As a business owner, you often have to wear many hats and know something about everything. This can be daunting, especially when it comes to bookkeeping and accounting – which is definitely not everyone’s cup of tea! However, keeping proper accounting records is essential in any business. And at Life Sorters, we know the most common bookkeeping and accounting mistakes that businesses make because we offer expert help and advice with our bookkeeping and accounting services. So, here’s our advice on the top 5 accounting mistakes you should avoid:

1. Bank reconciliation This is fundamental in preparing business accounts. Basically, when you prepare your business’s management accounts, you need to ensure that the bank account balance in your accounting records matches (or “reconciles”) with the month-end balance in your bank statements. But why is this so important? Well, bank statements provide an accurate list of all your monthly banking transactions. So, if the bank statements reconcile with your accounts each month, then this means you’ll have recorded every transaction passing through your bank account. This is the first and critical step in the accuracy and completeness of your company accounts.

2. VAT A bit of background on VAT - businesses need to be registered for VAT when turnover in the past 12 months (on a rolling basis) exceeds £85,000. Businesses can also choose to voluntarily register for VAT (ie when their turnover is below the threshold) – this can be useful to set your prices inclusive of VAT from the start of trading (so you don’t have to implement a full/partial price rise to include VAT) and also if you are making a lot of purchases which include VAT so you can reclaim the VAT charged on purchase invoices. However, if your business is NOT VAT registered, then be aware of these two ‘do nots’:- - do not add VAT to your sales invoices - do not account for VAT on your purchases separately. If you have made a purchase from a company that is VAT registered, then the total value of the invoice (including the VAT element) should be recorded as a single transaction.

3. Fixed assets You need to know the difference between • fixed assets, i.e., items that can be “capitalised”; on the balance sheet and depreciated over its “useful life”; and • items that can be “expensed” through the profit and loss. In simple terms: • fixed assets are equipment or other assets which you expect to use and benefit from for more than a year (laptop, phone, etc.) • equipment purchases which are typically lower in value (as a rule of thumb we suggest less than £500) and are more “consumable” in nature This simplifies the bookkeeping and accounting and keeps the fixed asset register (the list of fixed assets in the business’s records) easier to manage. You don’t want to include every light bulb, extension cable or phone charger as a fixed asset - and yes, we have seen this happen!

4. Not maintaining financial records You must retain all your accounting records, so there’s supporting documentation for every business transaction you make. For example, bank statements, sales invoices, purchases invoices/receipts and contracts. This is because the HMRC requires that documentation is held for a minimum of 6 years (either paper or digital). If you do not, they may disallow expenses, which increases your tax bill, or they may even charge you a penalty. Also, to prepare your business’s accounts, your accountant needs information. Ok, speaking as a ‘geeky’ accountant trained to prepare accounts from “incomplete records”, it can be pretty fun as it’s like a puzzle. However, we are not magicians and do need some information to work from! Additionally, keeping good records does keep those accounting fees down, which can only be a good thing for you.

5. Mixing business/personal expenses Do not be tempted to use your business bank account for personal transactions. It will leave you unable to track your business performance if you are relying just on the cash balances in the bank. It just creates unnecessary complexity, which just increases your accountant’s fees and is likely to create issues in the event of a tax audit. So, to help improve the quality of your business’s accounts, make sure you follow our simple advice on what common mistakes to avoid. That will help you ensure effective bookkeeping and accounting and provide the accurate financial information you need to grow your business into a success. If you would like to discuss any aspects of bookkeeping and accounting, then please feel free to contact us for more information.

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