Understanding small business accounting, software and your obligations
Tracking income and expenses, preparing your set of accounts, and reporting everything to HMRC. These are mission-critical challenges for small businesses… and they don’t stop there.
Get anything wrong, and you can face tough penalties.
Unfortunately, it doesn’t take much time to realise small business accounting gets very complicated very quickly.
So where do you start – what software and resources will help you?
What is small business accounting?
Accounting enables a small business to watch its financial performance and position, handle legal obligations and plan ahead. It can be done:
- In-house, with the right software.
- Via dedicated professionals like accountants.
- A mixture of the two – with experts providing your small business employees with advice.
Featured Guide
Our FREE guide to small business accounting and more
We’ve created a comprehensive guide covering small business accounting, software and outsourcing. It also covers other compliance challenges you’ll face.
In-house vs external accounting
In-house accounting means more effort and, undoubtedly, excellent software to give you maximum control.
An external accountant or bookkeeper takes the burden off – but you still need to supply them with data, so you might want software to make that job easier.
When it comes to accounting, there are three main types of solutions for small businesses:
- Cloud accounting software
- Desktop accounting software
- Hosted Desktop – desktop software hosted on a server
Accounting Software: what it should offer a small business
Small business accounting software can include some important features and characteristics.
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The cloud
Cloud accounting software lets you work from anywhere. We have a separate section on cloud, but for now, it’s important to know it is the newest form of accounting software technology. It’s different from desktop packages and doesn’t require the expense of a server. Instead, it’s designed to work in a web browser.
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Modules
Often, modern software is split into distinct modules, making them easier to update and keep safe. Some software providers, including IRIS, let you pick a collection of modules so you only buy what you need.
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Integration
Good software is truly integrated. Integrated software should mean all your modules work together, as well as with other software. This means financial data is passed between your online accounting software packages – and your desktop ones – and everything updates all at once. You can even link up HR and payroll.
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Compliance
Compliance is about obeying the legal regulations and professional standards required for a particular industry. In terms of accounting, that includes filing your tax return.
It’s crucial you go with a reputed provider that understands the needs of accounting. This makes sure your software produces reports that meet stringent requirements.
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MTD functionality
MTD stands for Making Tax Digital. It’s a way of ensuring businesses keep on top of tax affairs. Annually, these issues cost the UK Government billions. Check the Government’s latest rules on MTD. If you’re a VAT-registered business, you have to register for MTD. You also have to use approved software.
Software and your accounting workload
The following will help you appreciate the scope of the task at hand – a crucial decider as to how central accounting software will be in your small business.
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Yes, there are four types of business in the UK, and each affects how the accounting is done.
These are sole traders, partnerships, Limited Companies and Limited Liability partnerships (LLPs).
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Keep records, submit an annual return and pay Class 2 and Class 4 National Insurance (the latter depending on income). You also need to check if you have to comply with MTD. If you do, you or whoever looks after your affairs needs MTD software.
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In partnerships, two or more people run the business. They have to record expenses and pay income and National Insurance on profits. Partnerships don’t have to register with Companies House or file annual accounts. They have to register with HMRC and submit a partnership return. Partners do self-assessment. This can get complex, and that means you might want to track things with good bookkeeping and tax software.
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Limited companies are their own legal entity – separate from the people who own or manage them. You have to file accounts with Companies House, send a corporation Tax return to HMRC, record all money received and spent, and ensure you have a register of people with significant control over the company. Good software will help you keep track and prepare what’s needed.
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We recommend that you consider using a bookkeeper and accountant if your business is very complex. If you go it alone, your software will help you track your income and outgoings, meet MTD obligations, prepare reports, send tax returns, and stop things from getting out of control.
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Yes. Accounting, to some extent, overlaps with other compliance issues – not least payroll. You also have to ensure you put the necessary HR policies and procedures in place as your business grows.
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Not necessarily. It has been a problem in the past, but modern cloud software should allow these different platforms to “talk” to one another. They can share information and update one another as you go.
This can save you a lot of time as you simultaneously track staff, how much you pay them and your company’s bottom line.
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