Accounts software such as Xero, Quickbooks and Sage are keen to tell you in their adverts how easy doing your own bookkeeping is if you use their software. Just the press of a button will submit your VAT return, produce your year end accounts and submit your statutory accounts or annual tax return.
But nothing is ever that easy. What you get out of your software is only as good as what you put in. If you don't understand how to use the software and how your accounts transactions should be recorded you will never have accurate figures.
Here are five of the pitfalls I have seen (and there are many more I could highlight):
If you raise invoices from your software for your customer these will be recorded as income into your accounts. When you receive payment from your customer if you record the income as sales instead of allocating it to the customer's invoice you will be doubling up on your sales. Not only will this look as though you have done more sales than you thought you had, if you are VAT registered you will be paying HMRC twice for the VAT you have collected.
Choosing the wrong VAT code for sales
When you become VAT registered you need to understand the rate of VAT which is applicable to the sales you make. Most businesses will have standard rated sales so charge 20% on top of their fee or include 20% in the price of the goods they sell. Some business may sell products which are not standard rated - they may be zero-rated, exempt or perhaps even at 5% rate. Hospitality, for example used rates of 5% and 12.5% previously - how many businesses remembered to change the rate to the new rate when recording their income?
Sales which have no VAT charged will usually be zero rated or maybe exempt but they are a rate of VAT. No VAT in your software has a completely different meaning to zero rate or exempt and it is important that you choose the right one for the sales you make.
If a business chooses No VAT for sales which do not have VAT they will be excluding those sales from the VAT return and the submissions made will never match up with the income declared in the statutory accounts or tax return. This could be a trigger for HMRC to investigate.
Adding transactions more than once
There are several ways you could be doing this.
- Assuming you have paid a business expense yourself so adding it as a cash payment, but actually paying it from the business current account - cost included in the accounts twice and VAT claimed twice!
- Reconciling transactions from the bank feed and not noticing that you have the same transactions in the account more than once - checking your bank balance regularly is a must.
- Adding a supplier invoice more than once - and paying it again and again because the supplier keeps resending the invoice as a reminder to pay
Claiming VAT back on purchases/claiming as a business expense
VAT cannot be claimed back on purchases without a valid VAT invoice or receipt. But even if you do have a VAT receipt it doesn't mean you can claim back the VAT. Some receipts do not itemise the VAT element of the purchase so if you have purchased several items - food and drink for example - you need to know which have VAT on and which don't. And if you are presented with a proforma invoice you cannot claim VAT on this until you have received the VAT invoice.
Only expenses which are "wholly and exclusively for the business" are tax deductible and even some of those obvious business expenses are excluded when calculating tax on net profit. Do you know which are non allowable?
Allocation of income and expenses
The whole point of using accounts software is to produce accurate, regular and up to date information and, if you are VAT registered, to submit your returns through the software to comply with MTD.
You cannot produce accurate accounts information if you are not consistent with recording that information. Ensuring that payments for telephone, electric, rent, materials, etc all go consistently to the same account. Only by doing that will you have an accurate picture of how your business is doing. If you want to see how much you are paying for motor insurance each year for example you need to allocate it to the same code every month. The same goes for your income. If you have different income streams you should be allocating it to different accounts so you can see the total for each income stream on a month by month basis.
Over the years we have sorted out and tidied up accounts which have got in a mess. We are happy to sort out accounts but it can be an expensive option for you. You may think you are saving money by doing it yourself from scratch or taking over from your accountant because it looks easy enough, but qualified bookkeepers and accountants have expertise and knowledge which you don't have. They know what needs to be done and you won't even be aware of everything they do to keep your accounts up to scratch.
However, if you do decide to do it yourself, don't be surprised if your accountant charges you more for your year end accounts if they have to sort out anything you haven't done properly.
If you have decided that the bookkeeping is not for you after all give us a call. Our business has been providing bookkeeping support to businesses for almost 20 years. Our bookkeepers study to achieve their qualifications which gives them the foundation to build their bookkeeping knowledge and expertise to deal with the varied bookkeeping needs of the businesses we work with.
Not only will we keep your accounts up to date but we will be there for you when you have a question or need some support.