Importance of Keeping Accounts
1. Monitor and Control Expenses
Particularly in the early days of any new enterprise, it is important to watch the level of expenditure and not to let it get out of control. Regular accounting will tell you how your expenses are running when compared to your targets, and will also allow you to compare monthly income against monthly expenditure.
2. Save Time and Money
Talking of levels of expenditure, the cost of an accountant to prepare your Annual Accounts and Tax Returns is based upon the time it takes to do the work. It follows, therefore, that if you can reduce the accountant's time by doing much of the work yourself, you will reduce the fee. If you do all the basic bookkeeping and present to an accountant simply an annual summary asking just for your Self Assessment Tax Return to be completed, you will have saved the accountant a lot of time, and yourself a lot of money.
3. Claiming Expenses against Tax
UK tax regulations provide for expense claims to be allowed for monies spent in the normal course of business. Many people who work from home are self-employed. These two areas give rise to a wide range of legitimate expense claims where expenditure previously classed as 'private' now become 'business' and, as such, will greatly alter the level of profit and tax payable. However, without a proper set of accounts and records, such expenses cannot readily be quantified, and certainly cannot be substantiated if required at a later date.
4. Getting an Initial Tax Refund
Many self-employed people start work on a part-time basis while still maintaining a full-time job elsewhere. Almost inevitably this 'day job' will be taxed under the rules of PAYE. Often the first year or so of self-employment will result in an excess of expenditure over income termed a 'tax loss'. At the end of every tax year, all income is pooled from whatever source and the total tax bill recalculated. By bringing in a tax loss and setting this off against tax already paid, a tax repayment not only pays the accountant's bill, but also is a way of recovering part of the initial investment into the business. Remember, however, without any accounts you cannot calculate the 'tax loss', and you will miss out on the self employed tax repayment.
5. Borrowing Requirements
From time to time, the need to borrow money will arise. It may be a new mortgage or money for the business but, in all cases, the lender will want to know the levels of income and profit to support the loan. No accounts = no evidence = no loan!
