financial year dates for start-up- could I ask your opinion?

imeldabye

Hi. My client has started up in business selling from a mobile coffee van. Her first day of trading (ie taking money) was June 1st 2009, but she incurred a lot of start up costs prior to that - first invoice dates back to April 1st 2009. I intend to create a director's loan account for these expenses, which will be credited when there is enough money in the account for her to recoup these costs. I am assuming when registering as self-employed with the revenue she states 1st June 2009, but when it comes to recording expenditure etc in the books I am a little confused as to when her financial year should start and end. My aim would be to go v simple and avoid overlap profits and for self-assessment purposes have year end as 5/4/10 but not sure what to do with the start of the year? Any advice? This is my first start-up for a while, hence confusion, my apologies.

claudialowe

Is it a limited company or a sole trade? You talk about a directors loan account but also registering as self-employed.
:confused1::confused1::confused1::confused1:

Only after 31 May 2010 will you be able to tell which year end date will be the best. You would have to weigh up the financial pros and cons of each. Most of this would depend on the profit made in April 2010.

Claudia

imeldabye

no i didn't mean that kind of director's loan account - i meant to set up the expenditure incurred personally by the client as an opening balance on the credit side-do you see what I mean? she is a sole trader.

Bluewednesday

so you meant cash introduced then!

imeldabye

The client had to pay start up costs before the bank delivered the loan into her business account. The client used money from the personal account she shares with her husband.
My question is -if the first invoice she paid in this manner has the date 1st April but specifically relates to the turnover she began to produce on 1st June, is the client obliged to declare her start date (ie accounting period) as 1st April 2009?

Bluewednesday

I would use the trading date as the start of the financial year. Pre trading expenses are allowable and can be brought in as cash introduced.

imeldabye

Thank you Blue Wednesday, I agree with you, I just looked through some guidelines on the Revenue website and it says you can bring expenditure into a year's accounts if it is directly relevant to the period where the turnover is earned. However, sorry to sound ignorant but I have not come across this "cash introduced" -how do you account for it? Many thanks.

Gem7321

Rather than a directors loan/current account your sole trader will have a capital/current account and will be the second half of the balance sheet which is made up of:

Balance b/fwd (in this case this won't be until next year)
Capital/cash introduced (literally what it says on the tin, cash introduced by the proprietor)
Drawings
Profit/loss share

imeldabye

Gem 7321
thank you for running through that.
So I introduce cash and now she is trying to claw some of that money back by on the odd occasion using the business bank a/c to pay for personal things. Not great but that is how she is, to account for it i am guessing i DR the cash introduced and debit Drawings?
thanks

AK002

No.

To account for money drawn personally you Cr the bank (or cash, however it is drawn) and Dr drawings on the balance sheet.

Don't net off the two, i.e. don't dr cash introduced to try and reduce it. It should be seperate.

Money that you client has put into the business is Dr cash/bank and Cr Capital Introduced.

Money that you client has drawn personally (bar wages) is Dr drawings and Cr Bank/cash

imeldabye

god how embarrassing, of course you CR the bank.
i am just trying to get my head around this cash introduced account. surely there is a way of reducing the amount the business owes the owner from the time when she stumped up cash to pay for the start up stuff? sorry to be so colloquial!

AK002

It's ok, it's what the forum is for!

To reduce the amount of cash the business owes her (in cap intro) you Dr drawings, these form the bottom of the Balance sheet.

For eg.

Same scenario above, lady starts burger/coffe van. She has some initial costs, maybe buying the van, some stock etc but the business has no money to pay for it, so she buys the items personally. (say £10,000)

So you would Dr asset/stock/bank/cash (depends what she bought etc) £10,000
and Cr Capital introduced (the amount the business owes back to the owner) £10,000

Then during the year she draws money, pays for personal items via the bank (say £5,000)

You would Dr drawings £5,000
and Cr bank £5,000.

So at the year end the bottom of the balance sheet looks like this..

Balance b/f £0.00
Capital introduced £10,000
Drawings (£5,000)
Then profit (irrelevant atm)

So the balance sheet = £5,000 and we have reduced the amount that the business owes to the owner by £5,000.

Hope this helps..

imeldabye

many thanks for taking the time to give me such a detailed answer. i see now but needs to be done here
but........one small gripey question - why CAN'T you net off the two - to reduce the cash introduced?!

claudialowe

Because it doesn't show a true reflection of what happened in the business. It also looks at though the sole trader lived on nothing during the year, when in fact they took drawings.

A balance sheet that showed that a trader lived on say £500 for the year would "interest" the revenue far more than a trader that introduced £10K of capital and then lived on £10.5K - it looks right!

Claudia

AK002

It's (almost) the same as Debtors and Creditors, you don't net the two off against each other, you show them seperatly, one as an asset and one as a liability.

Psyche

For accruals purposes I would use the start of trade as the start of the financial year, and 31st March as the end (an accounting period does not have to be one year) to avoid overlap profits.

Bluewednesday

Quite often the first year is a loss which is why claudia's idea of waiting until 31 May to work it all out is better, overlap profits may not even arise.

AK002

If it is a sole trader, i rekon the best way is as said to make it tax year, stops overlapping of profits etc..