Small Business Accounting does not just entail maintaining the daily books for tax purposes; it is also a vital device for business reporting, identifying theft, fraud, and wastage. Accounting mistakes can result in penalties or fines, especially for submitting accounts late.
Many small businesses don’t keep accurate records because they don’t have the knowledge or time. However, accounting errors made over several years can lead to substantial financial losses. Keeping on top of small business accounting can save money.
A method used by some small businesses is the ‘shoebox method.’ You store all invoices and receipts in a file or box and passing everything over to an accountant or bookkeeper at year-end. We do not recommend this process for running small business accounting.
Accounting and Bookkeeping Services
Most small businesses don’t have an accountant on staff, so they rely on bookkeeping services. A good bookkeeper can enter the transactions and produce the reports required for the company but may not know about taxation.
Accountants take care of complex financial matters, including preparing reports for Companies House and calculating taxes. They also provide the information required by lenders, investors and banks.
Small Business Accounting Errors
If you don’t keep on top of or have procedures in place for small business accounting, it is easy to make mistakes. Some of the most common mistakes are:
- Making Data Entry Errors – It is easy to enter figures wrong, adding an extra 0 or get figures round the wrong way. Using accounting software can reduce errors and save time trying to correct them.
- Not recording all transactions – Even the most minor transactions can help to reduce the tax bill. Make sure you record all expenses and sales.
- Recording transactions twice –
- Accruals and Prepayments – If you are using the accrual basis for your accounting, all transaction will need to go into the correct period. Some transactions may have a timing difference due to invoice received late or services paid in advance.
- Not categorising transactions to the correct account – It is easy to post a purchase invoice to the wrong account code. Accounting software can help to reduce this by setting up rules for invoices.
- Not setting a budget may sound hard to do, but we have developed an Excel Budget template. By keeping track of your budget, you will know if the business is hitting the targets.
- Not Following Accounting Procedures – Within accounting, there are many procedures to follow. It is worth setting time aside to set up your accounting procedures. These may include invoicing, payroll, quotations, deliveries and recording transactions.
- Choosing the wrong accounting software – There are many different accounting packages available and Excel. Take time to choose the best package for your business as it may save time in the long run. Your company requirements might include self-assessment, stock, invoicing, bank feeds, fixed assets, credit control and scanning documentation.
- Not using an Accountant or Bookkeeper – Although they might be an additional cost, they can save you money in fines and their knowledge
Businesses should maintain and develop a sound accounting system to avoid accounting mistakes.
In addition to these accounting mistakes, accounting may involve complex financial issues such as international transactions, taxation, trade financing, mergers and acquisitions, leasing, debt issues, insurance, and real estate properties.
Many business owners find it challenging to understand all of the accounting language and terminology they need to understand and use regularly to complicate matters. Many business owners hire an accountant to help them understand and perform the accounting processes.
Small Business Accounting Taxation
Taxation is a complex issue, with many rules. Here are some of the taxes that the business may pay:
- VAT – If the business has an annual turnover of £85,000 or more, registration for VAT is required. The easiest way to calculate and report VAT is to use accounting software. HMRC has set up Making Tax Digital which requires companies to maintain and submit VAT returns digitally.
- PAYE – If staff are on the books, Income tax and NI will need calculating. The options are either to use HMRC payroll tools, accounting software or specialist payroll services.
- Corporation Tax – It is charged at 19% on all limited companies on any profit generated.
- Self-Assessment Income Tax – If you are self-employed or in a partnership, a self-assessment tax return is required each year. As part of the tax return, the tax and National Insurance calculation take place.
Small Business Accounting Software
There are several options for completing the accounts. Paper records, excel spreadsheets or software. We have created some easy to use Excel bookkeeping templates to assist in the accounting duties.
The most efficient way for businesses to run their account is to use accounting software. There are many different products available; some are free, while most have a monthly fee. Here are our top recommendations:
Free Accounting Software includes Pandle, Bokio and GNU Cash for a desktop option.
Paid software includes Xero, QuickBooks and Sage.
When looking at accounting software, start by listing the requirements, including stock, debtors, creditors, bank feeds, purchase orders, and auto entry for documents. Most packages include a free trial; this will help see if the package is suitable for the business needs.
For those small businesses that are just getting started or for those that are experiencing difficulties with accounting practices and the bookkeeping process, an accounting service may be an excellent solution. The accounting experts will provide training on proper bookkeeping and accounting practices. They will track and monitor accounting transactions and manage accounting duties. Small businesses will no longer have to worry about accounting errors and immediately address problems associated with accounting errors.
For further reading, check out the accounting basics section.