Chapter 27

Keeping the record straight

What is in this chapter?

• Why you need records (p. 364).
• Which records? (p. 364).
• Using software (p. 365).
• Using a book-keeper or agency (p. 367).

Why you need records

Good accurate records are needed for two extremely important reasons. First, accurate records are needed to help you to know what is going on in your business. This, in turn, means you can keep better control and you can plan for the future. It is impossible to make realistic estimates and projections if the basic data are patchy and inaccurate.

The second reason is that you need to be able to substantiate what is in the accounts.

If you are self-employed or a small company (see p. 63), your accounts do not need to be audited, but they are still required for tax purposes. You do not necessarily have to send accounts in to your tax office, but you must nevertheless still have them and be prepared to produce them if asked. There are hefty fines if you can’t.

You can be asked to provide a tax officer with any information and documents reasonably required for the purpose of checking your tax position. This is an extremely wide power that can mean virtually any type of information or document and can relate to past, present or future tax liabilities. HMRC* can enter business premises to inspect the premises themselves, together with business assets and business documents kept there. HMRC* concentrates its business records checks (BRCs) on those organisations that are more likely to be at risk of having inadequate records. The procedure is that it will write to these businesses to arrange a preliminary visit that will allow its inspectors to complete a short questionnaire. Where relatively minor issues are identified, the businesses will be offered targeted self-help education. Those that are assessed as being at risk of keeping inadequate records will be referred for a more thorough BRC visit.

Which records?

The first and most important record you need is for cash. You need some way of keeping information about payments into and out of your bank account and also any petty cash that you keep on the premises. The aim of your cash records is so you know at any moment how much cash you have.

For those businesses that do not sell all their goods for cash, your records will need to cope with keeping tabs on what people owe you and how long they have owed it. This allows you to forecast what money you will be getting in during the months ahead and enable you to chase debts.

Most businesses will buy goods, services and raw materials from others. Unless you are forced to pay cash for all your supplies, you will need to organise the bills that you have to pay. Following on from this, if you keep stocks of raw materials or stocks of finished goods, you need to have a tally of what there is: what has come into the business, what is currently held by the business and what has gone out.

Once you start employing people, your employee records need to be meticulous; in particular, records relating to your role as tax collector for the government (p. 251) need to be well organised and up to date. You have to report Pay As You Earn (PAYE) information to HMRC* in real time in an online system.

Finally, information about fixed assets, such as cars, equipment or property, needs to be recorded.

Using software

There is a whole range of simple accounts programs for your laptop or tablet and so even very straightforward businesses would benefit from adopting one of these, some of which are not that expensive. Search online for how different people rate different programs to find a cost-effective option suitable for your business and sector.

Of course, you should keep records and carry out other checks to back up the software packages. These include:

• Bank reconciliations: matching up what’s in your bank statement with cheques or payments that have been sent out but not yet cashed or cleared and cheques that you have received (but are not yet cleared). These days with online payments rather than cheques, there should be less discrepancy between the two sets of figures. However, if you do use cheques, remember to keep all cheque books, paying-in books and bank statements, and don’t forget to fill in the cheque stubs.
• Petty cash: you can deal with petty cash items in a number of ways. You could write a voucher or piece of paper each time you use petty cash and keep the voucher in the petty cash box. If you get a receipt for money you spend, staple this to the back of the voucher. Once a month, you could tot these up and put them in your purchases record.
• Sales: every time you make a sale, you should produce an invoice (or, if you are selling for cash, a receipt). The invoices should be numbered and filed in numerical order. As every invoice is paid, any documentation that comes with the payment should be stapled to it. A separate file should be kept for every accounting period.
• Purchases: as every invoice comes in for goods or services that you have bought (or a receipt for items that you pay cash for), it should be numbered and filed in numerical order.
• Fixed assets: if your business is a limited company, you are obliged by law to keep a record of fixed assets.
• VAT: you are required to keep separate VAT accounts if you are registered for VAT (see Chapter 29, ‘VAT’).
• Stock: you need to know at any time what raw materials or finished goods you have got in stock. Going to have a look is not the best way of doing this. Written records are the answer, because they are the best way to control and plan your business, and they will protect against staff pilfering.
• Employee time sheets: for certain sorts of business, for example manufacturing or assembly, records of how many hours employees work are important and are the basis for paying wages. You need a system to record when the employee started work and when the employee finished for the day. You also need to keep records for the working time regulations (see p. 253).
• Wages record: you have certain legal duties towards your employees (see Chapter 19, ‘Your rights and duties as an employer’). These include giving an itemised pay statement and deducting tax and National Insurance contributions from salaries and wages. Proper records need to be kept, and HMRC* provides a system for you to give them real-time information about PAYE and NIC. There are software packages to enable you to keep the following information for all employees:
  • name and address;
  • National Insurance number;
  • PAYE reference number;
  • pay;
  • pension deductions;
  • any other deductions authorised by the employee.

The actual wages record needs to show the payments made:

• gross pay, with a breakdown of how this is made up, for example bonuses and commission, as well as basic wage;
• employee and employer;
• hours worked, if worker is on a variable-hours or zero-hours contract;
• pension contributions;
• total pay this period;
• total pay to date;
• tax-free pay to date (see tables from HMRC);
• taxable pay to date;
• tax due to date (see tables from HMRC);
• tax paid to date;
• tax due on earnings for this period;
• employee’s National Insurance contributions this period;
• other deductions;
• net pay;
• employer’s National Insurance contribution.

This is also information that needs to be set out on an employee’s pay slip. You also need to keep records on statutory sick pay, statutory maternity pay, statutory paternity pay and statutory adoption pay and to keep records to show that you are meeting the requirements on the minimum wage and working time regulations.

Using a book-keeper or agency

A book-keeper, part- or full-time, would free you up to focus on other aspects of your business where your contribution could have more impact. Or, rather than deal with wages records and payroll administration yourself, you could outsource this task to a payroll agency, especially in view of the real-time information reporting requirement (p. 251). Many accountants* offer a payroll service or alternatively you could use a specialist firm. A search on the Internet will throw up many agencies. Your local chamber of commerce* or business contacts may be able to recommend a good one.

Summary

1. You need records to back up what is in your accounts for tax purposes.
2. Planning the business and controlling it cannot be achieved if records are inadequate.
3. Keeping your records in a methodical way is more important than installing very sophisticated systems for a very small business.
4. As your business grows, you need to create control procedures to ensure that you know what has been ordered, what has been received and the supplier invoice agrees with your purchase order form.
5. You need to know who owes you what amount of money at any time so that you can chase slow or late payers.
6. Consider using a book-keeper or agency.