for the good reason that there is much to learn and it doesn’t stop there. The rules change on a regular basis and accountants carry out Continuing Professional Development (CPD) to keep up to date.
Whilst new technology provides the functionality for business owners to file the accounts and tax returns themselves it doesn’t mean that they should do, especially if they simply do not have the experience or expertise to do this themselves.
Anything that is filed with the authorities needs to be right; they simply will not accept ignorance of the rules as a valid excuse to getting things wrong. Entering data into a system does not necessarily mean that the end result is fit for filing. Nor does it mean that you have captured all of the transactions that need to be included or excluded those that shouldn’t be in the accounts.
There are a number of things that can go wrong, can get missed from the figures or included in the accounts or claimed against tax when they shouldn’t be.
If you are going to file your company’s accounts and tax returns yourself then you do need to understand what you are doing. Whilst this section does delve further into accounting speak it’s included to demonstrate what needs to be done and what, if you’re unsure, should be left to an accountant to help you with.
Understanding the Accounts
By far the most common issue that occurs in accounts is not posting the transactions to the correct account meaning that they are not in the right place.
Whilst this area can start to get more complicated and “accountancy” if you are filing the accounts yourself you will need to understand the difference between the Profit and Loss Account, the Balance Sheet and the 5 categories of transactions being income, costs, capital, assets and liabilities as well as understand about the different taxes that may apply to your business.
Accounts for a limited company are made up of:
- Profit and Loss Account
- Balance Sheet
- Notes to the accounts
- Directors Report
When filing with the authorities they have to be in a prescribed format.
Profit and Loss Account
The profit and loss account is the financial statement that summarises the income and costs for the business for a specific time period (usually a year) calculating the profit being income less costs.
Balance Sheet
A balance sheet is the financial statement that shows the company’s assets, liabilities, and capital (shareholder’s funds) at a specific point in time, usually at the end of an accounting year.
Income
Often referred to as turnover, this is the revenue or receipts derived from business activities being the amounts received for work done or products sold.
Costs
Costs are the allowable amounts incurred for the goods and services needed to run your business. They can also be referred to as expenses or outlays.
Income and Costs are shown in the Profit and Loss account.
Assets
Assets are things that the business owns. These can be cash including amounts held in a business bank account or things that could be converted to cash like stock and debtors (people who owe the company money).
Liabilities
Liabilities are the amounts that the business owes to others.
Capital
Capital is how much is owed to the owners of the business.
Assets less Liabilities equal shareholder’s funds all of which are listed in the Balance Sheet. Implicit in the name is the concept that the Balance Sheet will balance!
This is all a bit technical but if you are filing the accounts yourself you need to understand these things as you are essentially saying that you’ve got the Profit and Loss account and Balance Sheet correct. If this is making your brain fry then logic should tell you that this is not an area to scrimp on and an accountant should be engaged.
Common Mistakes in Year End Accounts
For the inexperienced there are many things that can go wrong in the accounts. Common mistakes that can occur are:
Fixed Assets
Items are included as fixed assets in the balance sheet when they should be simply posted to a profit and loss account as a cost. Fixed assets are things of “high” value that have a useful life of over a year. There is no de minimis value for what should be classed as a fixed asset but a common sense rule of thumb of £1,500 could be applied or the price of a good laptop. In reality there is no tax benefit to including them as a fixed asset due to the tax treatment allowed under what is called the Annual Investment Allowance (a tax treatment best left to accountants to perform).
Missing transactions
Transactions can be easily missed from the accounts if they have not been made through the business bank account but have been paid for from private funds e.g. cash, personal credit cards or personal bank accounts. These should have been posted via an expenses claim at the time that they were incurred. Another transaction which is often missed is paying for the share capital when you formed the company.
Missing bank accounts
Bank accounts including PayPal and Stripe can be missed from the accounts if they have not been set up to load the transactions into the accounting system.
All bank accounts should be set up within the accounting system linked by bank feeds to ensure the completeness and accuracy of all transactions.
Tampering with bank transactions
If the bank transactions are tampered with (amended, deleted, loaded twice or manually added) the bank account balance in the system will not agree to the balance on the bank statement at the same date. So the accounts will be wrong. A regular check should be built into your accounting processes to ensure that errors such as these do not occur as you go. The simple rule is not to tamper with the loaded transactions unless you know what you are doing.
Incorrect starting position
Often at the year end there are adjustments to be made to the accounts for a variety of reasons. A common issue is that these adjustments are not posted into the system to bring it in line with the filed accounts. This means that the system becomes out of sync with the figures presented to the authorities. A typical adjustment is the corporation tax which is often calculated slightly differently in the accounting system to the actual tax due resulting in small rounding differences between the corporation tax return and the system. Even these small differences need to be reflected in the accounting system. Other year end adjustments need to be included in the system via posting them up as a journal and this is where you do need to know your debits and credits – so again it may be an area where you ask your accountant to help.
Salary and Wages mis-postings
All too often payments for salaries are posted to the wrong account simply because the accounting system has default account headings which are too similar, but result in very different types of postings, and the wrong code is used. Often times this results in the postings being made to the balance sheet (a PAYE control account) rather than a (Profit and Loss Account) cost heading. In reality this means that they have not been included as an allowable cost when arriving at the profit figure and so the tax due on profits is more than it needs to be. An accountant would pick this up straight away and make sure that not only the wages are in the right place but all other figures are where they should be.
Prior Year Comparisons
Unless it is the first year, the accounts should show the figures for the current year as well as the values for the previous year so that an easy comparison can be made between the two years. The inexperienced may be unaware of this need and so can miss the previous year comparative figures.
Too many cost headings
All too often too many cost headings are used in the transaction postings in the accounting system which cannot be easily mapped to the headings used in the filed accounts. The trick is to limit the number of cost headings that you use to a small (rule of thumb – 6 to 12) cost headings using the same headings in your accounting system that are on the Profit and Loss statement from your filed accounts.
Understanding Accruals
Accruals accounting is probably the hardest concept for anyone to grasp when they are preparing their accounts. Limited Company accounts have to be prepared to what is called the accruals concept (an accounting term). Generally, this means that the accounts must include not just the cash received or paid out but also:
- income that has been earned but not received
- costs that have been incurred but not paid for or costs paid for but not fully used
What this means is that you’ll need to record all income and costs as they occur (when you present or get presented with invoices) and not just when you pay out or receive the money. This means that there will be timing differences between the amounts in your accounts and the amounts in your business bank account as the money will only hit the bank when you pay or receive it and not when you post the transactions into the accounts.
Note – unincorporated businesses e.g. sole traders can elect to use a system called Cash Accounting for transactions to make things easier which means that you record income as you receive it and costs as you pay for them.
Losses
Some Cloud Accounting solutions do not handle the treatment of losses particularly well within their year end accounting functionality. This means that you could miss out on vital tax refunds if losses are not applied correctly during the calculation of Corporation Tax.
Adjustments for Tax
There are some costs that may have been incurred by the business that, although they can be included in the accounts, are not allowable for tax purposes. This means that an adjustment to the profit shown in the accounts needs to be undertaken to arrive at the profit upon which corporation tax will be charge. A typical example of this is entertaining customers or clients which is not an allowable expense for tax purposes. Whether this makes sense or not, as you’d think that something like taking a customer out for a lunch to chat over a business proposition would be business as usual, is something to debate another day. The facts are that you have to know what costs are and are not allowable for tax purposes and make any necessary adjustments before you submit your accounts and tax return at the year end.
It’s a minefield
The preparation of Limited Company accounts and the Corporation Tax Return is a minefield and best left to the professionals (a suitably qualified accountant) unless you’ve very straight forward financial affairs, some experience in this field or nerves of steel strong enough to carry you through query, inspection or investigation by HMRC.
Accounts are like a car – you could have a go at changing the brakes yourself but you wouldn’t do so if you didn’t have a clue what you were doing.
Check List
If after reading all of this you do decide to give the accounts and tax filing for your company a go then as a final check on your figures work through this checklist.
If your answer to any of the questions is “Don’t Know” then the clue should be loud and clear that you do need an accountant.
Question | Your Response |
Yes / No / Don’t Know | |
Opening Balances | |
Do the opening balances at the start of the year agree to the filed accounts and Corporation Tax return for the previous year? | |
Paying yourself | |
Have you paid yourself a salary, posted this into the Profit & Loss account and filed Real Time Information(RTI) returns at HMRC? | |
Did you pay any Dividends this year? | |
Did you prepare Dividend Vouchers and Board minutes for each dividend? | |
Was each Dividend legal i.e. paid out of profits after allowing for corporation tax? | |
Director’s Account | |
Do you have an overdrawn Director’s Account (i.e. the business has lent you money)? | |
Costs | |
Have you worked from home and claimed any use of home as office costs in the accounts? | |
Did you incur any costs for entertaining clients and have you disallowed these in the tax calculation? | |
Did you incur any other business costs than recorded in the business bank account, via expenses claimed and in the accounts? | |
Were all costs incurred wholly and exclusively for business purposes? | |
Do the accounts include any personal costs which should not have been paid for via the business? | |
Income | |
Did you receive any other income except that recorded in the business bank account and in the accounts? | |
Year End Adjustments | |
Does the company owe anyone or any business anything at the year end other than the amounts included in the accounts? | |
Is the company owed any amounts at the year end other than the amounts included in the accounts? | |
Did the company hold any items of stock of any goods or products at the year end? | |
Did the company have fixed assets in the year where capital allowances need to be claimed? | |
Has the company any loans and, if so, is the split between capital and interest correct as well as short term versus long term liabilities correct in the accounts? | |
Control Accounts | |
Do all Control Accounts reconcile i.e. show the correct balances due or owing at the year end. Control accounts are likely to be PAYE, VAT, Creditors and Debtors. These should be in the Balance Sheet. | |
Accounting Treatment | |
Are all transactions correctly recorded and accounted for in the Profit and Loss Account or Balance Sheets as appropriate? | |
Secretarial | |
Is the Confirmation Statement for the company up to date and correct? | |
Have you included Share Capital in your accounts? | |
Losses | |
Did the company make a loss which can be carried back to previous years for a Corporation Tax Refund? |
An Accountant’s Eye
An experienced accountant will be able to pick up the output from your Cloud Accounting system and review it for potential issues, errors or omissions. They should be able to work with you using the information that you have already generated. The trick is to find an accountant who when they identify an issue will not only correct it but will show you how to avoid that issue occurring in the future.
When in doubt then it really is worthwhile getting an accountant to help, review and file your year end submissions if nothing more than to allow you the peace of mind that everything is done to the rules.