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The Seven Stages of Year End

June 7, 2018

If you follow me on social media, you'll know that I'm quite a chatty accountant. I chat about the dog, what I've done today, how far I've run (never very far) and how pretty the sunshine is. I also try to slip in nuggets of useful info to help business owners make more sense of accounting, what us accountant's actually do and, of course, why you need us (wink). 

 

My practice, Bulldog Accounting, provides full service accountancy. We do your tax, we keep your records tidy, we give you advice if you need it and we do your year end. I wanted to shed some light on the process commonly referred to as "year end" which includes: the collation of your financial results; production of your annual accounts and any required submissions for HMRC or other regulatory bodies (Companies House and the Charities Commission being the biggies, but there are others). If you're a bit bigger, or a Charity, it can also encompass an audit or independent examination where an external party comes in to check your numbers are right. Not much fun but really valuable as a process.

 

I am a financial accountant by trade, and I LOVE accounts production but there is a lot involved which is why it can be quite expensive. In theory, the better your records are, the less it should cost to do your year end - and the more accurate your accounts will be. This is why I encourage my clients to use an accounting system to keep track of things as they go. Its much easier to remember what you've done this week than what you did back in May 2017!

 

Here are seven things I do when preparing accounts for my clients:

 

1. Check all accounts are reconciled and match to the bank statements.

Surprising how many people don't dot the "i's" and cross the "t's" on this one. If your bank isn't reconciled, your income and expenditure might not be correct and we can't have that!  Same applies to any Paypal or Go Cardless (or other third party accounts which link into your business). As your accountant, I would need to resolve any discrepancies before proceeding. 

 

2. Review your payables and receivables and check they're right

If your accounts are prepared on an accruals basis, it is likely that you will have some monies received or paid after the end of the year which should be attributed to the prior year. For example, the end of my financial year is 31 May. I did some work in the last week of May but didn't actually get around to invoicing for it until June. The work was done in the year ended 31 May 2018 so the income should also be reflected in that financial year, and not the new one. I therefore need to make sure there is an entry on my balance sheet to show that money is owed. This principle is all about making sure that transactions match up with the right time period. Even when you use an accounting system, its easy to get in a muddle over which payment relates to which invoice so this is a key area where mistakes can be found. (JARGON ALERT: Payables are amounts of money you owe to others, Receivables are monies owed to you. Creditors and Debtors in old parlance.)

 

3. Check the tax treatment and position

There will often be an outstanding tax liability at the end of the year for VAT or PAYE. Its always nice to check that the liability is in line with what HMRC are expecting from you! I have had a few clients who have a VAT liability on their books but who aren't actually VAT registered! It had been automatically posted like that because of the accounting system and no one realised until we came to do the accounts.

 

The year end process will also include the computation of your corporation tax liability (if you have one) which needs to be included in the accounts as a liability. This is based on the figures in your income statement so cannot be done until those have been checked and finalised. Every time the figures change, the liability has to be recalculated and updated!

 

4. Put through accounting adjustments

There are a few things which your accountant will do to make your numbers follow accounting conventions the two most common are:

 

A calculation to claim back costs incurred working at home: you can claim a (low) flat rate, or a proportion of your rent, mortgage interest, power and other costs (not water) based on the amount of time and space used in your home to run the business. More info is available on the HMRC website here

 

5. Reconcile the Director Loan account & recommend dividends to be paid.

Most Directors will have a balance of money with the business, usually owed back to them. This develops from personal start up capital paid into the business, incurring personal expenditure to recharge to the business, and the withdrawal of dividends. This balance tends to move quite a lot during the year, as Directors pay in and withdraw money to suit their needs, and those of the business. At the end of the accounting period, I do a reconciliation to see what the final position is.

 

If the company makes a profit, or has profits brought forward from a previous year, it is possible for dividends to be paid to shareholders. At this point, I would be able to suggest a suitable level of dividends to pay out, based on your personal tax circumstances, and the reserves of the business. 

 

6. Create the accounts

Once all the figures have been checked and reviewed, you have what is called a "Trial Balance". This is effectively a list of codes and balances, showing where the summed up transactions go. This is transferred into accounts production software (a recent and joyful revelation to me after years of creating excel spreadsheets from scratch) which formats everything, and populates the notes from your data. Some notes will always be manual, and the required disclosures vary depending on the type of organisation you are, and what your business does. Micro Entity accounts, for those with turnover under £632,000, are pretty simple to look at but there are still a few pages of bumf that need to be there, including a Director's and Accountant's report.

 

7. Check Check Check and check AGAIN

Once the accounts are produced, we then enter a roundabout of checking, cross referencing, tweaking and changing. I like to share accounts in draft form with my clients to see whether they are as expected (after all, who knows your business better than you!) Any changes made - such as an invoice coming in REALLY late, or a significant change to your business, will require all the checking to start over again. Whilst the most tedious aspect of the process, it is probably also the most crucial. Once checked and signed, accounts are sent off to Companies House where they will forever live on the internet, visible to all! If you haven't already, have a look on Companies House online. You can access a surprising amount of information about limited companies for free, including their most recent accounts (usually limited to just a balance sheet, but still). Have a look here if you are interested.

 

Of course,all this assumes you actually have accounting records to check. If you've got nothing but a box of receipts there is a whole raft of things to be done before you can even start with this lot!

 

 

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