How to do small company accounts
Covering everything from legal requirements to what records to keep, our invaluable guide will explain how to tackle small business bookkeeping without losing your mind.
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As anyone who’s done it will tell you, running your own small business is an exhilarating rollercoaster ride. You’re a multitasking supremo keeping your company in the black, tackling everything from doing deals with new customers to creating attention-grabbing social media content. It’s stressful of course, but it’s very rarely dull.
And business owners would also tell you that the major exception to this is the dreaded end of year accounts. Accounts are not fun – they’re annoying, fiddly, and time consuming. However, it's the law, and there’s no way around them – they need to be submitted on time, and they need to be correct.
Using a professional accountant can make a huge difference, but you still really need to know how the whole process works, so you can keep good records throughout the year and cut down the hours your accountant bills you.
That’s where we come in. This guide will tell you what you need to know about small company accounts, including what you absolutely have to do to satisfy HMRC and Companies House, and the best way to keep records of the specific information they’ll need every year.
You’ll learn exactly how to prepare for the entire process, and what to ask your accountant when it’s done.
Business bookkeeping tools – how to make the process easier
The cliched image of accounts season is harassed people running around like headless chickens in a desperate search for vital bits of paper.
It’s also, if you’ve got any sense, completely wrong – any small business owner wanting to save themselves such deranged scenes just needs to use accounting software to digitally create and store purchase orders, invoices, quotes, and anything else produced by their business. Many packages are also specifically designed for SMEs, so they’re perfect for use as small business bookkeeping software.
There are loads of choices available, with some of the top-end plans even adding extra features like cash flow forecasts and tax bill estimates, so you’re bound to find one that suits your needs.
Check out the table below to see which providers have been given the Startups.co.uk seal of approval, and click on any you like the sound of for more info.
Legal requirements for end of year accounts – what does the law say you have to do?
A vital part of small business bookkeeping is knowing what you have to submit and when, so here’s the lowdown.
- All limited companies have to submit end of year accounts to HMRC, along with their corporation tax return
- Both of these are submitted online within 12 months of the end of your company’s financial year
As you’d imagine, this is hugely important for any company – HMRC uses your accounts to check your tax calculations, so not doing so (or submitting late) can have all sorts of nasty consequences.
The law also requires you to:
- File statutory accounts with Companies House within nine months of the end of your company’s financial year, while keeping detailed accounting records
If you qualify as a small company in the eyes of HMRC (see below), then you can submit abridged accounts to Companies House and don’t need to be audited.
You will, however, still need to submit more comprehensive accounts to HMRC – it’s only your statutory accounts that can be abridged.
Statutory year end accounts – what are they, and how are they different?
Statutory year end accounts – often known as ‘financial statements’, to differentiate them from the normal accounts you use to run your business – differ in two main ways from the company accounts you send to HMRC with your corporation tax return.
Firstly, these financial statements are sent (or, more accurately, submitted electronically) to Companies House. Their purpose is to give an overview of your company to anyone searching the Companies House register – in other words, they demonstrate the reliability and solvency of your company. You also must give a copy to any shareholders in your business.
Financial statements also have a different deadline to accounts sent to HMRC – they must be submitted within nine months of the end of your company’s financial year.
There’s also one other difference – any company that satisfies the “small company” criteria set out by HMRC (see above) only has to submit an abridged financial statement (but must still send full accounts to HMRC). If you fulfil this requirement, all that’s needed is a balance sheet signed by a named director.
Everyone else, though, will need to submit full accounts. This brings us nicely onto:
What do I need to include in my statutory year end accounts?
To start with, you’ll need a director’s report. This is, as you’d expect, a statement written by the company directors which gives an overview of how the business is doing. It should include a summary of how the business performed throughout the year, as well as the directors’ view of its current state, and how they expect it to perform in the future.
There are two other vital documents that must be included:
- A balance sheet – this is a record of the total sum (i.e. the financial value) of the company’s assets (the things it owns) and liabilities (the things it owes) at the end of the accounting period (your financial year).
- A profit and loss sheet – this should give a summary of your income and expenses over the previous accounting period, including records of your sales, expenses, tax calculations, and – crucially – the total amount of profit or loss over the period.
The key difference between these two is that the balance sheet gives a snapshot of your business at a particular time, while the profit and loss sheet explains how your company performed over the entire financial year.
Finally, it’s a good idea to also include explanatory notes that add further detail to the balance/profit and loss sheets, so that the figures are given proper context.
Can I prepare my own limited company accounts?
Theoretically, there’s nothing to stop you preparing and filing your own accounts.
However, there’s a reason almost every company in the UK uses an accountant for this – it’s a time consuming and difficult process, and getting it right will take a lot of time and effort that could be spent boosting your business in other ways.
Barry Cumberlidge, Client Director at small business accounting specialists Moose, strongly backs up this view:
“You can prepare and submit your own company accounts, but a tiny minority choose this option as the software available to do this is limited. It would only be advisable if you’re a qualified accountant, but even in these circumstances, they tend to employ Moose to file on their behalf.”
However, businesses should view this as an opportunity rather than a financial burden, with Cumberlidge identifying three areas where accountants can really help small businesses:
- Incorporation – If you are starting a business with a colleague, an accountant can help ensure the right structure and associated agreements are in place. They can also, as Cumberlidge puts it, “assist in asking the founders the tough governance questions”.
- Investment – For any company looking for investment, having neat and tidy books to show prospective investors is really important. Additionally, an accountant can help you apply for funding through the Seed Enterprise Investment Scheme (SEIS) and/or the Enterprise Investment Scheme (EIS), which offer tax relief to individuals that invest in your company.
- Tax savings – This is the crucial benefit for most companies. Using an accountant will ensure that you are claiming all of the costs you can and utilising all capital allowances, meaning you pay less tax. They can also help you with applying for R&D tax credits, which can provide a handy cash injection for eligible businesses.
Finally, Cumberlidge discusses how Moose works with its clients, and emphasises how accounting software can make the whole process much quicker and easier:
“We normally work with the company on a daily/weekly/monthly/quarterly basis with an accounting tool such as Xero, Quickbooks or Freeagent (we have a preference for Xero), which means the collation of data is expedited compared to 10 to 15 years ago.
“Utilising the information from these tools, we then pull the data into our practice management software, and prepare the statutory accounts format for review by the client.”
This last bit is important to note – using accounting software is not an alternative to using an accountant, but a much more efficient way of working that will also make it much easier and quicker to collaborate with your accountant.
How do I plan my annual accounts? – Smart bookkeeping during the year
As any good boy scout knows, if you fail to prepare, you prepare to fail. As clichéd as this may be, it’s not a bad motto for life, and it’s definitely how you should approach accounts season.
To avoid tearing your hair out looking for vital bits of paper later, it’s really really important to keep proper records during the year. You need to easily be able to get hold of your sales receipts, or payment invoices, or your tax returns. And this doesn’t just make a big difference when you’re putting together your end of year accounts – keeping on top of this stuff while you run your business will mean you have much better knowledge of the money coming in and going out.
Take control with accounting software
Using accounting software makes this loads easier – you’ll be able to create invoices, quotes, estimates, and almost all the other business documents that you might need on the go. What's more, everything is stored in the cloud, meaning that it’s always at your fingertips whichever device you’re working on. There are loads of different options out there so it’s easy to find one that fits your company, and some of the more comprehensive plans will even estimate your tax bill as you progress through the year. To get started, check out our quick guide to the best small business accounting software.
Decide a plan of action
When it comes to actually putting together your end of year accounts, you first need to decide just how much work you want to do yourself. You will almost certainly have to use an accountant at some point, but keeping accurate records (as discussed above) will reduce their workload (and billable hours). Once again, accounting software can really come in handy here – many plans allow you to give access to your accountant, so they can easily access the records they need.
Once you’ve hired an accountant, remember to view them as a useful resource, rather than a necessary evil. For example, make sure to ask how you could reduce your tax bill before the end of your financial year – for example, you can sometimes make significant tax savings by bringing forward certain expenditure to reduce your company’s profit in that financial year.
Just as importantly, once the end of year accounts have been submitted, it’s a great idea to book a closing meeting with your accountants in order to identify areas for improvement over the coming year. For example, you could ask their opinion on whether you should upgrade your accounting software (or how it could help your business if you’re not using it), or how you can manage your creditors more effectively. You can also get expert insight into how you can control costs, make tax savings, and manage your business’s cashflow more effectively.
What accounting records do I need to keep? – What you do (and don’t) need to track
Generally speaking, when you’re running a small business, it’s a pretty good idea to keep a record of almost everything that happens in your business. Accounting software makes this much easier – all your documents and data are stored in the cloud, meaning it’s basically impossible to lose them, and they don’t take up any space in your office.
However, if you’re just starting out and don’t want to keep everything, there are some key accounting records you are legally required to keep.
- Income and expenditure records – You need a record of when and how your business spends and makes money, so make sure to keep records of all sales and purchase receipts, cheque books, and up-to-date bank statements.
- Unsold stock and uncompleted work at year end – These are known as ‘floating assets’, and are really important for service businesses who often have a lot of work in progress that cannot be counted as a fixed asset (see below).
- A register of fixed assets – This is a list of the equipment and property your company owns, including the value of each piece and other important information. It does not include stock, which would come under the ‘floating assets’ discussed above.
- A record of company liabilities – Liabilities are essentially things your company owes, so this should be an accurate and complete record of any debt or investment your company has taken on.
- Staff payroll information – HMRC keeps a particularly close eye on payroll and expenses matters, so make sure you keep accurate records of who’s been paid what and who’s claimed expenses for what.
How do I keep records of my business’ sales and purchases?
Something that stresses out lots of small business owners is the best way to keep records of the sales and purchases made by their business.
Here are a few handy tips that should make this quicker and easier, saving you time and stress later on.
Use unique invoice numbers for different products/services
Make sure that you mark all sales or purchases of a particular product or service with a particular invoice number, so you can easily pull up all the sales/purchases of that product or service. Someone running a clothing business might for example use 1234 for sales of white t-shirts, and 4321 for sales of black t-shirts – allowing them to easily access records of each.
List your outstanding debtors at year end
An “outstanding debtor” is a person or company that owes your business money, most often customers who have bought a good or service but not yet paid for it. It’s really important to keep track of these, so make sure you keep an accurate list. You should also ensure that this list includes the unique invoice numbers for each transaction, the payment due date, the amount owed, and the name of the customer.
Also, if you are reasonably certain that a particular invoice won’t be paid (if the company that bought from you has since gone out of business, for example), then mark it as a potential bad debt and explain why. Doing this means your accountant may write it off as a ‘bad’ or ‘doubtful’ debt, which means it could count as an allowable business expense.
List your outstanding creditors at year end
An ‘outstanding creditor’ is a person or company that your business owes money to, and it’s obviously rather important to keep track of these too. The process is the same as for outstanding debtors – make a list that includes the unique invoice numbers for each transaction, along with the payment due date, the name of the supplier, and the amount you owe.
Again, if you don’t expect to pay for a particular purchase (if you received damaged goods, for example), then make a note of this and explain why.
List debtors and creditors by date
This may be simply common sense, but make sure to order these lists with the oldest debts first – this will help you analyse which debts are likely to go bad, and helps you work out which creditors you should pay first and which debtors you should be chasing up.
How do I keep records of stock and uncompleted work?
When you’re running a small business, it can be hard to know what the line is between a completed and uncompleted sale – a crucial difference when it comes to your year-end accounts.
The key is to be aware of the cut-off.
Generally speaking, there are two key rules:
With these principles in mind, you should complete a three-stage process when it comes to accurately calculating stock levels for your year-end accounts.
- Perform a stocktake
A stocktake just means literally physically counting all the stock your business holds, so you can then value it.
In order to minimise disruption, you should plan for this process in advance – making sure no new stock comes in on stocktake day, for example, will make things much easier, and you can speed up the process by setting aside stock of the same type so it’s easier to count.
If you have employees, it’s crucial to have a standard stocktaking procedure in writing, so that everyone is on the same page.
- Calculate the total value of your stock
Now you know exactly how much stock you have; the next step is to work out how much it’s worth.
Remember that, for tax purposes, you want this value to be as low as possible, so either use the cost you paid for the goods or the price you expect to sell them for – whichever is lower.
Match the descriptions and names of your goods to the ones used in suppliers’ brochures or price lists, so everything tallies up and there’s no confusion. Old, damaged, or unfinished goods should have a corresponding depreciation in recorded value – a fancy and complicated way of saying that if a piece of work is 25% unfinished, then its value is 75% of the value it would have when it’s finished.
- Use the percentage of completion method to calculate the value of unfinished projects
As mentioned above, this is much less complex and technical than it sounds.
What it means is that, to work out the value of unfinished projects, you work out how much of the project has been completed, and then use that as a percentage of the total completed value.
So, if you’ve completed 50% of the project, then the value would be 50% of the finished value in your year end accounts.
To work out your percentage completion, use time records, costs, or diaries (so make sure these are kept up to date as you work).
How do I keep records of fixed assets?
A fixed asset is something that your business will have for a long period of time (as opposed to stock), such as property (e.g., your business premises), vehicles (a company car or van), and IT equipment (computers, laptops etc.). Supplying accurate records of these is a crucial part of the year end accounts process.
To get started, make a list of all your fixed assets, making sure to record the following information on each:
- Type of asset – property, vehicles, IT equipment etc.
- Purchase date
- Purchase price
- Asset description
- Asset location
- Other information (such as vendor contact details for IT equipment)
You should also keep a record of assets disposed of or sold during the previous year.
Needless to say, holding on to proofs of purchase is really important when you’re running a business, so make sure you file invoices and receipts in a safe place.
So far, so straightforward. However, you need to account for depreciation, and here’s where things get a bit more technical.
Let’s get the basics out of the way: depreciation refers to the way things you buy (assets) lose value as you use them. A common example is the way a new car loses some of its value as soon as you drive it off the forecourt.
This also applies to any fixed assets owned by your business, and you’ll need to account for this in your year end accounts.
There are multiple ways of doing this, and comprehensive guides to this can be found online, like this page on fixed assets, depreciation, and amortisation from Ainsworth Accountants. Make sure to ask your accountant what they think the best strategy would be for your company.
How this affects your tax bill is another complex area. Because different companies use different assets for different periods of time, it wouldn’t be fair to simply allow companies to apply set rates of depreciation to offset their tax bill.
Instead, fixed assets are governed by capital allowances, which essentially means that you can subtract some or all of the value of the asset from your profits before you pay tax. This works differently for different types of assets – for more information, see the gov.uk page on claiming capital allowances, or this guide to understanding capital allowances from Caseron Cloud Accounting.
How should I keep payroll and expenses records?
Few things are more important in business than getting your payroll right – your employees won’t stay happy and productive for long if you’re not paying them correctly, and it’s your legal responsibility to ensure things like the correct National Insurance (NI) contributions are paid by everyone working in your business.
Using accounting software can make a huge difference here. It will help you work out payments and deductions, and many plans also offer a complete outsourced payroll service as an additional paid add-on.
As for expenses, the key is to ensure that you have a universal system in place for all claims, and that a record is kept for each claim. The simplest way to do this is to draft a standard expenses form, and require employees to attach receipts.
Expenses are another area where there’s some complexity when it comes to tax. Basically, most expenses incurred personally by company employees are exempt from tax, and don’t need to be reported as long as certain criteria are met. However, other expenses – like company cars or private healthcare – do need to be specifically accounted for using the (notoriously tricky) form P11D.
How long should I keep company records?
Thankfully, the answer to this one is nice and straightforward.
This is according to the official gov.uk page on running a limited company, which also states that six years is the minimum, and records must be kept for longer if:
- The records show a transaction that covers more than one of the company’s accounting periods (i.e. more than one financial year)
- They relate to a company asset that is expected to last more than six years, such as equipment or machinery
- The Company Tax Return was sent late
- HMRC has started a compliance check into the Company Tax Return
As you can tell, there’s a lot that goes into preparing and submitting your company’s end of year accounts.
However, if you want the quick version, here are the three golden rules:
- Use accounting software – Accounting software makes it much easier to keep track of everything your business is doing, plus all your data is stored in the cloud, so you can access it wherever you are.
- Hire an accountant – Yes, it’s an added expense, but doing it on your own just isn’t a realistic option. Remember they’re a resource and not just a financial burden, so make sure they check you’re doing everything you can to lower your tax bill, and ask if they have any recommendations on how you could run your business more efficiently.
- Keep records – Your accounts shouldn’t just be something you think about at the end of your financial year, but should be baked into how you run your business. Make sure you always keep organised, accurate records, and putting together your annual accounts will be much easier.
This guide should give you a good grounding in the basics, but there are loads more resources out there if you need more help. If you’re struggling to understand certain concepts then there are specialised guides available, while if you want to know what is the best option for your business, then the best option is to discuss it with your accountant.
There’s no doubt that year end accounts are intimidating, especially for small businesses with little experience in this area. However, a bit of planning and research will make things go much more smoothly, and save you no end of stress at the end of your financial year.