Small business bookkeeping tips
Everyone knows that businesses have financial books and records, but a number of questions inevitably follow:
- What exactly are they?
- What do you need to have?
- And how long do you have to keep them?
We have therefore put together this brief guide to help you.
Generally a company’s books and records are referred to as the ‘accounting records’. Legal obligations imposed by tax laws require that companies maintain these records in order that they can calculate both profits and what they owe in tax. In addition the Companies Act places additional responsibilities on directors of limited companies such as accounting for the company’s activities to the shareholders.
However, irrespective of the legal obligation to keep these records it is also good business practice to do so. In order to be able to make informed management decisions, your records should let you know:
- The revenue and profit you are getting from the money put into the business
- Whether you will be able to pay your bills as and when they are due
- The extent to which you could attract or increase finance from outside the business
- Your profitable and unprofitable product lines and;
- The extent to which additional working capital will be required to finance any expansion plans.
Through some basic small business housekeeping tips, you should therefore ensure that:
- All income is recorded and banked promptly
- All recorded expenses are authorised and valid
- All recorded debts are recoverable and;
- All your liabilities are identified and recorded when they are incurred.
Books and records can refer to much more than just the accounting records and below we detail some other things you should have in place and also some advice on how long to keep things.
Value added tax (VAT)
VAT records have to be kept for a minimum of 6 years although HM Revenues & Customs (HMRC) may permit companies to keep records for a shorter period following a full explanation from the business of why it is considered impractical to keep the records for as long a period. To look at VAT in more detail see our introduction to what VAT is all about.
For Pay As You Earn (PAYE) tax HMRC’s recommendation is that pay records are kept for at least three years after the income tax year to which they are relevant. For more information on this tax why not also have a look at our introductory article on PAYE.
All business records must be kept for a period of six years. For periods before the start of self assessment HMRC can decide to make an assessment at any time up to six years after the end of the chargeable period to which it relates. There is no time period limit however in cases of fraud or wilful default.
- Accounting records – these must be preserved for six years from the end of the accounting period.
- Statutory Books – Although there are no specific requirements the Companies Act states that an entry relating to a former member of the company may be removed from the Register of Members 10 years from the day he or she ceased to be a member.
- Register of Directors and Secretary – From 1 October 2009 Companies are no longer required to maintain details of past directorships held within the preceding five years.
The general rule for documents relating to Government grants is that they must be kept for four years from receipt of the grant. Where grant aid is still being received however, no documents should be destroyed without consulting the relevant Government department.
Employers’ liability policy certificates
Previously businesses were required to keep Employers’ Liability policy certificates for 40 years. This rule has now been replaced by guidance which states that as potential liability for illness and injury at work does not end when the policy expires, records should be retained to ensure that any future claim can be met.
Limitation Act 1980 – general periods
The 1980 Limitation Act allows an action to be brought on a contract for up to six years from the event (e.g. breach of contract) that gave rise to the claim. Where a contract is under seal (or deed), the time limit is twelve years. These periods are relevant in terms of how long invoices and other documents should be retained as evidence in case of a claim by, or against, another party.
Final thought on small business bookkeeping
The above rules and regulations highlight the number of individual items which are relevant for business record keeping. Taking them as a whole it is recommended as a general rule that all company records are kept for a period of at least six years after the end of any tax year or accounting period.
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