Online bookkeeping software such as Xero, Sage One and QuickBooks have absolutely revolutionised bookkeeping for so many businesses. There is a danger though, that in making a lot of the traditional bookkeeping tasks so simple, they lead business owners to overlooking some parts of bookkeeping and accounting which are superficially similar but can have a huge effect on the ultimate profitability of the business.
It is absolutely vital to understand how everything should be recorded, and to ensure that everything is recorded correctly. Over the years I’ve been assisting business owners with their bookkeeping and accounts, I’ve come across some very common, and potentially damaging, bookkeeping mistakes, and have listed some of them below.
1. Revenue and capital expenditure will influence your profit and loss and balance sheet, if incorrectly treated your tax liability will be affected.
1.1. A revenue expenditure is assumed to be consumed within a very short period. An expenditure in the ordinary conduct and administration of your business. Example: rent,
salaries and wages, carriage on salable goods, office day to day costs etc.
1.2. A capital expenditure is assumed to be consumed over the useful life of the related fixed asset. Items that are bought to assist in the running of the business and will remain in
the business for a long time – generally for more than a year. Example: property, plant or machinery, office equipment, furniture and fixtures or motor vehicles etc.
1.3. A capital expenditure (Fixed Asset) will generate a revenue expenditure transaction in the accounts known as depreciation. You reduce the value of the fixed asset over an
2. Paying yourself will influence your tax liability if treated incorrectly, and accounting laws and procedures must be adhered to.
2.1. A Limited Company is a separate entity and all finances belong to the company. You must follow certain procedures
2.1.1. Pay yourself a director’s salary through PAYE, you must register your company with HMRC
2.1.2. Pay yourself a dividend payment from available profits, you must be a shareholder. Available profits after Corporation Tax. You must hold a board meeting to ‘declare’ a
dividend, minutes must be taken and keep a dividend voucher to show details of the payment.
2.1.3. Take money out of a limited company as a director’s loan, either by lending money to your company or borrowing money from your company. If you owe your company less than
£10,000 you may have tax consequences if not repaid within 9 months and 1 day from the company’s accounting year end date. Your company will be liable to Section 455 Tax
at 25%. If you owe your company more than £10,000 you will have to declare the loan on your Self-Assessment tax return. The company will then have to pay additional
Section 455 Tax at 25%.
2.1.4. Take money out of a Limited Company as expenses. There may be times when you have paid for a business expense out of your own pocket, but you can reclaim this money
from your company by keeping the receipt and completing claim forms. These expenses can be reimbursed to you every month or at any other interval that is convenient. Every
year you should complete a form P11D to show how much you claimed in expenses and you must include the expenses in your Self-assessment tax return, otherwise, you will
be taxed on this money.
2.1.5. A Sole Trader and Partnerships will not be eligible to pay themselves through PAYE, when they take money out of their business it is accounted for in the Profit and Loss
(Revenue less expenses).
3. Underutilising your systems and reporting can be detrimental to your business; you may not be able to predict where your business is heading, and bad decisions are often made.
There are good online accounting systems, time and effort to understand what financial information is crucial for you to know about your business, you can set up your accounting
system to record the information useful to you. You may wish to ask to advise on what is available from your existing system, or maybe it is time to look at something new.
3.1. Different revenue groups for your goods or services
3.2. Costs incurred against each of your revenue groups
3.3. How much profit and money are you making on each of your revenue groups
3.4. No key performance indicators
4. Inaccurate and late accounts can have a catastrophic effect on your business, I have seen too many businesses either making incorrect decisions or no decisions quick enough, too
much money has been taken out of the business which they cannot afford or could have made capital expenditure decisions within a Company Tax Year that would have been more
tax efficient. Late account filing will incur additional costs in penalty fines. Know when your accounting filing deadlines are and ensure you keep accurate and timely records.
5. Leakages commonly happen when businesses continue to have one, many or all the following: -
5.1. Direct debit or Standing order payments paying for services you no longer need or have.
5.2. Not reviewing your costs and prices, not all suppliers will notify you of price increases, they just happen and not on your radar
5.3. Stock held for products to re sale, there is a danger of holding too much stock that is not moving quick enough to generate cash for you. Lead times for selling products can be
tricky to get the right balance.
5.4. Manufacturing raw materials wastage can be higher than you would like. Reviewing your order book and getting good prices on your raw materials to meet your gross profit
margins you require. How much off cuts will you be left with; can they be used on other jobs?
5.4.1 Work in progress (WIP) refers to partially completed goods that are still in the production process. The value of the WIP is typically measured at the end of an accounting period.
To assign a valuation to the amount that is on the production floor. Raw materials, labour and overhead costs incurred for products that are being manufactured.
I genuinely hope that this article is helpful. The list is by no means comprehensive, but in my experience, these are some of the most common mistakes. Importantly, if you are confused by any of the numbers in your business, or how you should account for them, it is vital that you seek guidance from your accountant or bookkeeper.