Having always done manual accounts. When producing a profit and loss I have always adjusted expenses for personal use before including on the P & L.
However, I am now using a computerised programme and I noticed that it includes the full amount in the P & L. Adjusting it only for private use for the taxation computation.
Have I been doing this wrongly all along
Please help
Valerie
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We must stop meeting like this. Either way or a mixture of both methods are a correct way of 'adding-back' private elements.
The starting point for finding taxable profits are the accounts themselves so if adjustments have already been done with debits and credits, then there's just less to do in the disallowable column or tax computations.
My concern is that surely if accounts have not been adjusted for private use then the profits are understated for purposes where they may be needed, e.g to gain finance.
I've been looking at accounts created by various accountants and it does appear that some adjust first and some after. Surely this should be standardised.
Am I going crazy
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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.
Yes, it odd when there's nothing in the disallowable column. Then again, on the short pages, there are only 3 line accounts. I suppose it comes from wanting to tell HMRC as little as possible.
I'm guessing, but in the past, perhaps you were only preparing accounts for tax purposes. This is worth a read if you haven't already :
Valerie I can understand why you are confused by this as before I read this thread I had no idea that accountants would include private items in profit and loss account. This is totally new to me. In the books, as everyone knows, only business transactions are ever included in the accounts. I don't understand this. So some accountants adjust at the end of the year or some don't even do that and only adjust on the tax return? Why would they do this. Surely the accounts they are producing are wrong?
Is this the case for sole traders and ltd companies? What if they were producing monthly accounts with private items included? Profit would be over/understated.
Tim can you shed any more light on this, maybe why an accountant would want to do this rather than dealing with private expenses right away and putting through as drawings?
My concern is that surely if accounts have not been adjusted for private use then the profits are understated for purposes where they may be needed, e.g to gain finance.
Hi Val, they'll need to be adjusted one way or the other for tax purposes and for a meaningful loan application. In the software you're using, the Private Use Report does the job of the tax 'add-backs'. You can just as easily do it the way you always did, but then the loan company wouldn't have as much info to go off.
A self-employed trader isn't likely to do these adjustments before handing in his bookkeeping; perhaps even more so now with cloud computing / bank downloads.
These are interesting questions but surely it's clearer to have a summary of all the 'add-backs' in the year for tax purposes.
You're always going to have to add back depreciation, losses, interest received and entertaining, so there's a ready made format for any other adjustments.
Thanks for the reply. I have a better understanding now of what you mean. I was looking at it from the position of a sole trader handing in all source documents to an accountant/bookkeeper to record in the accounts. I then couldn't understand why private transactions were not separated at this initial stage and put to drawings.
So if a sole trader has prepared his/her own bookkeeping that then includes some private transactions these can either be adjusted on the profit and loss or on the tax return itself. That's great that clears that up for me.
I am studying for the ICB self assessment at the moment so I am just learning that some of the expenses that are allowable for accounting purposes are not allowable for tax purposes and have to be added back eg depreciation and some entertaining etc.
Thanks for taking the time to answer question on the forum it is great to be able to get answers to things you are unsure of from experienced bookkeepers/accountants.
Even where they bring in prime paper documents, I wouldn't often adjust within the bookkeeping. The P&L will then show the grand total spent on, say, telephone, which may be of use for management purposes.
The same goes for motor expenses, especially one in dual business/private use. I'll be either given a business mileage or be able to glean an estimate, and it is then simpler to add back an annual percentage rather than say, "he filled the tank up that day to go to Blackpool illuminations etc".
This is becoming a really interesting subject. I think it comes down to the fact that accounting is so subjective. I've always found it very difficult to understand why things are not black and white.
So, I now have my profit and loss showing the full amounts spent on motor expenses, telephone etc. produced from moneysoft.
In the past I have only ever provided a client with a P & L and a Balance Sheet. Would it be right then to also include the Private Use Report. Is there anything else you would include to create a full set of Accounts.
Kind Regards
Valerie
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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.
Yes, I like things to be black and white as well but accounting doesn't seem to work thay way. I just hope once I am up and running that everything falls into place for me. If not the ICB technical helpline is going to be constantly engaged lol.
I think I know what you meant now lol. We are talking about transactions that have a dual business/private use? Sorry I thought we were talking about perhaps the client buying a new kitchen for his own house and trying to put this through the books. It makes more sense now and I can see why it might be useful to include total costs of a dual transaction and then add back the personal element.
I usually include the full cost in the accounts and add back the private use adjustment on the tax computation.
This is to show the tax man that you have accounted for private usage so they are less likely to open an investigation.
I believe that if you don't show it added back then the tax man has the doubt in his mind that private use hasn't been accounted for and is more likely is doubt the quality of the accounts.
As a matter of course, I would include a bank rec. and Asset Depreciation Schedule, with Additions and Disposals and Partnership Allocation Statement, where relevant.
If you're doing the Tax Return too then it's usual to provide both Profit and Capital Allowances Computations to show how you've arrived at the taxable profit.
Moneysoft's Private Use Report ties in with their Tax Calculation Report and taken together resemble a traditional Profit Computation. The Capital Allowances feature (under WDA Reports) will have to be checked very carefully and if you take things this far, then you'll have to bear in mind, basis periods.
All in all, you CAN use these and nothing else but you'd have to be very sure of what you're doing and it looks more professional in a spreadsheet or specialist tax software.
Hi Elizabeth,
Andy makes a good point about what the Revenue expect to see. In other words, if you were to have done 12 months management accounts, adjusting for non-business items along the way, then HMRC might prefer to see both the gross figure and the total disallowed in the year.
Its good to get input and find out how others approach things
I think from now on I shall include full costs in the P&L and then produce a private use report.
I do currently include a fixed asset register, tax computation and capital allowance report but I do agree Tim that the Moneysoft reports are not too professional looking so I have my own templates. This does however take valuable time so its a shame the software reports are not better looking!
Oh well
Thanks again all
Valerie
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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.
Those reports can save time for the smallest cases. Have a play with the fonts and try excluding the Report title under Setup / Page. Also, if you bring down the top margin you can squeeze both on to one A4 side.
Best wishes with the SA exam Elizabeth - it looks really useful and I'm almost tempted myself to brush down the cobwebs. I'm sure you'll find everything AND the kitchen sink being put through the business - one of my favourites was a windsail board which came soon after skiing and motor racing lessons with the same client lol
This thread is really interesting, and is making me think about the way I do things! My experience has always been predominantly on the 'show all expenses and add back private on the tax comp' basis. However, there are no end of conversations and awkward instances where I have to explain why the accounting profit is not the same as the taxable profit. NB it is the taxable profit you need for tax credit renewals, which I try and give if I know the client claims tax credits, but there are going to be numerous claims that are based on the accounting profit - which may be lower than the taxable due to private add backs, or may even be higher if the client has bought assets and claimed AIA.
Yes, the self assessment diploma with ICB is a really good starting point but I think I would like to study tax a bit further.
Nick
This has been an interesting thread and as I don't have any practical experience I didn't realise that it was common for private items to be in the p & l. In the text books all private stuff doesn't even get passed the source document stage. It has got me thinking though just how meaningful is the p & l?
Yes, the self assessment diploma with ICB is a really good starting point but I think I would like to study tax a bit further.
The (ICB) Level IV has modules on Personal and Business taxation. These books recently became available in the ICB shop.
EDIT : Just had a look at the two books. The personal one is 300 pages and the business one is 500 pages. The Self Assessment Diploma was only 85 pages.
-- Edited by Peasie on Friday 16th of December 2011 12:18:22 PM
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I've got the first two modules that I haven't started reading yet - I'm trying hard to put off buying these next two modules. I think I may give in to temptation and buy the Personal one.
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Never buy black socks from a normal shop. They shaft you every time.
I've got the first two modules that I haven't started reading yet - I'm trying hard to put off buying these next two modules. I think I may give in to temptation and buy the Personal one.
I was beginning to think the level 4 tax books would never be available. It must be months since the ICB said they were nearly ready lol.
I've got the AAT level 4 tax books and they are really good but as they are also published by Kaplan am wondering if the content might be very similar. I've bought AAT and ICB kaplan texts in the passed only to find they were almost identical in content and even in worked examples. But in saying that I probably will end up buying them.
I wonder how much I will have spent on books by the time I finish level 4? Probably a small fortune. Never mind, hopefully will get some clients in the new year to make it all worthwhile.
