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Accounting is often one of the first aspects small business owners hand off when their business scales.
But while you can delegate your accounting to a professional, it’s still important that you have a good grasp of the basics. With this knowledge, you can more easily stay on top of your day-to-day bookkeeping or accounting responsibilities, and communicate with your business stakeholders.
There are a few key accounting terms and concepts you should know.
The balance sheet and profit and loss statement are two important financial statements every business owner needs to review. The balance sheet provides a summary of a company’s financial condition, and reports its assets, liabilities and owners’ equity at a specific point in time.
The P&L shows a company’s revenues and expenses. It also comprises other key elements like COGS, gross profit and net profit or loss.
The phrase “cash is king” rings true, particularly for small businesses. The cash flow statement, which indicates how much money is flowing in and out of your business is one that you should review on a regular basis. Optimising your accounts payable, staying on top of your accounts receivable and conducting in-depth cash flow analysis at least once a month are examples of steps you can take to improve your cash flow.
As a small business owner, having a good grasp of your business financials is key-even if you've hired an accountant.
While you can delegate your accounting tasks, understanding the basics will place you in a better position when it comes to discussing your business finances with your team members, financial professionals or potential investors.
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Previously, we've explained about the top accounting terms and concepts you need to know. In today's post, we'll explain the differences between bookkeeping and accounting. While these two terms are often used interchangeably, they refer to two vastly distinct functions and roles.
Running a business involves catering for many aspects of the business that can bog you down.
You can even forget crucial roles, such as monitoring your small business finances. Although budgeting may not be the best and most exciting part of running an enterprise, it is fundamental for success.
When starting a new business, a budget is a vital part of your business plan. Once the business is open and operational, then budgeting becomes an essential exercise that takes place annually or quarterly.
A budget comprises of fixed and variable costs accompanied by the allocation of monies to reflect business objectives.
A broad swath of small business owners are tackling the myriad tasks required to pay bills, invoice customers, cut checks to employees and contend with past-due accounts, among other accounting tasks.
While that might work for very small businesses, it often opens the door for firms to make accounting mistakes that undermine their growth and siphon precious time and mental focus from other important areas of their business.
Here are five accounting mistakes that can derail growth for small businesses and how to avoid them.
Your annual accounts are prepared from your company’s financial records at the end of the financial year. It must include:
All limited companies are required to file their annual accounts at Companies House each year. In addition, you’re required to send a copy of your annual accounts to all shareholders, individuals who attend your company’s general meetings, as well as to HMRC (as part of your company tax return).
There are several deadlines you need to take note of.
The deadline for filing your company accounts is nine months after your accounting reference date—or your company’s financial year end, while your company tax return must be filed 12 months after the end of your company’s accounting period for corporation tax. If you’re in your first year of trading, your annual accounts are due 21 months after you’ve registered with Companies House.
Keep in mind that if you fail to meet your deadlines, the penalties for late filing may range from £150 for filing under a month late, to £1,500 for filing more than six months late.
Approaching a company's first year-end can feel incredibly stressful, as there will be a lot of paperwork you need to file at this time.
In this article we provide you with a simple list of what you will need to do, along with a few tips to make the whole process easier for you. We finish with the penalties and deadlines for late filing.
The Partnership Statement (SA800(PS)) is used to record details of your earnings from sources other than trading and professional income indicated on your SA800 Partnership Tax Return.
Your first set of accounts is due 21 months after the date you registered with Companies House. Your accounts for the subsequent financial years are due nine months from your financial year end. Do note that if you change the accounting reference period, the filing time may be reduced.
Different deadlines apply for public companies.
A year end refers to the end of a company's financial year. As such, the year-end accounts are a summary of a company's performance across the financial year, and will typically include a directors' report, balance sheet, profit and loss statement and explanatory notes. These financial statements and reports, along with the company tax return (CT600) must be filed with HMRC.
1. HMRC - Companies must register with HMRC to file online and obtain a user ID and password.
2. Companies House ‚- To file online companies must obtain an authentication code from Companies House
Alternatively, the accounts can be posted to Companies House.
Limited companies and limited liability partnerships are required to file a confirmation statement (CS01) to Companies House each year. The document details information about a company’s capital position, ownership, management and activities, and helps verify that the information Companies House has about your business is up to date.
You can file your confirmation statement online, by post, or by using a third-party service (such as our GoForma accounting packages) to complete your filing. If you aren’t subscribed to our packages, completing your filing online will be your best option. It’s faster to complete the form online, and cheaper too—it costs £13, compared to the £40 fee for filing a paper form.
You’ll need to fill in the ‘additional information’ section of the form if there are changes to the following details of your company:
Keep in mind that even if there hasn’t been any changes, you still need to check the existing details to ensure that they’re accurate.
You need to file your Confirmation Statement up to 14 days after the due date—which is 12 months after the date your company was incorporated, or 12 months after the date you filed your previous Confirmation Statement.
We can’t emphasise enough on meeting your filing deadline. The penalties for late filing can be severe—your company and its officers could be prosecuted, with your company struck off the register.
A confirmation statement (CS01) is a document that limited companies and limited liability partnerships must file at Companies House annually. It details information about a company's capital position, ownership, management and activities, and helps verify that the information Companies House has about your business is up to date.
You can file your confirmation statement online. You may view Companies House's video for instructions on how to file your confirmation statement.
A confirmation statement (CS01) is a document that limited companies and limited liability partnerships must file at Companies House annually. It details information about a company's capital position, ownership, management and activities, and helps verify that the information Companies House has about your business is up to date.
As a sole trader, how you get paid is fairly straightforward—you pay yourself through personal drawings from your business.
If you’re running your own limited company, there are two main ways in which you can pay yourself: by taking a salary or drawing dividends.
As the director of a limited company, you’re also considered an employee. As such, any salary you draw will be paid through the PAYE scheme—similar to how other employees of the company will receive their pay. You’ll run a payroll, report to HMRC and receive your salary (after income tax, along with Class 2 and Class 4 NICs have been deducted at source).
Dividends are payments of profit that a limited company distributes to its shareholders, and typically paid out on a monthly or quarterly basis. Corporation tax isn’t levied on dividend payments; depending on the amount of dividends paid out, each recipient may have to pay dividend tax.
For the 2021/22 tax year the most tax-efficient salary will usually be £8,840 per year, which is the NI Secondary threshold amount. There are important tax implications you need to consider when you’re deciding on the amount you should draw as a salary. If you decide to draw a very low salary (or not at all), you risk missing out on maternity benefits, part of your personal allowance and pension entitlement.
A dividend is money that's paid out by limited liability companies to investors, usually on a quarterly or annual basis. These payouts are based on the quarterly profits of your company as well as the amount of stock you own.
Dividends are calculated based on profits-what is left in your company after all expenses have been paid-not revenue.
Dividends can be either paid in cash or reinvested into your investment portfolio via dividend reinvestment, or via SCRIP dividends-which allow companies listed on the LSE to give investors additional shares instead of cash payouts.
Dividend tax refers to the rates by which those dividends are taxed according to HMRC. Each year, these tax rates may differ.
<p>As a <a href="https://www.goforma.com/knowledge-base/what-is-a-limited-company" target="_blank">limited company</a> director, you have greater flexibility to work around the tax system, and are able to implement <a href="https://goforma.com/tax" target="_blank">tax optimisation strategies</a> not available via other <a href="https://goforma.com/limited-company/sole-trader-vs-limited-company-vs-umbrella" target="_blank">business structures</a>. </p><p>One of these ways is to draw dividends from your company, as opposed to receiving a salary; doing so can help to reduce your tax bill.</p><p>If you're <a href="https://www.goforma.com/self-employed#how-to-start" target="_blank">newly self-employed</a>, this can be rather confusing. </p><p>You might be wondering: How can dividends help reduce my tax bill, and what taxes do I need to pay on them? Are there additional considerations I need to keep in mind?</p><p>These are the questions we'll be answering below:</p>
A dividend is a payment of profit that a limited company distributes to its shareholders. This is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.
Dividends are important as they are a tax-efficient way to pay yourself from your limited company. Other than drawing dividends as income, you may also consider paying dividends into a pension fund, ISA or to family members.
As a self-employed person or limited company director, staying on top of your filing deadlines is key. The last thing you’d want is to get into the bad books of HMRC, and incur unnecessary expenses like penalties for late filing.
The filing deadlines for sole traders are as follows:
And if you’re running a limited company, the following filing deadlines will apply:
Tax season can be stressful for small business owners.
You don't have the convenience of having an employer filing for you. While there are all kinds of tips and strategies for managing your taxes, the first order of business is to get key deadlines noted on your schedule, and determine how and when to make your payment.
Here's what you need to know:
As a contractor running your own limited company, you need to be aware of the following deadlines:
You can change your company's year-end-otherwise known as the accounting reference date (ARD). Changes can be made to your current financial year or the year before.
Your company's financial year can be shortened as many times as you want, with the minimum duration you can shorten it by being one day. You can lengthen your company's financial year by up to 18 months once every five years. If [other conditions apply](https://www.gov.uk/change-your-companys-year-end#:~:text=You can change your company's,the one immediately before it.), such as if your company is in administration, you'll be able to lengthen your financial year more often.
If you're paying salaries to employees or directors, you need to register for PAYE and pay your PAYE bill to HMRC.
There are various ways to make your payment.
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As a limited company director, there are several important deadlines you need to be aware of. These are:
Accounting is often one of the first aspects small business owners hand off when their business scales.
But while you can delegate your accounting to a professional, it’s still important that you have a good grasp of the basics. With this knowledge, you can more easily stay on top of your day-to-day bookkeeping or accounting responsibilities, and communicate with your business stakeholders.
There are a few key accounting terms and concepts you should know.
The balance sheet and profit and loss statement are two important financial statements every business owner needs to review. The balance sheet provides a summary of a company’s financial condition, and reports its assets, liabilities and owners’ equity at a specific point in time.
The P&L shows a company’s revenues and expenses. It also comprises other key elements like COGS, gross profit and net profit or loss.
The phrase “cash is king” rings true, particularly for small businesses. The cash flow statement, which indicates how much money is flowing in and out of your business is one that you should review on a regular basis. Optimising your accounts payable, staying on top of your accounts receivable and conducting in-depth cash flow analysis at least once a month are examples of steps you can take to improve your cash flow.
As a self-employed person or small business owner, getting a good grasp of accounting fundamentals can feel like an uphill task.
As accountants who specialise in small business needs, we're familiar with the challenges that you face-and have put together a series of articles to help you easily understand the basics of accounting.
We've touched on key accounting terms & concepts and the differences between bookkeeping and accounting. Below, we'll dive in to explain what debits and credits mean in accounting.
Whether you're self-employed or running a small business, you need to stay on top of your business finances.
While you can delegate your company's financial affairs to your accountant, it's still important to have a good grasp of the essentials-such as basic accounting terms and concepts. With this knowledge, you'll be better able to communicate with financial professionals, team members and potential investors.
To help you get started, we've written up an introductory guide to accounting terms you need to know:
This refers to money owed to the business by its creditors (suppliers, vendors and other service providers). These are recorded as a liability on the balance sheet.
This refers to money owed to the business by its debtors (clients and customers). The amounts are recorded as an asset on the balance sheet.
Accruals are amounts that are unaccounted for at the end of the accounting period. These can be expenses that have been incurred or revenue that has been earned, but aren't yet recorded in the accounts.
Any resource that is owned by a company. There are two main types of assets: current assets and non-current assets. Current assets are expected to be consumed within a year, while non-current assets are expected to be held for longer than a year.
The balance sheet shows how much a business owns (assets), owes (liabilities) and the amount that is left over for its owners (owner's equity) at a point in time.
Cash flow refers to the total amount of money that is moving in and out of your business.
The chart of accounts is a listing of all the accounts used in the general ledger of the business.
The total of all costs associated with producing your products or services.
An accounting entry that increases a liability or owner's equity account, or decreases an asset or expense account. The term may also be used to refer to an entry on the right side of a T-account.
An accounting entry that increases an asset or expense account, or decreases a liability or owner's equity account. The term may also be used to refer to an entry on the left side of a T-account.
The measurement of the decline in the worth of an asset.
Common methods of depreciation include: straight line, units of production, sum-of-years-digits and double-declining balance.
Dividends are a payment of profit that a limited company distributes to its shareholders.
It is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.
In the UK, the GAAP is a set of accounting standards published by the UK's Financial Reporting Council (FRC) for reporting financial information.
A record of all the accounts that a business uses.
The accounts are classified into three categories: assets, liabilities and equity accounts.
The P&L is a financial statement that shows how much money your business has made or lost.
Debts and obligations of a company.
There are two main types of liabilities: current liabilities and non-current liabilities. Current liabilities (otherwise known as short-term liabilities) are due within a year, while non-current liabilities are due after a year.
Equity can have several meanings in accounting.
Firstly, it refers to the net amount of finances an owner has invested in the company.It can also refer to the residual value of assets less liabilities, as represented by the accounting equation ‘Equity = Assets - Liabilities'.
Costs incurred by a company for revenue generation.
A few common types of expenses a business may incur are:
Otherwise known as net profit, net income refers to a business' financial position when the total revenue is more than the total expenses.
Present value is a calculation that measures the current value of a sum or stream of money to be received in the future, through adjusting for inflation and interest.
A metric of profitability used to measure the gain or loss that an investment generates, relative to the sum of money invested.
The amount of money a company receives from selling its goods or providing its services.
It refers to the amount earned before expenses are deducted.
A trial balance is a report that lists the balances of all general ledger accounts of a business at a specific point in time.
An expense should be recorded in the same period that the related revenue is earned.
For small business owners and contractors who have just started out, staying on top of your business finances and documents can be daunting.
Here's where our article comes in, so you can quickly get a grip on the basics.
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The government has committed to continue paying 80% of employees' wages when they are unable to work, with employers not having to make any contributions until July 2021.
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As part of the covid support package from the government, the the Chancellor confirmed that he will extend the self employed income support scheme with those submitting a self assessment tax return before midnight 2nd March being eligible.
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The £20 weekly uplift in Universal Credit has been extended for a further 6 months, with Working Tax Credit claimants being eligible for a £500 one-off payment.
For self-employed persons or employers, it can be challenging trying to understand the rules surrounding benefits in kind. These can be complicated; some benefits are taxable while others aren't, and it gets tricky figuring out which rules apply to your situation.
To make things a little easier to understand, we've written up a quick guide below. After reading our guide, you'll understand what benefits in kind are, have a clearer idea of which ones are taxable (and which ones aren't), and get an overview of what you need to do when it comes to reporting and paying taxes on benefits in kind.
Do keep in mind that this isn't a definitive guide, as HMRC's decision to impose a tax varies by situation. If you need specific advice, doconsult our specialist accountants at Forma.
Speak to one of our accountants on a free 30 minute accounting consultation.
Reach more about our complete guides to Limited Company Accounting...
As a small business owner, you’re always on the lookout for ways you can save money. Therefore, deciding whether you need to get an accountant can be a difficult decision—as that’s an additional cost that you’ll incur.
But managing your business financials well is central to your small business success—and that’s something that an accountant can help you out with.
If you’re still on the fence about this, here are questions that can guide you towards making a decision:
Here are a few things to keep in mind when you’re selecting an accountant:
Should you stick with your current accounting practices—or is it time to implement a new way of handling your accounting? Here are the signs that indicate it’s time to make the switch to accounting software:
Most businesses need to submit their VAT return quarterly (this applies even if you don't have VAT to pay or reclaim). The deadline for submission is a month and seven days after the end of a VAT period.
Online returns must be filed by 31 January. Paper returns are due earlier, and must be filed by 31 October.
As a limited company director, you’re required to file the following:
Unlike limited company directors, sole traders aren’t required to file accounts with a public body.
Cash flow refers to the total amount of money that is moving in and out of your business.
The balance sheet shows how much a business owns (assets), owes (liabilities) and the amount that is left over for its owners (owner’s equity) at a point in time.
The P&L is a financial statement that shows how much money your business has made or lost.
Dividends are a payment of profit that a limited company distributes to its shareholders. It is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.
At the end of a business’ accounting year, limited company directors are required to file the following...
A DLA is is a record of all transactions between the company and its directors. It records not just the money owed by the directors, but also the money owed to them. At the end of the financial year, the amount is recorded in the balance sheet either as an asset or liability.
Benefits in kind are benefits provided to a director or employee that aren't included in their salary or wages. These can be assets or services, such as company cars, private health insurance or non-business travel and entertainment expenses.
Self Assessment is a tax return form that businesses need to submit to report their annual earnings to HMRC. The term ‘self assessment’ refers to the fact that it’s the individual’s responsibility to work out how much tax they should pay.
Payments on account are advance payments for your tax bill that are spread out across the year. You'll need to make two payments each year, and these are due on 31st January and 31st July.
The P11D form is a tax form that records employment benefits that the employees and directors of a company have received across the year.
Holiday pay is calculated based on a week's pay. The calculation will vary, depending on the kind of hours an employee works (fixed hours, shift work with fixed hours or no fixed hours) and how they are paid for the hours. We’ve elaborated more on this, as well as payment for overtime and commission in a separate article.
Entrepreneurs' Relief is a scheme that reduces the amount of Capital Gains Tax payable when you dispose of (sell) shares in your business. You pay a reduced tax rate of 10%— instead of the usual rates—on the first £10 million of gains. There isn't a limit to the number of times you can claim.
‘Cash is king’ is an adage that holds true—particularly when it comes to small business finances. Even profitable companies are faced with the threat of closure, if negative cash flow becomes a regular occurrence.
Keeping a firm grip on your cash flow is key, and we’ve outlined a few tips you can implement:
