In the know: Accounting for Limited Companies of a Smaller Size

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Accounting can be overwhelming, not least due to the wealth of information that it requires incorporating- from receipts and expenses to taxes and depreciation. This is before you can even begin to consider the different reports that need to be prepared.

Do you know your profit and loss statement from your balance sheet? There is a whole host of terminology and elements that can make the task, initially at least, seem like all too much. This doesn’t always have to be the case, however.

Not only is there new systems available, designed to help small businesses, but depending on your type of business, the requirements may be less onerous than you thought. Whether you end up taking on the accounts yourself or hiring an expert accountant, we’ve put together our simple guide to the basics you need to bear in mind.

In particular, we will be looking at the accounting requirements of a Limited Company. If you are looking to register as a Limited Company, consider using 1st Formations (https://www.1stformations.co.uk/) for a great value, easy and quick process providing you with all you require.

If your company is registered as a Limited Company, there are a number of elements that must be precisely documented and disclosed in full, in order to provide an honest representation of the state of the company at any given point.

These elements include expenses (cost of sales, business expenditure and cost of equipment), liabilities (a liability is an amount which the company owes to someone else- be it a the bank or a supplier), assets (an asset is something that holds a value that can be converted into cash) and income (the income gained as a consequence of the businesses activities).

 

The records to which these amounts relate to must be kept for at least 6 years, therefore it is prudent to keep accurate records. These will include:

  • Money spent by the business
  • Money received by the business
  • Assets that the business holds
  • Debts owed to the business
  • Debts owed by the business
  • Inventory the business is holding (at financial year end)
  • All goods bought by the business, all goods sold by the business, from whom these goods were bought and to whom these goods were sold (please note that this does not include retail trade)
  • Stock takings in relation to stock inventory on-hand

 

These records are then used to prepare certain documents and work out certain taxes, which comprise of:

  • Company Tax Returns
  • Full Statutory Annual Accounts
  • Corporation tax on taxable income

Some additional documents are also required in certain circumstances. For example, if the company’s annual turnover is over £85,000, this is over the VAT (Value Added Tax) threshold. Therefore they must also prepare a VAT return and pay the required VAT bill.

We will now look into the statutory accounts required by a Limited Company. There is an annual requirement for companies to file their accounts and they must be in line with the International Financial Reporting Standards (IFRS) or UK Generally Accepted Accounting Practices (UK GAAP). This is a requirement even if the company is dormant at the time of filing. However, dormant companies only need to prepare and file a balance sheet and notes withCompanies House and there is no requirement to file these with HMRC.

 

The accounts active companies must file are:

  • A profit and loss statement. This shows the company revenues, minus the costs and expenses incurred during the financial year.
  • The balance sheet. This shows everything still to be paid to a company as well as everything the company owns, as of the last day of the financial year.
  • A director’s report, which provides a statement on the condition of the company and notes it’s compliance with principles, including the financial, accounting and CSR standards.
  • An auditor’s report, which is when an internal or external auditor evaluates the accounts. Please note that certain companies are exempt from having to provide this.  
  • Notes relating to the accounts.

 

Not all companies must prepare accounts to this extent however. Companies turning over below £6.5m qualify to only provide abbreviated accounts, which consist purely of the balance sheet (plus notes).

Despite this allowance, full statutory accounts must be provided to the shareholders of the company and HM Revenues & Customs.  Companies House have a requirement that the annual accounts are filed with them within 9 months of the ARD, which is the Accounting Reference Date.

To work out your ARD, you take the month that your company was registered- your ARD is the last day of this month, one year later.

 

When filing the Company Tax Return (which must be done online), there are a number of elements that should be filed:

  • Statutory accounts
  • Calculation of Corporation Tax
  • CT600 form
  • Any capital allowances, loans from directors, losses carried forward from the year before and any gains on assets

The reason that HMRC require this information is that it allows them to calculate the corporation tax. This tax must be paid within nine months + one day post end of financial year.  

A late tax return can lead to fines from the HMRC. This could be anything from £100 to 10% of the tax left unpaid. If this tax return is not filed on time for three years in a row, a minimum fine will be incurred of £500.

There are many small business owners who feel they are capable of compiling their businesses accounts. There are even online systems available that can help small business owners input the necessary information in order to compile these reports.

If you don’t feel you cut the mustard when it comes to preparing these accounts, seek out the expert advice required. While it may seem like an added expense, it will save the potentially significant penalties imposed by Companies House and the HMRC.  

A delay in filing annual accountants can lead Companies House to fine your company anything from £150 to £1500. If the accounts are late two years in a row, this fine is doubled. If you completely fail to file the accounts and no attempt is shown to rectify this, you can be fined up to £5000.

Not only will you potentially receive this fine, but you are also liable to be personally prosecuted. We will now look into how to find the best accountant for your company.

 

Consider Your Type of Business

It is usual for accountants to specialize in particular industries, therefore it’s worth finding an account that has this expert knowledge about your profession and businesses industry.

 

Consider Asking Around

If you are struggling to find an accountant, try asking for recommendations from your close network. Do not purely rely on these recommendations however and still ensure do your research.

 

Think About Your Size of Business

As a small business, large accountancy firms who focus on larger businesses are probably not the best option. Instead, focus on finding smaller accountancy firms who focus on small companies.

Not only will these save you paying large fees, it means that you will receive the care and attention your business deserves.

 

Make sure You Check Qualifications

There are numerous bodies, which ensure that your accountant has qualified from the training necessary in order to fulfill their role, as well as ensuring they have undertaken ongoing training to make sure their knowledge remains current.

These include the Institute of Chartered Accounts in England and Wales (ICAEW), the Chartered Institute of Management Accountants (CIMA), the Institute of Chartered Certified Accountants of Scotland (ICAS) and the Association of Chartered Certified Accountants (ACCA).

 

Check the Fee Details

As you can imagine, costs vary when it comes to accountants. Take the time to do some market research so you can gain an understanding of how much you should be paying.

Make sure to read the fine details, as there may also be variation not just in the price, but the fee structure. Whilst paying as and when you need work doing makes it easy to monitor the fees, it can also end up more expensive when compared to fixed fees. Do not purely chose your accountant on price either.

Consider the elements discussed in this article and think what it is your company needs from their accountant.

 

Consider How Much Time You Have

If you have time within your business to keep ongoing records you may be able to save money for your business in fees. On the flip side, if you don’t have time to maintain these records, this needs to be a consideration when deciding which accountant you use and under which fee structure.

Once you think you have found the right candidate it is a good idea to try and set up a meeting with them. This provides an opportunity to ask any questions you have and confirm areas that need confirming.

Whether you chose to do your accounts yourself in the end, or hire an accountant, we hope this article has helped clarify some of the basics, to help you make an informed decision.

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