For a sole trader who doesn't have a business bank account, you have the option to create a simple income and expenditure account, with no balance sheet.
If you need to create a balance sheet, you take last years closing balance on the capital account, as this years opening balance. You add capital introduced, deduct drawings, and then add profit or decrease if there's loss. That then gives you the closing balance which will become the opening balance next year.
The capital account closing balance should equal the assets less the liabilities.
Self assessment tax does not go into the accounts, unless it is paid by a business account, and then it would be posted to drawings. You dont make any adjustment for it if its not been paid
-- Edited by FoxAccountancyServices on Wednesday 20th of November 2013 02:46:02 PM
May you please help with the following issues giving me sleepless nights:
1. Is it correct to say that the Drawings account is a balancing account in a self-employed business?
Do I need to itemise everything that goes in there or can I just dump any small amounts in there?
2. Also, when I am reversing last year's balance sheet items, how do I treat the Capital Introduced account? do I also reverse the amount, and if so, where do I reverse it to? Dr Capital Introduced Cr what??
Or, does the Capital Account only have the Balance b/f as the only cumulative figure, with things like capital introduced, drawings and net profit being current period values?
3. The tax liability for the period between January and 5th April (that amount payable in July for self assessment); what do I do with it? Cr Other liabilities & accruals then Dr what??
I'm confused...please help. Dealing with self employed for the first time.
1. By 'a balancing account' I would understand you're dealing with a trader who does not keep a precise record of drawings each period. Secondly does not carry forward a cash balance to the following week/month. The implication being that you're left to sort out both. Either once a year, or weekly if you prefer, you'd have to debit to drawings the surplus cash. With a bit of luck he can give you a closing balance. Not ideal but very common.
2. Your Capital Account figure consists of :
b/f figure add Capital Introduced add Profits (or deduct losses) and deduct Drawings
All you carry forward is the resulting figure which needs to agree with your assets less liabilities. The same formula then applies to the next year.
3. The tax liability for the period between January and 5th April (this isn't the SA amount payable in the following July). I wouldn't generally account for tax liabilities for sole traders and partnerships. If you want to then your theory is correct and you would Debit Drawings.
Quite right it's not always necessary to prepare a balance sheet. With my software it's little trouble to take it all the way if I just prefer to have one.
Phew!! I knew I could count on you folks. Thank you, it's beginning to make sense.
This client has always had a balance sheet prepared by her accountant and yes she has a business bank account.
Almost there, but Tim, just to clarify one point, did you say the tax liability for the period between January and 5th April isn't the SA amount payable in the following July? is it not? I thought it was.
Isn't it that there are 2 payments to be done in January and July, so, say SA for yrs 2011/2012 was £4000. First instalment of £2000 would be paid July 2012 and 2nd instalment of £2000 in January 2013, is this right?
It's probably a bit pedantic but I thought the period between 31st January 2013 to 5th April 2013 (2 months) would be apportioned to become a liability of £666 (2/6 x 2000) due but not yet paid for the period 2011/12; or am I confusing myself with the dates or something?
The July instalment is an estimate based on the previous years liability. It's not earmarked as being for any particular dates. It used to be payable 30 June, for instance.
If the period you're dealing with was say commencement to 5th April then the liability then would have a fixed date of the following 31st January.
Either way, you simply post self assessment tax liabilities to the drawings account if its paid through the business bank account. SA tax is not a business item, its a personal one.
Sorry if I have got the wrong end of the stick, I just wanted to make sure that was clear, after seeing the word "apportioned" - sounds like you are gearing up to make some adjustment on the balance sheet, and you shouldnt be
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