Tax

There are many types of tax but this article will be exploring personal tax.

The amount of tax to pay each year will be determined by profits minus personal allowance.

Also referred to as a tax-free allowance.

For the tax year 2020 to 2021, the standard allowance is £12,500 for the first tax bracket.

A sole trader can make up to £12,500 profit before any tax is due.

Any amount over this figure will be taxable

The basic rate is 20%. That’s £20 tax due for every £100 profit.

Anything over £50,000 but less than £150,000 is taxed at a higher rate of 40%.

The personal allowance is reviewed yearly.

A person might be entitled to trading, marriage, disability or another allowance, increasing their tax-free allowance.

Some income is tax-free such as savings, dividends, some benefits, lottery wins and more.

If someone earns more than £100,000 the tax free allowance will be reduced.

Tax Accounting is a complex and specialist subject.

If things are unclear, bookkeepers and accountants are available to help.

Get it right, don’t pay too much tax.

Suppliers

An organisation that supplies goods or services on credit to another organisation.

A supplier is also referred to as a  vendor, manufacturer or distributor.

To account for goods or services on credit the following entries are made:

  • DEBIT – purchases or expense account
  • CREDIT – credit control account (supplier account)

Once payment has been made the following entries are applied:

  • CREDIT – Bank Account or equivalent
  • DEBIT – Supplier Account

When a supplier chases for payment of invoices this is called credit control.

It is vital to maintain supplier accounts ensuring timely payments are made.

The profit and loss report will differ depending on whether a business reports using cash or an accrual accounting.

In cash accounting the date of when payments were made or received is recorded.

In accruals accounting the date the invoices and bills were issued or when services were provided is recorded, regardless of whether payment has been made.

Knowing the accounting system will ensure that supplier transactions are accurately recorded.

Statements

Also referred to as a report.

The data gathered is used to create statements and reports.

Statements are provided to external agencies such as HMRC, companies and lenders.

They are made up of the same data but are laid out differently to achieve different results.

The four main statements are as follows:

  • Income statement (statement of profit and loss
  • Balance Sheet (statement of financial position)
  • Statement of owners equity
  • Cash flow statements

Statements provide an overview and an insight into a business.

Often overlooked but vital to every business.

Salary

It is wages and benefits that are paid over a period.

Money paid from an employer to an employee.

Usually paid monthly, fortnightly or weekly.

Wages and salary are both used to describe money paid to employees but they are different things.

Salary is quoted annually and maintains fairly consistent throughout the year.

Wages are paid as a reflection of an hourly rate multiplied by the hours worked.

Wages often change from week to week and a salary is fixed.

Both have advantages and disadvantages for the employer and the employee.

Knowing the difference between the two is vital to ensure that the correct payments are made or received.

Revenue

Often confused with profit but very different things.

Revenue is money received for sales or services.

The amount earnt before subtracting expenses.

It is often found on the top line of the profit and loss statement.

Revenue – cost of goods sold = net income.

In accruals accounting revenue is recorded when goods or services have been provided not when payment has been received.

In cash accounting revenue is recorded when payment is received.

Revenue can also be in the form of interest or fees earned.

It is useful to categorise these into sales revenue or income and other income.

Also referred to as operating revenue and non-operating revenue.

Revenue is vital to ensuring a business can pay for all expenses and be sustainable.

Remittance Advice

A remittance advice is a document that is sent along with payment to a supplier.

Often shortened to remittance.

Unlike many of the other financial documents this one is optional.

The remittance will often state the invoice number or numbers, so the payment can be easily tracked and allocated.

It can be sent in paper format or electronically, usually mimicking the payment method.

It is up to owners what they do with them once we have matched the payment to the correct invoices.

They are not required to be kept but they might come in handy.

Although remittances are helpful, they should not be fully relied upon.

Sometimes errors are made or sometimes a remittance is received but payment does not follow.

The remittance advice should be checked, the payment allocated and the document saved to file.

Reconciliation

What is it? Do business owners need to do it?

Reconciliation is when checks are completed to ensure that two sets of data match.

It ensures that the money going out of the account is the same as money actually spent.

It is the same for money coming into the accounts.

This can be as simple as checking the balances match at the end of each period.

When the balances do not match this is where things become more challenging.

Uneven balances will be due to an error.

Investigating errors can be fairly quick if reconciliations are completed regularly.

If unable to locate the error, then support from a bookkeeper or accountant should be sought.

All errors need to be rectified, as owners are legally required to keep accurate records.

Outsourcing this task if it becomes complex will likely save time and stress.

Receivables

Otherwise known as accounts receivables.

It is the balance due from customers who have been supplied with goods or services on credit.

Only used by businesses who provide credit to customers.

Accounts receivables are listed as a current asset within the balance sheet.

Aged receivables refer to funds for goods on credit, that are now overdue for payment.

Accounts payable is the opposite being money due to be paid out for goods or service received on credit.

Statistics show that the longer a debt goes unpaid the chances of receiving the funds reduce.

A sustainable business ensures that enough money is coming in to cover the money going out.

QuickBooks

This is one of the popular and user friendly accounting & bookkeeping software.

Used to help manage our income and expenses.

Great functions like automatic reminders for bills due for payment or for money due to be received.

Provides many insights and easy reporting functions.

Includes income statements, expense logs, profit and loss, balance sheet and much more.

Designed to make managing finances quicker and easier.

Available on desktop and online platforms.

Offering a 30 day FREE trial, so the business owners can test it out first and make sure it is the best software for them.

Bookkeepers offer training and support to people helping them to get started.

https://quickbooks.intuit.com/uk/

Profit & Loss

This term refers to one of the most vital reports. A Profit and Loss Report

Also know as a Statement of Profit & Loss

This is one of the two main reports business owners need to pay attention to.

The other one is the Statements of Financial Position or more commonly known as the Balance Sheet.

The profit and loss is important as it shows how much money the business is making each period.

It will help business owners make judgements on how best to continue to operate their business.

Figures from the profit and loss report or statement, are submitted to HMRC annually under self assessment.

They are also submitted to companies house if registered as a limited company.

It’s helpful to note that when talking about a profit and loss it can be referred to as a statement, report or account.

Don’t worry they are all the same.