I do receipts and payments accounting for my very small self employed business. Let's say I send someone an invoice on date A, I receive a cheque from them on date B, I send the cheque to my bank on date C, and the credit appears in my bank account on date D. Which of these four dates is the date I write against the receipt in my accounts?
Now let's consider another invoice. I send my invoice to my customer on date E. I receive a Remittance Advice from them on date F, which says they have paid or are going to pay me by BACS on date G, and the credit appears in my bank account on date H. Which of these four dates is the correct date to write in my accounts?
This all seems relatively important since the date I choose may affect which tax year the receipt is in, and may therefore alter the amount of tax I pay. I don't want to use the wrong date and be open to challenge by HMRC...
You should base your figures on the date when the income was generated rather than when you were paid.
Say you do your accounts to 5 April. On 1 March, you issue an invoice and tell your customer "don't pay me until after 5 April". This is wrong, as you've done the work.
So in your example for E/F/G/H, the date you should recognise income is E, the date of your invoice.
This comes under the matching principle in accounts.
My understanding is that for small businesses, accounts may be prepared on a "receipts and payments" basis, as an alternative to the "income and expenditure" basis. I think you are talking about income and expenditure accounts. I'm trying to do receipts and payments accounting because it avoids all the complications of balance sheets, receivables, payables, debtors, creditors, accruals etc. although I accept that it won't give as accurate a picture of the state of the business.
Of course if I've misunderstood what I'm trying to do or what's allowed by HMRC, please tell me!
I think perhaps you are referring to Cash Accounting for VAT purposes. If you are registered for this (and it only affects VAT) You pay VAT on sales when the money is received and claim back VAT on purchases when you have paid for them.
A sales invoice would be dated on the date you make the sale. The receipt of the cheque would be the date you receive it/pay it into the bank
A purchase invoice would be dated with the date on the invoice The payment would be dated with the date you made the payment.
However, even using cash accounting for VAT, your sales and purchases would be taken as the dates on the respective invoices as being the month/year in which the transactions take place.
That could be an explanation, although I've just reread the original post and it does mention tax year. The follow up post by Rowan also mentions balance sheet items, which is why I didn't think it related to VAT.
I'm not registered for VAT at present (nor do I expect to be). However I was registered during a previous period, and it may be that the "receipts and payments" accounting system that I remember came from then.
Is it then the case that for "normal" accounting for my small, one man business, I must do profit and loss accounting, balance sheet, stock, receivables, payables and all that stuff?
I suppose it is the case that I will very rarely receive any revenue without submitting an invoice (I suppose interest on any bank accounts might be an exception). So I must use my invoice date as the date of the income? And if I subsequently agree with the customer that he doesn't have to pay everything I've invoiced him, I have to issue a credit note? And if he refuses to pay me from something that I've invoiced, I have to write this off as a bad debt?
And am I right to assume that the correct date for payments is the date written on the supplier's invoice (not the date of the purchase order, nor the date I received the invoice, nor the date I sent him the cheque, nor the date the cheque was actually paid by my bank)?
In the case of payments, it's much more likely that I will pay things without having an invoice. This will happen if I go into a shop and buy something (they may or may not give me a receipt), or if I pay for car parking or similar out-of-pocket expenses. In this case the relevant date is presumably the date I paid?
My objective here is do spend as little time doing accounts as possible while still complying with the law. I'm not so interested in management accounts, or visibility of profit etc. (the business is too simple to require much time spent on this).
