In part two of 10 things your accountant needs to know when preparing you accounts I am going to discuss capital equipment, loans, bad debts and accruals.
Have you purchased any Vans, Equipment or Cars during the year?
These items are considered to be capital rather than revenue costs primarily because it will take more than one year to use them up in the process of generating sales. The purchase of equipment should not therefore be shown as an expense within repairs and likewise the purchase of motor vehicles should not appear in the profit and loss account as motor expenses. Instead both should be shown in the balance sheet under fixed assets. A proportion of their cost, depending upon their estimated useful life, will be allowed against profit in the accounts each year via depreciation. All three are treated differently for tax purposes. There is currently an Annual Investment Allowance of up to £100,000 each year on which 100% of the cost of equipment and vans, but not cars, can be claimed. Any expenditure above the annual allowance will be written down at 20% per annum within the capital allowances pool. Cars will also only receive a 20% annual allowance and this may be reduced by any non business use.
Are those loans or leases that you are paying for during the year for which the accounts are being prepared?
It’s very important to know the difference since the repayments are treated differently in the accounts. Payment for leases lasting less than five years (operating leases) are shown as an expense in the profit and loss account. Payments for leases of longer than five years (finance leases) are split between the capital repayment element and the interest element. The former is deducted from the original amount borrowed, as it is paid off, and the latter is included in the profit and loss account as loan interest. For other loans it’s also important to know how much interest is added to the debt each year in order to provide for this as a tax deductible expense.
Have you incurred any bad debts that need to be recorded in the accounts?
Are there any amounts that you have invoiced to your customers that it doesn’t look like you are going to collect? This could be because the customer has actually gone bankrupt or just because he is not paying you despite promises to the contrary. You can reclaim the VAT on these amounts as well as claim a tax deduction for the net value of the part of the sale not paid for. You can also make a general provision for bad debts in the accounts based on, for example, what percentage of your debtors have turned out to be bad in previous years. This type of provision, however, is not tax deductible and will need to be added back to the profit when your accountant is calculating the tax liability.
Are there any expenses that straddle two years accounts?
Electricity, gas and telephone bills may cover a quarter that is partly within the accounting period under preparation and partly within the next accounting period. Your accountant will need to see these bills, even though they are dated after the year end, so that he can calculate the relevant proportion of the expenditure. This is another way of ensuring your tax bill is kept to the minimum.