I prepare a monthly profit and loss for a small business (sole trader) and there have been various business related expenses paid through the owners personal account (eg. training course, products purchased etc).
Should I be included these expenses in the profit and loss?
I also wanted to ask, the owner is also banking cash into the personal account, but I only see cash into the business account, how should I account for this?
Oh dear, what you need to ask is how you think HMRC would regard that!
The client needs to stop this practice immediately.
All money should go into the business account and then be distributed from there.
The questions that you need to ask yourself are things such as are you being informed about ALL transactions that are taking place, is the correct money from transactions being declared in all instances, are the invoices that you see the same as the one's the customer pays? is the client commiting fraud? (including tax evasion).
The previous statement is total overkill but that's how HMRC will look at a sole trader who uses their personal and business bank accounts for business purposes.
Some clients do this because they really don't know what they're doing and cannot see the difference between the business and themselves (which is admitedly more blurred for sole traders). Others know exactly what they are doing when they put company transactions through their own account.
Where a client is in the early stages of their business there are occassions where they use personal accounts but that is before their business account exists. If that is the case here then simply get the client to also supply you with their personal bank statements with justification of all movements in cash (are they also paying expenses from their private account?).
As this seems to be a cash based business of course you also have the issue of amounts that don't make it to either bank account which is a whole different headache.
If you feel that the client is merely having a problem understanding the difference between business and personal then time to sit them down for the talk... I normally find the warning about HMRC freezing all of their bank accounts and credit lines works as a real wake up call to how people run their businesses... Quite surprised after I have that chat that people don't run back screaming banging on the doors of their previous employers to take them back into permanent employment.
HTH,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
You might point out that the client is over-complicating your job by doing this and that you'll need to charge them accordingly. Some have far to many bank accounts (personal, business, ISA, savings, joint acc, old bank account, credit card etc). Getting them to close one or more can bring a swift halt to some of these transactions.
Credit card accounts are often uneccessary yet may exist only to take advantage of discounts and special offers. You might find resistance to closing them.
Thanks to everyone for their helpful advice. I will be advising the owner that best practice is to - pay all sales income into the business account and then transfer into the personal account when needed for personal use (drawings) and also to pay business expenses out of the business account and pay personal expenses out of the personal account.
I know that the owner (sole trader) will be concerned about tax and just want to be clear on what I'm advising. If there is a loss/broken even (most likely) there will be no tax to pay, is this correct ? If there is a profit, what is the calculation to work out the tax to be paid ? I also just wanted to check that for the self assessment my calculation of profit is correct - Sales income less business expenses less drawings equals profit ?
....... If there is a loss/broken even (most likely) there will be no tax to pay, is this correct ? If there is a profit, what is the calculation to work out the tax to be paid ? I also just wanted to check that for the self assessment my calculation of profit is correct - Sales income less business expenses less drawings equals profit ?
Hi Kate, there is no easy answer to that. Have you thought about private use adjustments for telephone and vehicle? If there is a vehicle, then you should consider capital allowances as against claiming 40p per mile. Does the client have any other income? If so, this needs to be entered on the self assessment including interest received. All in all, tax will only be payable when the person (not just the business) has exceeded personal tax free allowances.
Regarding your other post, it's always good to see how drawings relate to both profit and the balance of cash in hand at any particular time. In short, it's handy to have at least a draft balance sheet.
It needn't be expensive to buy software that automates the double entries so that you barely notice that you're making two. If you want to re-invent the wheel, a spreadsheet can also automate this process.
I didn't mean to type so much but it would be great if you had somebody to give a 'once over' at what you've done before submitting the Return.
I also just wanted to check that for the self assessment my calculation of profit is correct - Sales income less business expenses less drawings equals profit ?
Hi Kate,
Profit is Sales Income less business expenses. Drawings aren't allowable against tax, they're the amount withdrawn by the owner for their own personal use.
-- Edited by ADAS on Monday 10th of October 2011 10:22:40 PM
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Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
Also why not have a look at this tax software which I haven't used. It is the cheapest I've heard of and there are a couple of recommendations on here if you search 'Andica' in this forum.
