I have a friend who runs his own business and his accounts are basically non-existent. It's been running for a couple of years now, is there any way to pick a point and just start the books from there? how would we represent that? it's a very small one-man business so he was able to submit three line accounts last year for HMRC, but he really wants to get things in order. I am still a student so I can't yet do it for him but I would like to help him out with some advice somehow.
I know at the year end everything gets put through T,P&L and then into the capital account, could we just start with the bank balance at the start of this financial year as capital and then roll from there?
Your typical shoe box client! Welcome to the world of your average bookkeeper. He might be the first poorly organised person you meet but he won't be the last by any stretch!
Two options off the top of my head, depending on how much work you want to do.
Start from day one and build all the accounts to check the returns against before continuing with the 2013/14 year so you can 'adjust' the tax return.
Or start from April 1st 2013 - build to March 31st 2014 for this years tax return and then continue from there.
I know you say you are a student, but you can build the accounts in excel for him, you just have to get a fully qualified accountant or bookkeeper to check them over if he is going to rely on them - then the 'risk' is with the accountant/bookkeeper, technically. Or you can get him to sign a waver - as long as you are not paid and he accepts the risk of using work from an unqualified source you should be ok - check that with your governing body though.
A third option for you, though it will take a lot of your time, sit with your friend and teach him/her how to record their finances so they know both what they are doing and how the job is done. Some of my best clients come that way. They want to understand and take control they just have no idea how and are often happy to pay to be taught the skills they lack.
Oh and while I hope your friend is better organised than some I have met - don't expect to get every piece of supporting documentation - he is probably unaware of what he needs to keep.
Good luck! Sounds like brilliant experience for you.
brilliant post. You absolutely hit the nail on the head there.
I've come to the conclusion that there seems to be two sorts of clients.
1) Those (like this one that the poster has) who hide their head in the sand and hope for the best... Now there's a business model that always works.
2) Those who think that they know what they are doing and it takes longer to unravel what they have done than it does to do it properly.
Of the two I favour the ones who just bring in the bag of paperwork and you pray that they have actually included all of it (like that ever happens).
The other sort has the additional issue that they believe that they have done everything for you so what on earth do we do to justify our fee's!
Wouldn't it be good if the professional bodies actually tested us on real life clients... Then again the exams would end up ridiculously expensive as they would need to incorporate around hundred emails... Of course, of the hundred emails a good percentage of them would be follow up emails asking for information already requested. Plus, when you have finished the accounts the examiner would then send you another bag of paperwork that they had lost, fifty percent of which you already had copies of and at least ten percent disagreeing with information already processed.
They could follow that up with an oral exam where you sat down with the examiner pretending to be the client and had to explain their own accounts to them in language that they understand whilst the examiner talks over everything that you are trying to explain with stories of what little billy is doing at school, how the dogs sick and about their latest holiday.
... Do you think maybe I'm getting a bit too cynical?
p.s. Hi new poster, welcome to the forum. Hope that you enjoy posting here.
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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.
thank you both for getting back to me so fast :) I am certainly going to be sticking around this forum a lot more!
Unwize, you suggest I do the work without pay and get another bookkeeper to okay it, I am more than happy to do this for my friend but wouldn't this still fall foul of MLR? Also, you say I could start at the start of this tax year and work forward, what would my starting figures be? do I just treat it like he started up on that day and take his bank balance at that date to be the starting balance? Since he was using his personal account for some of that year, how can I document when "drawings" and capital investment occurred? There's no way to know whether he withdrew cash from the business or from other money that happened to be in the account. But I think we need to reflect this, otherwise it's going to look nothing like his actual account's current status. I believe I know how to deal with things the other way round, for example where he's bought a new drill for work out of his pocket, I treat that as capital being invested into the company by him and then being spent on the fixed asset the same day, yes? Talking of things out of his pocket, he's not kept any kind of petty cash record so if a customer pays him in notes, he might just go spend that on personal things, but that needs to be recorded as drawings. so would I just need to write up any discrepancy between bank balance and net profit as drawings?
As it is at the moment I am having him gather together all the paperwork. luckily it seems since I spoke to him last year he has kept all his incoming bills, receipts and invoices in a big box so whilst they are disorganised they are at least together). His own invoices to customers (he doesn't do sales apart from new products as required for servicing) are all on google docs so I am getting him to go through them and put the date, customer ref, total and amount outstanding into a spreadsheet for me so I can start to help him put some coherent accounts together.
Last year he got away with just submitting 3-line accounts to HMRC but it's another government department that wants his accounts at the moment and they seem to want everything. Thank god he's well under the VAT threshold, I don't think I could ever explain VAT calculations to him. He's a brilliant engineer but useless with money.
Could you perhaps also recommend a low-cost computerised bookkeeping solution for him? (if you happen to know of one). It doesn't need to be all-singing and all-dancing but features like bank reconciliation and so forth would be very useful (not least because he's only this year started using a separate bank account for his business). No payroll needed or anything.
sorry, I now that's a lot of questions and information but I would really appreciate some further advice should you have the time to do so.
thanks very much :)
(oh and Shamus; my friend is very much a #1 sort of client, he knows he's rubbish at bookkeeping and likes to quote Dylan Moran from Black Books. you probably know it but I've included it below because it always makes me laugh.)
Nick Voleur [accountant]: Now Bernard. About this new filing system you were telling me about.
Bernard: Ah yes well
[reaches into pocket and takes out handful of receipts]
Bernard: This is March to... boobelyboo
[takes out more receipts]
Bernard: this is err... misc
[takes out more receipts]
Bernard: and this is... other.
Nick Voleur: Bernard. This new filing system. It's very closely modeled on the old one isn't it?
Bernard: Well Nick I'd actually go further than that. I'd say it was more or less exactly... the same...
Okay... certain amount of reading between the lines here... A.N.Other HMRC department? He's being inspected? Or he is pitching for a Government contract? That changes the game - it's start from day one and do the whole job.
If it's an inspection he is about to find out the hard way that mixing business and personal is a really poor idea - it gives the inspectors freedom to check all his personal finances as well as the business stuff. If it's a pitch he could do with three years of full accounts - or from the start of trading which ever is more recent.
MLR - as you are a student you won't have MLR cover, if you get the work checked by a pro they will need to do all the MLR checks. If you are helping a friend - well, the truth is he may slip the radar, (anyone who does their own books, with or without the assistance of friends, tends to do so) but if you think he is dishonest as supposed from careless you should report it. The penalty for not doing so is several years in jug for you and more for him, however I doubt you would be here asking for advice if this was the case so good on you for thinking that it might need checking. Your instincts are bang on and you'll make an excellent bookkeeper/accountant once you have the training.
I've been assuming he is a sole trader, is that correct? If he is then the business entity concept gets a bit fuzzy - he is the business in that case, so you can get away with one set of accounts separated into trading activities and personal. The requirement is a full and true set of accounts showing all trading activity, if he has mixed everything up then you just do the best you can. Try and explain just how hard he is making his own life as well as yours - as if you haven't already! And get him a duplicate receipt book! He doesn't have to hand out the top copies but he really should write up every cash receipt he gets - if he can't prove the income was only the amount he claims then HMRC are free to declare an income based on apparent lifestyle and he can't contest it. The extra tax and late fines that they might place on him could easily cripple a young business.
If the only way to make him wake up and take his business seriously is to frighten him - well it is Halloween soon! People who play at being in business are their own worst enemies and they never see the inevitable downfall.
The key column for his books btw will be income - if he doesn't claim back everything he could that is less important but you must get every possible income listed - better to pay a little extra tax and be seen as slightly foolish that try and play the numbers and get slammed for it.
He's not getting inspected, but because he only runs the business part time and has complex benefit claims alongside it (he has disabilities and is a carer for his wife), the benefits lot need to know how much he's earning and when (it's a very small business, probably turnover of no more than £15k / year at most.) yes he is a sole-trader.
It's important we can show the drawings accurately as well since he has a limit on how much money he can make from the business each week before it starts to affect his benefits and we need to show whether that has happened at any time. (hopefully not obviously but if he's been taking money from a sale and using it to buy food without recording it as drawings then it causes a problem [he has however recorded receipt of the money as payment for the invoice raised so that part is okay])
I think you are right that his is probably great training experience for my future career!
Poor him, good to know he has a friend who will help.
In the short term cover the time period requested by the benefits office but look to get all the books done as soon thereafter as possible in case they want to dig deeper. It is unfortunately true that there are cases of guilty until proven innocent, so arm him with facts and figures. As to starting figures if you jump in mid period - not easy if he is mixing business and personal - best suggestion would be go from a tax return where he will have stated some formality and try to reconstruct from there, it may honestly be easier to do the whole job though.
I may end up in a not dissimilar boat - my eldest daughter has PoTS and will be assessed in a couple of weeks time for the degree of disability she is suffering from as part of the diagnosis (she is missing on average a day a week from her A2 timetable) it may turn out she needs a carer or other support (being driven to and from school rather than taking a bus - lessons recorded for her, that sort of thing) which to be honest I could do without on so many levels! I don't think I have calculated the amount of time I spend helping her but I dread having to formalise it to some jobs worth. I won't dwell on the impact to my business if I have to limit my hours to that extent! I routinely start at 7am so as to have after school free for my younger daughter, who is autistic.
I wish you both luck proving everything you need to
VT Cash book is free to download and when you download it you automatically get the 60 day trail of vt plus as well. You cant do invoices through VT cashbook but its certainly worth putting it in their if only for practice and a quick way to see whats what, so its certainty a starting point. Going forward what about something like quickbooks online or similar. Yes he may not want to justify the cost now but if it makes him do his books regularily.
Enjoy your new career and Im sure you will help him sort it.
So, I thought it best to keep you updated because I am still struggling a little here (but I really really appreciate all your help!
I just spent the entire afternoon and evening manually inputting every sales invoice since the start of business into quickfile. I still need to do the purchase invoices and receipts but obviously the income was the most important to get done. So do I take it that if his bank account was currently zero then all the sales - expenses should equal the drawings (if a positive number)? Obviously his bank is NOT zero atm but would that be the case? and if a negative number this would represent a capital investment by him into the business? Otherwise I am not quite sure how to get everything all matched up properly.
Also, I am not sure whether I need to then some how print out and submit all these individual transactions or whether I can just submit a trial balance to them? they are asking for his "latest accounts" (it's anyone's guess what that means!) last year he just submitted an itemized list of income and expenditure and that seemed to satisfy them. If they want final accounts, does this mean I can just finalize April 13-14 and send them the balance sheet and t,p&l? If it was me I would just call them up and ask what they want, but getting him to do that sort of thing can be difficult. perhaps I can persuade him... If anyone happens to know the answer as to what carer's allowance are looking for from self-employed traders, please let me know!
I would assume that 'latest accounts' for a sole trader would mean the 2013/14 year, yes.
Zero in the bank given he mixed business and personal should mean the total of all incomes less the total of all business expenses and the total of all personal expenses - remember you have told us he gets some disability allowance and carers allowance (other income - not from business - which will need to be shown separately. Someone will correct me if I am wrong but disability and carers allowances are I think, taxable!)
As an example try this - totally made up but hopefully shows the point.
Week 24
Invoice 1077 £100 (Washing machine repair)
Benefits £158
Invoice 1078 £250 (Build and delivery of PC mother boards)
Washing machine parts (for inv 1077) £25.89
Food purchases £80.00
Car MOT and service £140
Car insurance £170
Vet bill £92.11
Business
Total income for week 24 £350
Total expense for Week 24 £25.89
Net profit for week 24 £324.11
Personal
Total income (from Benefits) £158
Total costs £482.11
Loss on week £-324.11
Result - zero in the bank!
Week 25
PC parts (inv 1078) £80
Food Purchases £78
Benefits £158
Business
Net loss of £80
Personal
Total income £158
Total Expenses £78
Net 'profit' £80
Result - zero in the bank!
So in Week 24 our imaginary business owner drew money from the business to the tune of £324.11, but in week 25 he put money back to the tune of £80. In terms of the business it was in profit over the two weeks of a net amount of £244.11, which is how much he 'overspent' on his living expenses. Your accounts for your friend need to show both halves - the fact that the business is (or is not) earning and that it is either supporting or being supported by their lifestyle. It's not as simple as 'Zero equals drawings, negative means investment'. Because of the two way flow of money as needs arise between business and personal the money he takes would be more in the nature of a Directors Loan - not drawings - as he might well be 'paying some back' only a few days/weeks later.
Not sure if I'm just confusing you more!
Shaun, Bill - anyone care to dig in and help here!
