Accountancy. Just hearing the word will send a chill down the spine of most freelancers. Whether you’re a sole trader or a limited company, some level of bookkeeping and accountancy is a necessary evil. Never fear, however – if Balance Sheets make you go cross-eyed and you think a P&L is a type of cross-channel ferry, we’re here to help.
Year end accounts are produced using the “accruals” accounting concept. At its simplest, this means matching your sales and expenses to the year the work was done.
An accrual journal is typically an expense which occurred in the next year of trading but which relates to the prior year. It should therefore be included in those accounts to accurately reflect the profit reported for that year of trading.
Aged Creditors is a report which provides a list of the suppliers to whom your business owes money and how old the debt is.
Aged Debtors is a report of the customers who owe you money and how old their debt is.
This report can be used to see how much each customer owes you along with how much all of your customers owe you in total.
The writing-off over time of the value of an intangible asset, such as goodwill.
An annual return is a snapshot of certain company information at a particular date known as the ‘made up date’. This is the date at which all the information in an annual return must be correct.
The made-up date is usually the anniversary of:
- The incorporation of the company; or
- The made-up date of the previous annual return registered at Companies House.
It is a separate document from a company’s annual accounts.
An annual return contains the following information:
- The name of the company;
- Its registered number;
- The date to which the annual return is made-up (the made-up date);
- The principal business activities of the company
- The type of company it is, for example, private or public;
- The registered office address of the company;
- The address (single alternate inspection location – SAIL) where the company keeps certain company records if not at the registered office, and those records held there;
- The details of the company secretary (corporate or individual), where applicable; and
- The details of all the company’s directors (corporate or individual).
If the company has share capital, the annual return must also contain:
- A marker to indicate whether the company was a ‘Traded company’ at any time during the return period;
- A statement of capital; and
- Details of the shareholders
In the broadest terms, an asset is something that is:
- Owned / controlled by the company.
- Going to last for more than 1 year.
- Intended to be used in the company to generate more income.
For example, a telephone used to make business calls, or a tool for your work such as a laptop, would qualify. You might decide to bring an item under company ownership as an asset so you can obtain certain benefits.
A snapshot of the business at a particular date, showing the amounts owed to other people, and the assets (such as stock, and money in the bank) that the business owns. The total at the bottom shows the value of the business at that date (ignoring goodwill and other intangible assets). See here for a nice simple explanation of Balance Sheets.
Bank Deposits and depositing cheques
When you pay cash or cheques in to your company bank account, this is classed as a bank deposit and you should enter this in Crunch to ensure your banking records are up to date. From the ‘Banking’ tab you can select ‘New bank deposit’ to do this. If you are recording any cheque deposits, you’ll be able to select them from a list of cheques you’ve entered into Crunch as client payments received.
Bank deposits can also include money lent to the company by its directors in the form of electronic transfer from a personal bank account, cash or cheque.
Benefit in Kind
Benefits in kind are various non-wage compensations provided to employees in addition to their normal wages or salaries. They may be thought of as perks.
Common benefits include:
- A company car
- Private health insurance
- Personal tax return fees paid for by the company
- Interest free loans from the company to an employee
- Travel and hotel accommodation (HMRC require travel to be reported even though it’s not taxable)
Due to the fact that these benefits effectively increase your income, they may incur National Insurance contributions. Any National Insurance contributions owed should be paid to HMRC by the company, not an individual employee.
A P11D form informs HMRC of the value of any benefits in kind employees of a company have received during the tax year.
The allowing by HMRC of a certain amount of money spent by a company on fixed assets to be taken off the profits of the company before tax is imposed.
Capital allowances are only allowed for certain kinds of assets.
A tax levied on the taxable profits of a company. Corporation Tax must be paid within 9 months of the end of your company’s accounting period.
Cost of Sales
Any purchases made in order for a sale to have happened, such as an item that is resold. So, for a restaurant this would be food and drink, or for a computer repair shop this would be computer parts.
A credit note is a document sent to a buyer from a seller stating that an amount has been credited to the buyer’s account. Credit notes are usually used to correct mistakes on invoices or to document the fact that a refund has been given.
A person or other company that is owed money.
Those assets that are short-term in nature. Includes cash, bank balances, and assets that you expect to convert into money within a year’s time, such as amounts owed by customers, and trading stock.
Amounts owed to other people, which have to be paid within one year.
A person or other company that owes you money.
The decrease in the value of a tangible asset, such as a computer, over time.
Dividends are payments made to company shareholders from the profits of the company after corporation tax. If you draw dividends that take your income beyond the basic rate tax band, you may incur a personal tax liability depending on your annual earnings. You do not pay National Insurance on dividends.
It is up to the director/s of a company to decide if and when a dividend is paid to the shareholder/s. If the company has not made a profit then it cannot pay a dividend. Dividends can be issued to shareholders in accordance with how many shares they hold.
First accounting Year End date
The end date of the company’s first accounting year. For limited companies this is usually one year after company formation (and the end of that month).
Fixed assets are assets that have a long-term, ongoing role in the business. This includes property, equipment, vehicles and goodwill overheads: Those expenses that are less likely to vary with short-term ups and downs in the business. Examples of fixed assets include premises, computers, expenses and office salaries.
IR35 is a piece of government legislation that affects how much tax you should pay if you work for an organisation via a Limited Company but would be considered an employee of the organisation if it were not for your Limited Company. It is designed to combat false self-employment.
You can read more in our IR35 guide.
National Insurance Number
Your NI number is your personal identifier for the social security system. This identifier ensures that your National Insurance contributions and tax are properly recorded.
A P11D is a form required by HMRC that details any benefits in kind that have been claimed during the past tax year (6th April – 5th April).
Details of any benefits in kind are required for:
- All directors and employees of the company who earn over £8500 per year
- Any director own owns more than 5% of shares in the company
Even if your company only has one director you still have to file a P11D. The P11D form must be filed with HMRC every year on the 6th July. Any tax payment due must be paid to HMRC by the 19th July each year.
(The P11D is not to be confused with form P11, which is for tracking deductions made by PAYE)
P45 / P46
When you stop working for an employer, they will give you a P45. A P45 is a record of how much they paid you in that tax year, and how much tax was deducted.
If, for whatever reason, you don’t have a P45, you may have to complete a P46 form. The information you provide on this form will determine how you will be taxed.
A compulsory method of tax collection, where an employer must deduct tax from most wages and salary payments to staff.
PAYE Annual Return
A PAYE Annual Return, also know as an Employer Annual Return comprises a P35 and P14 form. The PAYE Annual Return is not to be confused with your company’s Annual Return.
A P35 combines all of your employees’ end-of-year payroll totals, while a P14 form is for each individual employee for whom a P11 or equivalent record has been maintained.
Almost all employers are required by HMRC to file their Employer Annual Return online and must be filed with HMRC by the 19th of May.
These terms specify the number of days allowed to your client to pay off the amount due.
Personal Service Company
You are a personal service company if more than half of your income is derived from services that are performed by its shareholders and provided under contracts between your company and its clients.
Please note that this does not necessarily mean you fall within IR35. That is a separate consideration dependent on the contractual and working arrangements that are in place with your client(s).
Profit & Loss Account
A statement which shows the profit or loss of a business, and summarises how it has arisen. It usually covers a year, and also shows last year as a comparison.
Real Time Information (RTI)
From 6 April 2013 employers are required to report PAYE information to HMRC in real time through the Real Time Information (RTI) scheme.
This means that employers will have to send details to HMRC electronically every time they pay an employee as part of their routine payroll process.
HMRC is introducing RTI in order to modernise the Pay As You Earn (PAYE) system and keep pace with changes to modern working patterns. RTI provides HMRC with up to date information, so it should be easier to ensure deductions for tax, National Insurance and student loans are accurate
The way PAYE is calculated, employees paid and payments made to HMRC has not changed.
Under RTI, instead of sending information to HMRC once a year (via a ‘P35′ and ‘P14s’) RTI returns must be made each time employees are paid. There is also no longer a requirement to file starter or leaver forms (‘P45′ and ‘P46′) to HMRC as this information will be included as part of a regular RTI submission.
This is the amount of net income kept in your limited company which has not been withdrawn from the company as dividends.
A form of periodic payment to an employee from his or her employer.
This is a new term which came into effect on 1st. October 2009.
Until that date, directors were required to state their usual residential addresses on the forms at Companies House. Now they may state a service address, which may be the company’s registered office or some other address where they may be contacted. A director must still notify Companies House of his or her residential address, but this is not put on the public record, though it will be available to public authorities and credit reference agencies. So, when registering a company, the director must state both their service address and their usual residential address (though they may well be the same address).
Statutory Adoption / Paternity / Maternity Pay
Statutory Sick Pay
Any employee who is struck down by illness for four or more consecutive days may be entitled for up to 28 weeks of replacement salary. See our full SSP guide here.
Those assets that you can touch, such as property, equipment and cars.
The period of time covered by your VAT return, usually this is quarterly.
The time when a VAT liability arises. For goods, this is usually when you send the goods to a customer or when they take them away. For services, this is usually when the service is performed.
All goods and services you sell or otherwise supply which are liable to VAT at the standard, reduced or zero rate – whether you are registered for VAT or not.
The total value, excluding VAT, of the taxable supplies you make in the UK. This excludes capital items like buildings, equipment, vehicles or exempt supplies.
A Trial Balance is a list of ledger balances, in debits and credits, within your yearly general ledger.
You can use the trial balance to ensure that your company’s books do indeed balance, i.e., the sum of the credits is equal to the sum of the debits.
Value Added Tax (VAT)
A tax charged on business transactions that is added to the cost of the goods or services provided.
A VAT Return is a document sent to HM Revenue & Customs stating the VAT you have charged on your sales to your customers and the VAT you have paid on your purchases during the VAT period.
Written Down Value
From a taxation perspective, the Written Down Value is the value of an asset minus any capital allowances.
Photo by Horia Varlan