Something we are asked regularly by our clients is, what’s the best accountancy method to use? It’s a decision that every small business or self-employed individual needs to make, but first, they need to establish which method is best for them. In this blog we’ll explain the types of accounting and what’s involved in each one, helping in some way to make that choice a little bit easier.
We all know that it’s a legal requirement for businesses to keep records of their income and expenses for their tax return. However, what’s required varies from business to business, for example, if you are self-employed and act as a sole trader or as a partner, then you’ll need to keep records of your personal income tax along with your business returns. If you’re the nominated partner in a partnership, then you must keep records for that partnership too.
Limited Companies need to provide a lot more information about the company itself. Keeping track of financial data for a Limited Company can be complex. It’s not complicated but it is time-consuming and needs a lot of attention which is why it’s recommended that you hire a professional. At SRM Accountancy we can help you not only choose the right style but support or manage your accounts and tax returns, leaving you to manage your business.
So, just how do you go about choosing the best accounting method to suit your business? Well, there are two main accounting methods, Traditional accounting and Cash basis accounting.
Traditional accounting, otherwise known as “accrual basis ”, accounting, calculates your profits based on when you send s or receive invoices – regardless of whether you actually received or spent the money.
Many businesses use traditional accounting where you record income and expenses by the date you issued an invoice. For example, let’s say you invoiced a customer on 28 March 2021, and you record that invoice for the 2020 to 2021 tax year – even if you did not receive the money until the next tax year i.e. after 5 April 2021.
Cash Basis Accounting
This accounting method is a favourite for sole traders as it is a far more straightforward method to use than others. It looks at when your business spent or received money. It doesn’t actually focus on invoices received.
With this method, you only record income or expenses when you receive funds or pay a bill, which means you won’t need to pay Income Tax on the money you have not yet received in your accounting period.
This method is also the easiest to use if you earn less than £150,000 per year. Once your business is really ticking along and you are earning more than £300,000 a year, you must switch to the traditional method of accounting.
The importance of record-keeping
If you are self-employed and under the above accounting methods, there are certain records you need to keep, they include:
● All sales and income
● All business expenses
● GST records if you’re registered for GST
● PAYE records if you employ people
● Records about your personal income
● Your grants, if you claimed for any of the States of Jersey support schemes i.e.:
○ Co-Funded Payroll Scheme (CFPS)
○ Visitor Attraction and Events Scheme 2 (VAES2)
○ Visitor Accommodation Support Scheme (VASS)
○ Fixed Costs Support Scheme (FCSS)
○ Business Disruption Loan Guarantee Scheme (BDLGS)
But why do I need to keep these records?
The Income Tax department may ask to see proof of any information provided, so it’s necessary to retain all your receipts for goods and stock, keep a record of your business account’s bank statements, chequebook stubs, sales invoices, till rolls and bank slips too.
What records do I need to keep if I elect for the traditional accounting method?
As well as the standard records required, you also need to retain information on the following:
● What you’re owed but have not received yet
● What you’ve committed to spending, but have not paid out yet, for example, you’ve received an invoice but have not paid it yet
● The value of stock and work in progress at the end of your accounting period
● Your year-end bank balances
● How much you’ve invested in the business in the year
● How much money you’ve taken out for your own use
So in a nutshell, the accounting method you choose will depend on your type of business, be it sole trader, partnership, limited company etc. The information you must keep also varies according to the accounting method you choose to adopt.
Think carefully before deciding, make sure you understand the level of time and commitment required which could become a distraction from the day-to-day running of your business. Ask yourself if you have the right tools to gather and store the required information. If not, you’d be wise to seek out the support of an accountant like SRM Accountancy to assist you with effective
record-keeping and accounting.