Tax authorities are often relaxed about the need for small
business to prepare and produce formal accounting records.
Often the requirement is simply that each business retains
sufficient financial records to support the accounts
submitted.
Such advice from tax authorities places a burden upon small
business in that the vast majority are honest hard working
people who are meticulous about keeping accounting records
of sales made during the financial year. Unfortunately many
small businesses are not so meticulous about keeping
financial records of business expenses in their accounts.
A typical taxi driver may for instance keep a diary and
record the daily receipts from his fares. If those recorded
receipts are accurate then the total sales turnover for the
year will show the correct total. The same may not be true
of expenses and the accounts thereby overstated.
The total business expenses of the taxi driver would mainly
include the fuel receipts plus the other running costs of
the business. Typically a receipt for fuel will be obtained
and kept in a file or shoe box. Some may get mislaid and
lost and be missing from the final accounts preparation.
Other receipts for miscellaneous items may not even be
retained as forgotten, lost or not thought of at the time
of purchase. Examples may be purchase of the diary in which
sales records are kept, business cards, other stationery,
and cash payments for a whole variety of miscellaneous
items.
The same practise is also often applicable to not just taxi
drivers but many small businesses. A small business owner
may visit a supermarket for groceries and also buy an item
of stationery for business use the cost of which is lost
when the grocery receipt is discarded. If close attention
is paid then the stationery item could have been obtained
on a separate receipt and the cost of the journey to
purchase it also included in the business expenses.
The stationery item is just one example which could be
multiplied hundreds of times with hundreds of different
items during the financial year. While each item missed and
unrecorded may not be significant the total could well be
sufficient to significantly reduce the year end tax burden
by lowering the net taxable accounting profit.
Having retained a separate receipt for everything it is
useful if the receipts are filed and the bookkeeping system
employed updated at least once a month and preferably each
week. By updating the accounting records on a regular basis
more expenses will be recorded as the memory will remember
recent expenses more clearly and accurately.
Another useful method to ensure all business expenses are
maximised is to keep a daily diary of all expenses
incurred. Use the entries in the diary when updating the
bookkeeping records to ensure nothing has been missed in
the accounts.
The essential message is to be meticulous about keeping
receipts for everything, no matter how small, and recording
both income and expenditure on a regular basis so that
items are not lost or forgotten and included in the
bookkeeping records. By also keeping a diary of financial
records even if a receipt has been mislaid the amount
should still be included in the accounts. It could be
disallowed later if the tax records are enquired into but
that is a matter of negotiation with the tax authority from
a standpoint where the financial records are correct.
In addition all small business should take some time to
review all potential expenditure which can be claimed under
the tax rules. Many valid expense items can be missed
having been dismissed as ordinary expenses which may be
business related and therefore claimable in the financial
accounts.
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Terry Cartwright, accountant and CEO at DIY Accounting,
designs accounting software
http://www.diyaccounting.co.uk/smallbusinessaccounting.htm
on excel spreadsheets providing complete single and double
entry bookkeeping systems
http://www.diyaccounting.co.uk/bookkeeping.htm
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