First time accounts for a Sole Trader

CrystalClear

Sorry if this has been discussed elsewhere already, (I've searched and can't find... and there's lots of blogs...)

I'm a full member and helping a friend out with her books, and it's my first time. She begun her catering business mid Dec 09 and didn't keep any records, other than a "pile" of receipts, bank statements and a rough pad with daily till collections.... The biz is not VAT registered.

I'm planning to use the VT cashbook as it looks pretty simple and suitable for her business needs.

However, I'm a bit stuck on Sole Trader accounts/tax returns.

Firstly, does she have to fall into the 2009/2010 tax return bracket? (There's a lot to do).

Secondly, for a Sole Trader, do they just require the P&L figure?

Thirdly, Seeing as it's not VAT reg nor Ltd, once the P&L is done, is the tax return fairly straightforward to complete?

Lastly, I can do the bookeeping, but should I refer them to e.g. MIP for the tax return bit?

Thanks (and sorry if any of this is rather obvious).

Jan

Crystal
I honestly think you should just do your freinds bookkeeping, you haven't the experience or knowledge to help her with accounts/tax return.
A pile of receipts, bank statements and a rough pad of "takings" are sometimes all an accountant has to go on, but if you tidy it all up for her and present the accountant with reconciled bank statements etc you will be helping your friend enormously.

Monsoon

Good advice from Jan.

Yes, if she started trading in Dec 2009 she will have to complete a 2009-10 tax return and she should have registered with HMRC as self employed within 3 months of starting to trade.

Yes, just a P&L will suffice but if she has a business bank account this should be reconciled. If she uses her personal bank account it's often hard/ too timeconsuming to do a bank rec.

CrystalClear

Thanks Jan, Mosoon,

That's very helpful. I'm cracking on it, and it's not too bad once I'm in a flow...

One other thing, about the bank rec, yes, infact it's a personal account, and it's proving quite difficult to rec. Do you have any suggestions of the best way to go about this?

Also, about accounting periods, I had noticed that on the manual bookeeping, they are set up weekly - any special reason, or shall I just stick to the monthly? (PS. I'm using a bookeeping software now).

Vonni

In order to keep the financial year end in line with the tax year end you should opt for 31st March or 5th April 2010 as the first accounting period.

However, some of my clients try to resist this when they are starting up a new business and prefer to use a complete financial year.

If you keep to the tax year end the SA return is straightforward - but as it's a short first period remember to watch the AIA or WDA claim as this will need to be restricted to
4/12ths and remember to provide for prepayments on rent, insurances etc.

Any further queries PM me.

Good luck V

Monsoon

CrystalClear wrote: »

One other thing, about the bank rec, yes, infact it's a personal account, and it's proving quite difficult to rec. Do you have any suggestions of the best way to go about this?

Don't do a bank rec - unless the client is happy to pay for your time trawling through personal transactions.

I'd do a mini-audit instead: take some paperwork, match it to the bank, as long as everything seems to tie up then I'd take it as ok. We are here to check some things within reason and this is a sane check given the situation.

I wouldn't include the bank account in the balance sheet as its a personal asset and not business and if you included it then technically all the drawings (personal transactions) should be in there too. Every transaction on the bank account is a movement of capital, not an asset account.

Londina

Hiya! I'm in a similar situation. I have to do accounts for a sole trader and he asked me to do a balance sheet too. He doesn't have a computerised accounts system and he only gave me a spreadsheet with list of invoices and various expenses paid by credit card and business bank account. He is register for VAT flat rate scheme (don't even know what it is!!).

How can I create a balance sheet with these docs only? How do I work out the debtors and creditors figures (and any other BS accounts). I tried to do a bank reconciliations with all the sales invoices I have, but things are even more confusing now, I have different figures :-(

Do soletraders really need a Balance Sheet or this client is just fussy? (by the way he's not charged extra for this but it's taking me so much time so work/sort out everything!!)

Thanks in advance!!

sdv

Monsoon wrote: »

Don't do a bank rec - unless the client is happy to pay for your time trawling through personal transactions.

I'd do a mini-audit instead: take some paperwork, match it to the bank, as long as everything seems to tie up then I'd take it as ok. We are here to check some things within reason and this is a sane check given the situation.

I wouldn't include the bank account in the balance sheet as its a personal asset and not business and if you included it then technically all the drawings (personal transactions) should be in there too. Every transaction on the bank account is a movement of capital, not an asset account.

A very risky strategy indeed!

I suppose you can get away with almost anything on the accounts and tax returns of a client in as much as the figures on P&L amd margins are reasonably and within the parameters on HMRC expetations, to avoid investigation.

you will only get in a rut if HMRC chooses to investigate the accounts and the SA returns declared by the client based on a professional accountant's assessment.

why? because it is in breach of a number of accounting standards

eg - FRS18 (IAS8) Accounts have to be reliable etc......

If there is a major flaw in the bookkeeping (lack of bank recs), how can a mini-audit be reliable?

"Not to include the bank account in the balance sheet" would be a first prompt for HMRC inspector to probe into the accounts further.

I don't know! Maybe I am out of touch with current good parctice in accouting, to have expressed the above points.

comments by other practicing MIP would be enlightening


or perhaps this could be posted as FAO STEVE, comment please!

Bluewednesday

I have done this where all personal transactions are movement of capital and it really is difficult when the client uses the same account for business and personal but I don't think what Monsoon has said is a risky strategy. You get a feel for the client's business and whether all income is treated correctly. Obviously if things didn't match up then you would have to get involved in the nitty gritty.

Would you really suggest identifying every transaction in the bank account to allocate it when possibly 60% or more is personal items if other reliable sources of information are available? How much would a client be willing to pay for that? I may even be tempted to not include a balance sheet at all in this situation depending on what other assets are available

Obviously the best way forward is reliable records and a separate bank account but that won't help you this year!

Londina

Bluewednesday wrote: »

How much would a client be willing to pay for that? I may even be tempted to not include a balance sheet at all in this situation depending on what other assets are available.!

If you have a fixed rate deal with a soletrader and then he requires a balance sheet, would you charge extra?

I'm findind really difficult to work out balance sheet items by just using the bank a/c and list of income and some expenditures, how do you do it? in our studies the bank rec was something so simple, just about some presented/unpresented cheques and bank charges, but in reality things are much more complicated.

I prefer to avoid all this and just prepare an income statement and his self assessment!

burg

@ SDV

I would also do similar to Jenni. Yes it is not ideal and I am aware that we have a duty to provide reliable accounts but if we were to reconcile a personal account it would cost the client a fortune and they would probably then do it themselves and it would be even less reliable.

@ Londina - Generally I don't do balance sheets for Sole Traders. If however they have a few assets or are VAT registered then I usually do depending on the nature of the business.

It is certainly a lot harder to do with no bank account to reconcile to and no decent records. Maybe you suggest to them that they keep better records that will enable you to produce a balance sheet.

sdv

Bluewednesday wrote: »

I have done this where all personal transactions are movement of capital and it really is difficult when the client uses the same account for business and personal but I don't think what Monsoon has said is a risky strategy. You get a feel for the client's business and whether all income is treated correctly. Obviously if things didn't match up then you would have to get involved in the nitty gritty.

Would you really suggest identifying every transaction in the bank account to allocate it when possibly 60% or more is personal items if other reliable sources of information are available? How much would a client be willing to pay for that? I may even be tempted to not include a balance sheet at all in this situation depending on what other assets are available

Obviously the best way forward is reliable records and a separate bank account but that won't help you this year!

burg wrote: »

@ SDV

I would also do similar to Jenni. Yes it is not ideal and I am aware that we have a duty to provide reliable accounts but if we were to reconcile a personal account it would cost the client a fortune and they would probably then do it themselves and it would be even less reliable.


It is certainly a lot harder to do with no bank account to reconcile to and no decent records. Maybe you suggest to them that they keep better records that will enable you to produce a balance sheet.

Interesting!

I have just turned down a job, a customer's accountant wanted every thing balanced and reconcilled.

The customer had used 4 separate credit cards to buy stock for his 2 separate busines as well as his personal expenses (including wife's).

The job was to identify each transaction and categorise into above 3 headings. Match them with invoices (many of them missing) and identify where the payment of the credit cards made from.

some of the payments was from his personal bank account and other payments were from any of the other 2 business bank accounts.

The ACCA accountant was insistent on matching and reconcilling all the transactions (18 monthts worth).

I could see that I will be spending hours to reconcile this and even then it may not be 100%
Sone of the items may be requied to be written of to personal account and it will have a direct effect on the profit margins

I was given an impression that the work had to be spot on.

Londina

sdv wrote: »

The job was to identify each transaction and categorise into above 3 headings. Match them with invoices (many of them missing) and identify where the payment of the credit cards made from.
some of the payments was from his personal bank account and other payments were from any of the other 2 business bank accounts.
I could see that I will be spending hours to reconcile this and even then it may not be 100%

This is the situation I'm having at the moment, a sole trader with personal/business accounts, credit card, no supplier invoices, just a spreasheet with lots of expenditures..and I'm not sure if the reconciliation I'm doing is going to be correct, wish I put everything into an accounting software!

burg wrote: »

@ Londina - Generally I don't do balance sheets for Sole Traders. If however they have a few assets or are VAT registered then I usually do depending on the nature of the business.It is certainly a lot harder to do with no bank account to reconcile to and no decent records. .

So what's the law requirements for soletrader? Is the balance sheet compulsory or not?
We all know for companies what to do, what about them? There isn't an equivalent of "companies house"...In our studies this is not covered in depth...I'm so confused and don't know what to do when I'm dealing with a soletrader accounts and they want a balance sheet too!

Monsoon

Londina wrote: »

So what's the law requirements for soletrader? Is the balance sheet compulsory or not?

No it isn't.
Any set of accounts should be produced from a TB, so the BS info is there, but there is no requirement to produce it. I don't think I've ever put a sole trader BS on the self employment pages and haven't ever had a problem with this.

@SDV, as Burg says, it's not the ideal approach but sometimes you have to take prudence into accounts and be realistic.

A sole trader turning over £10k with 40% business 60% private use of personal bank account is NOT going to want to pay hundreds of pounds for a bank rec that is arguably not needed.

They provide all their business expenses receipts, and all their sales. I would definitely do a reccy of all the income in to the bank. After reference to debtors, etc, if there was more income into the bank than in the sales records, you ask the client. If they have an explanation, fine. If they don't, they have the choice of it being sales or personal. It's self assessment. If they insist it's not business revenue (and you have no good reason to suspect otherwise) then I wouldn't include it - but put in writing to the client that should HMRC inspect, they will have to prove that the income wasn't business.

A business turning over, say, £50k plus and in a situation like SDV described really should 'know better' and have a 'proper job' done, and pay for it. However with records like that, it's never going to be perfect. You can't make a silk purse out of a sow's ear, not even with all the fees or time in the world.

Remember, while we have a duty to produce accurate accounts, it is self assessment and we are not auditors.

Just keep everything in writing to the client.