According to the latest research from SJD Accountancy, as much as 72% of small business owners manage accounting on their own. Here are 11 bookkeeping facts these millions of amateur accountants ought to know if they want to reduce the level of stress related to managing tax records single-handedly.
Given that the cost of bookkeeping services can be substantial, a lot of small businesses and budding entrepreneurs decide to handle taxes on their own. It may be a good decision, as long as you spend some time to learn the ropes. The following list is intended as a starting point for all amateur accountants.
1. Business costs reduce your taxable profit
All costs incurred exclusively in relation to your business can be claimed as expenses reducing your taxable profit. In other words, these purchases reduce the amount of tax owed to the state.
To claim deductible expenses, you need to provide evidence in the form of invoices and receipts. Thus, if you’re meticulous about collecting expense-related invoices and receipts, you can save yourself a considerable amount.
2. Only some business costs are allowable
You can only claim allowable costs through your business. That is, only the ones which were incurred exclusively in relation to running your business are deductible. You cannot deduct private purchases, such as leisure travels or guitar lessons.
Also, you can’t claim dual-purpose purchases for which it’s not possible to calculate which portion of the expense is business-related.
3. It’s okay to store your invoices and receipts in a digital format
While you may get many invoices and receipts on paper, you don’t have to store paper receipts and invoices. You can make a digital image of your expense-related invoices and receipts and then get rid of the paper copies.
Bear in mind that even when you digitise your expense-related documents, you still need to categorise them and make sure they’re readable and easily accessible in case of a tax compliance check.
4. You need to keep tax records for a specified period
When you do bookkeeping on your own, you have to make sure you store your tax records for as long as the law requires it.
UK-based sole traders must keep their tax records for at least five years after the self-assessment submission deadline which is the end of January. Limited companies keep their tax records for six years from the end of the company financial year. Read this article to learn about the difference between sole traders vs. limited company.
According to the American IRS, the self-employed and small businesses are required to keep their tax records for between 3 to 7 years. In some cases, businesses must keep them indefinitely.
Read this guide on how long to keep tax records in the UK.
5. E-invoicing is 100% okay but still not very common in Europe
Using e-invoicing is allowed according to the laws in the EU as well as in the USA. In other words, you are free to email files with invoices to your clients.
What’s even more interesting is the fact that some countries plan to make e-invoicing mandatory in B2G (business-to-government) transactions, or even in all B2B sales, for example in Italy. The reason for this is mainly to combat VAT fraud.
6. Foreign expenses are okay but remember to convert foreign currency to sterling
It is inevitable that some business purchases happen abroad meaning that you have to know how to handle overseas invoices and receipts. A good example is business travel for industry conferences and meetups.
Expense-related documents issued in another country are okay as long as you convert the amount to sterling using one of the HMRC-allowed methods.
It’s likely that your accounting system can handle multiple currencies for sales and expenses. Learn how to enable and use multi-currency in QuickBooks Online.
7. There’s a difference between invoices and receipts
An invoice is a legally enforceable document which businesses typically issue before the payment arrives, so it’s more of a request for payment. Invoices are evidence that an amount related to the transaction is owed.
Receipts, on the other hand, are used to acknowledge payment, be it cash, bank transfer, credit card, or online. Here you can learn more about the difference between invoices and receipts.
Only valid VAT invoices allow business owners to reclaim VAT if they’re registered for VAT. You can’t reclaim VAT from documents that don’t meet certain criteria. Check out this list of elements required on a VAT invoice valid in the entire EU.
8. Know your deadlines
The deadline for company tax returns related to UK corporation tax is 12 months from the end of the accounting period it covers. The corporation tax accounting period is no longer than 12 months and you can check yours by signing in to HMRC’s online services.
For self-assessment the deadline is 31 January if the assessment is filed electronically. The same deadline applies to all tax that is owed.
9. Long-term assets depreciate, reducing taxable profit
‘Capital assets’ are anything intended to be used for more than a year. Assets are either tangible, or intangible. Tangible assets are, for example, land, properties, goods, machinery or office equipment, while intangible assets are patents, copyrights, or trademarks.
The assets you purchase depreciate over time, which is a cost to your business. It’s not treated the same way as all other business purchases–the value of an asset is typically offset over a longer period, usually over a few years.
In the UK, businesses can write off company assets through capital allowances. This is a framework that allows companies to deduct the cost of some selected assets from the taxable profit instead of using depreciation. The HMRC also offers an investment allowance, which makes it possible to deduct the full value of some items, but not cars or items that you owned before.
10. Cloud accounting systems can do a lot for you
While it makes sense to learn some general accounting concepts (like accounts payable vs. accounts receivable), you don’t have to fully understand them to run your own books.
This is simply because most small business-focused cloud accounting platforms, such as QuickBooks, allow you to simply invoice your clients, add bills and expenses, add company assets, and so on. All ledger entries, balance sheets, financial statements, and tax returns are generated automatically.
11. You don’t have to enter data manually
Some small businesses deal with a lot of paperwork, especially when they buy and sell a lot of goods and services. This can mean a lot of manual data entry, even if you use cloud accounting. Bear in mind that with dedicated add-ons it is possible to reduce the time spent on data entry by using a combination of OCR and machine learning.
There are systems that speed up the data entry process by extracting data from receipts and invoices and exporting it directly to the accounting system.