Is there an easier way to prepare sole trader accounts?

As sole traders we dream of spending each working day immersed in the things that made us set up our business in the first place – making a product or selling a service.

We didn’t dream about the tedious, demoralising and sometimes overly complex chores that come part and parcel of the self-employment package. Frequently, the easier option is just to bury our heads in the sand.

Wouldn’t you agree?

Now, I’m guessing that preparing accounts doesn’t feature highly on your list of favourite things to do. You’ve bought the yellow “Dummies Guide” to Starting and Running a business, read a few websites and tried to figure out the jargon but you’re in overwhelm mode right now and you can’t really gain momentum until you’ve got this part figured out.

Can you relate?

Well, thankfully there is an easier option but before we get there we’ll have to wade through some important accountancy jargon, so stay with me.

What accountancy jargon do I need to understand?

You may have seen the terms “accruals accounting “ and “traditional accounting”  written in the context of preparation of accounts.

What do they mean? Both these terms are synonymous but I will use the term “accruals accounting” throughout this blog. Accruals accounting is the universally recognised basis adopted by accountants to prepare accounts. Sole trader accounts are prepared on this basis.

What is the Accruals method?

Income you earn and expenses you incur in the business are recorded in your accounts in the accounting period to which they relate and crucially NOT in the period when the amounts were received or paid.

The best way to illustrate this is with an example.

Your business has an accounting year end of 30th March and you decide to run a training workshop at the end of May 2016. You receive money for your workshop in March. Under the accruals basis you should be recording your income for the workshop in May (because this is the date that the workshop took place). You can bank the money and record it as cash but you hold this money as a creditor in your books at the accounting year end for March 2016.

Most very small businesses record their income and expenses during the year as and when monies are received and paid. But, if using the accruals method you will need to adjust your accounts for timing differences at the beginning and end of the accounting period.

If in any doubt as to how to use this method, talk to a qualified accountant. I’m here

If i’ve totally lost you at this point don’t worry, there is an alternative – the Cash basis.

What is the Cash basis?

This was introduced to small trading businesses in the Finance Bill 2013 and offers an easier option for sole traders preparing their own accounts.

Instead of using the traditional accruals method you are allowed to record your income (even at year end) on a receipts basis and your expenses on a paid basis.

Using my workshop example above, you would record the income in the accounting year that you received the money (year ended March 2016) and not the accounting year that you run the course in (year ended March 2017).

Using the Cash basis you won’t need to worry about calculating capital allowances (except cars) as capital items are treated as if they were normal running costs.

This basis is optional but you do need to tick the “cash basis” box on your tax return and have a turnover of under £82,000.  Click here for more details on the Cash basis

What are the pro’s and con’s of using the Cash basis?

If you struggle with the accruals method (and this can be complex accountant’s stuff), then subject to the limitations listed below, the cash basis could be a simpler method for you to adopt to prepare your sole trader accounts. And, could help you reduce your exposure to potential penalties e.g failing to account for stock, debtors and creditors correctly.

However, take heed of the following limitations:

• If you make a loss in your business and you have chosen to use the Cash basis, your options for relieving this loss are limited and depending upon your circumstances you may not be able to get a tax refund.
• If you have a business loan or overdraft and the interest is more than £500 p.a you will not be able to deduct more than this amount from your profits under the Cash basis scheme. You can deduct all of your interest if you are using accruals accounting method.
• If your business involves dealing with lot of stock, the Cash basis may not be the best scheme for you.

If you followed my examples above you will have picked up on the fact that the basis you choose will affect when you pay tax. The basis you choose does not change which expenses you can you claim or the amount of tax you pay in the long term.

There’s still help at hand

If you’re still with me but feeling even more confused, I cover the basis of preparing sole trader accounts in my workshop – starting a business: the sole trader’ introduction to getting it right first time and would be more than happy to talk through your options

If your business is growing and the accounting becoming more complex, drop me a line or look at my bespoke one-to-one support packages.

In the meantime, I hope this blog has been helpful in unravelling and demystifying some of the accountancy jargon you’ve read about in the past but not quite understood in detail. I would love to hear your views on all that’s been covered above, so do leave a comment in the box below.