The importance of keeping good bookkeeping records
Short Guide to Keeping Good Accounting Records
Section 1
Any accountant or tax advisor will tell you to keep good accounting records. Not only because they understand the proactive benefits from maintaining organised and accurate records but they have also seen the "horror stories" that actually happen to those who don't.
Why should I keep good accounting records?
Here is an extract taken from the Inland Revenue "General Guide to Keeping Records":
Q: "What happens if I do not keep adequate accounting records?"
A: "The rules allow for a specific penalty up to £3,000 to be charged for each failure to maintain or retain adequate records to backup a tax return"
However, there are additional issues such as:
. Higher accountancy fees for you, due to unnecessary time being spent by your accountant sorting out unorganised records;
. Lengthy Inland Revenue investigations. Should you be unlucky enough to experience an investigation, poorly managed records also results in the whole process taking longer to finalise, causing undue stress and worry to you.
. Lack of control from business owners, including
o bad debts - from forgetting to chase customers for money
o bad credit - from forgetting to pay your suppliers what is due
o bad decisions - unable to carry out good judgement based on accurate and up-to date information
o high tax - due to missing information, and therefore foregoing tax relief
All of the above can be avoided by keeping good accurate accounting records. So, let us look at it from the positive scenario where you do keep good records. This is the new picture I see:
. Peace of mind that fines from the Inland Revenue will be avoided;
. Ability to keep unnecessary accountancy costs to a minimum, leaving you with funds to pay for more beneficial services such as proactive tax and business advice;
. Confidence that any investigations will be resolved with minimal effect on you;
. More control over your finances and direction of your business;
. Satisfaction that you have maximised all tax savings
If you are interested in finding out how to do this, what records to keep and methods to use, read onto section 2. The likelihood is if you have got this far, you will.
Section 2
What does it mean to keep good records and where do I start?
i) Create a system: The first place to start, once you have committed to keeping good records, is to devise a system. What bookkeeping method shall I use? Should I go computerised? Where should I keep the records? How shall I file the documents?
ii) Maintain: After that, a commitment needs to be made to maintain the records regularly throughout the year.
iii) Retain: Keep the records in a safe place for the required time period
i) Creating a system
Is computerised better than manual?
Computerised is better than manual, for 3 main reasons.
1) Computerised programmes are less open to "human" errors making it a more reliable system
2) Computerised methods reduce duplication of work by both you and your accountant
3) Computerised programmes are capable of analysing results of the business in an easier fashion than from a manual system
The above takes care of the things we mentioned in section 1. Just to recap and put into context:
. More reliable; to satisfy the Inland Revenue and accountant
. Saves time, for both you and accountant
. Monitors results of the business more effectively for decision making
Of course, with any electronic data it is important that regular copies are made and stored in a safe place. Also, all original "source" documents, i.e. invoices, bank statements etc need to still be retained to support the computer data.
How to file documents?
This is a personal choice but some common options are:
. By month: A separate folder per month, with sub headings for each type of document
. By document type: A separate folder for invoices, bank statements etc
. By supplier or customer: alphabetically
. By reference: one folder, with documents in no particular order but clearly referenced from 1-1000, for example, which relates back to where it is recorded
Whichever method you choose, be strict with yourself and staff to use the same approach. Having a good filing system saves enormous amounts of time when you are asked to go back over past information.
What records do I need to keep?
In short, all records that make up part of the preparation of the tax return need to be kept.
If you are a business owner, it is also important to keep business records and personal records separately as they make up different sections of the tax return and it avoids confusion if they are treated individually. This involves setting up an independent bank account for business income and expenses to that of your personal finances.
Examples of records that need to be kept are:
Self employment
. Sales invoices
. Purchase invoices
. Business bank statements
. Cheque book stubs
. Paying in book stubs
. Wages workings
. Mileage log
Employment
. P60 / P45
Investments
. Bank statements showing interest received
. Dividend vouchers
. Rental Property Income and receipts for relevant expenses
. Pension paperwork
These are only examples of the main documents and a full list can be obtained from your accountant.
ii) Maintaining records: How often do I need to update my records?
Quarterly should be the minimum frequency to maintain records but monthly or weekly is preferable if you want up-to-date records. Set yourself a day each period to do this and treat it like a meeting that can not be cancelled or re-arranged. If you can get into the habit of doing this you will benefit from up-to-date information at your fingertips as well as early advance warning of tax bills as you will be able to pass your records to your accountants shortly after your year end has passed.
iii) Retaining Records: How long do I need to keep records?
For non limited companies, the requirement for keeping records is 5 years after the due date of that return. For example the 2002 tax return is due for submission on 31/1/03. The records for this return would need to be kept until 31/1/08.
For limited companies, the requirement for keeping records is 6 years after that specific year end. For example, the records for the accounts year end for 31/12/02 would need to be kept until 31/12/08
Summary and Solution
More information about keeping records can be found in full from http://www.hmrc.gov.uk/pdfs/sabk4.pdf
In our opinion, best kept books will be computerised and regularly updated. We are able to discuss the perfect solution for you, if you are a small business owner to ensure this for you.
Where we can help
As an accountancy firm we want to protect our clients from Inland Revenue Investigations as well as help them to regain control of their finances. We already do this for many clients by working closely with them over 3 steps:
. providing software to record their business transactions
. providing training so they feel confident to work on their own and
. providing a high value, reasonably priced, pro-active, accountancy service
If you want to join these people, or simply want to find out more, please contact us on:
T: 01872 242800
E: support@finance4chiropractors.com