I am currently studying towards the AAT Diploma and am working through level 2. I am generally understanding the mechanisms surrounding double-entry book-keeping(fallen back on the notion of money in the bank = Debit and Money out = credit, then working backwards to find the relevent entry in the ledger accounts to ensure entries are recorded on the correct side!), my query is when a bookkeeper takes over a new client, how does the bookkeeper know the correct balances in each of the ledger accounts (including bank, capital, creditor debtors etc)? As i understand not many customers requiring a bookkeeping service are well organised with their accounts, therefore to be sure on actual bank values would be unknown, and if estimated would differ from any previous submitted tax returns? Does the bookkeepr start from scratch i.e with nil balances in the accounts and start a fresh (as if the company was a startup) - although this would not provide the client with a true value of the profit/loss of their companies accounts? Apologies if i am missing the obvious, but this has been confusing me to how clients can pass their accounts over to (new bookkeepers, accounts or from themselves) to ensure the correct figures are transferred, and if not previously recorded match with what is submitted to HMRC and tally with business accounts? Any information would be greatly apprecited as i am really enjoying studying the AAT and look forward to assisting in a bookkeeping role in the future (i currently work in accounts - employed at the moment).....forgot to say hi to all this is my first post (hence the probable above waffle and lack of knowledge)!!!!
-- Edited by DN on Monday 17th of January 2011 11:34:43 PM
Often you wont know and will have to work it out as you go along!
The bank starting point should be the same as or fairly close to the bank statement balance so that gives you a starting point. The creditors and debtors figure wont have affected the tax return of your average small business person anyway and you can calculate this by working backwards from what you do have and know and then seeing what gaps you're left with. i.e. a trading year starts on 1st May, a receipt goes in the bank on 5th June for which there is no invoice raised in the current year, this is then going to be part of your opening balance for debtors.
Most small business people (in my experience) don't know how what their c/f profit is and aren't particularly bothered, they want to know how much their tax is, or if they're after a mortgage then their interest in their profit for that year may increase briefly as they want it to be higher to borrow the maximum amount.
Bookkeeping in the real world is very different to how it's shown in text books, it's far messier!!
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Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
many thanks for your reply. I thought that would be the case, I presume this could and does cause many issues with partnerships when understanding the original capital investment made to the company, if the partnership were to divide. also I'm sure many issues arise when expenditure has become confused between personal and business accounts! Would you ever consider doing the books for clients minus certain ledgers I.e capital, to just capture as you costs etc from the point of taking control of the accounts? The complications involved seem to be many, and like you say dependent on whether the customer wishes to reconcile the actual value profit etc from the company start up! Very messy indeed. Also practice is definately different to the text book which I am currently and keen to obtain the most amount of experience to overcome complications. This is an excellent forum and I am already learning lots through it in addition to my studies and work.
I can't think of a case (in 12 years) of having a partnership account that we haven't been able to initially get, or work out the capital situation. Generally we've either started partnerships off from scratch or have taken them over from another accountant/bookkeeper so figures have been available. There's been the odd messy one but by working backwards I've been able to figure it all out.
It is entirely possible to just do income and expenditure bookkeeping and ignore all the capital accounts. That's the way I approach a lot of sole traders accounts who only come in once a year to do their tax return. Essentially I'm going through their paperwork to make them an income and expenditure account, and a list of capital expenditure so I can work out allowances. The rest of it is not relevant to the tax return in most cases.
But then I don't really count them as my 'bookkeeping' customers, they're the tax return customers. To me bookkeeping is the nitty gritty of having everything right and balancing to the penny for all the day to day stuff, not drawing up a once a year overall picture of what they've bought.
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Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
