18 December 2019
What’s your favourite resource to help small business owners learn about accounting?
With the internet now an integral part of our lives, it is amazing the volume of content that is freely available. A simple internet search can net you thousands of results, but often you don’t know what to search for or which sources to trust. Whilst the content may have been accurate at the time of writing, the world of accounting, and in particular tax, changes all the time.
The most reliable content is going to be that published by the professional accountancy bodies, such as:
- The Institute of Chartered Accountants in England and Wales (ICAEW) (https://www.icaew.com)
- The Association of Chartered Certified Accountants (ACCA) (https://www.accaglobal.com)
The Government website (https://www.gov.uk) also has a surprising amount of useful information, especially if you are starting out in business.
However, it is often quicker and simpler to ask your local accountant. In many cases, they will probably offer the answer or advice for free as long as the question isn’t too involved!
What’s the difference between accounting and bookkeeping? How do I know which one I need?
Bookkeeping and accounting are two functions which are extremely important for every business. In the simplest of terms, bookkeeping is responsible for the recording of financial transactions whereas accounting is responsible for interpreting, classifying, analysing, reporting, and summarising the financial data. Bookkeeping is best seen as a subset of accounting.
As a result, whilst a bookkeeper is useful for ensuring financial transactions are accurately recorded, it is your accountant who would be best placed to give you business advice based on the bookkeeping information.
Your accountant would also be responsible for preparing the financial statements, which would give insights into the profitability and cash flow position of your business. Business owners will, therefore, often look to accountants to understand the bigger picture of the business and the path it is progressing on. In addition, accountants would help with strategic tax planning, financial forecasting, and tax filing.
Can you explain the difference between traditional accounting and cash-basis accounting? How do I know which one I should use?
If you run a small business, cash-basis accounting may suit you better than traditional accounting.
This is because you only need to declare money when it comes in and out of your business, i.e. cash movements, and so it is much simpler to get your head around. Using cash accounting means you won’t have to pay Income Tax on money you didn’t receive in your accounting period.
But cash accounting is not ideal if you:
- want to claim interest or bank charges of more than £500 as an expense
- run a business that’s more complex, i.e. you have high levels of stock
- need to get finance for your business – as a bank would want to see accounts drawn up using traditional accounting
- have losses that you want to offset against other taxable income (referred to as ‘sideways loss relief’)
Also, you cannot use cash accounting if your turnover is over £150,000 per annum. But if your business falls into this size category, it is likely you would want to engage an accountant to look after your affairs anyway, in which case they can help you with the traditional accounting method.
We will be posting the next in our Accounting for SMEs Q&A series shortly so watch this space! Our next piece will focus on those starting out with a new business venture.
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