The Chart of Accounts enables us to view various elements of our business within groups, or entities. Our article "What is a Chart of Accounts" goes into further details about the uses and purposes of a Chart of Accounts in general.
So, if we now know what a Chart of Accounts is for, what is the best setup of a Chart of Accounts for someone who is self-employed?
As in all cases for any Chart of Accounts, the requirements for the COA layout are determined by the information that you need to get from your accounts information. The primary driver behind the Chart of Accounts layout will therefore be the creation of groups that allows you to see the important flows of money into and out of your business. However, for the self employed running a small business with a turnover below £64,000 they will often have a "feel" for where they are earning their money, and where their main expenses lie, primarily because the number of transactions in running the business are relatively small. So, in this case is the Chart of Accounts needed, and if so, why?
Well, the answer is that the Chart of Accounts can make the completion of your tax return a much simpler process, because it can provide the necessary answers to some of the important boxes you need to complete on your self-assessment tax return.
For the self-employed running a business with a turnover below £64,000, the most detailed information required by the Inland Revenue is not just your total allowable expenses incurred in running your business, but if your turnover is above £30,000 then you also need to provide a breakdown of this total - and this is where your Chart of Accounts can provide you immediately with the answers that you need.
The self-employed tax return form requires the following breakdown of your total expenses:
- Costs of goods bought for re-sale or goods used
- Car , van and travel expenses
- Wages, salaries and other staff costs
- Rent, rates, power and insurance costs
- Repairs and renewals of property and equipment
- Accountancy, legal and other professional fees
- Interest and bank and credit card charges
- Telephone, fax, stationery and other office costs
- Other allowable expenses
The last one is a "pot" to put all other business expenses into (but NOT client entertaining costs: these are not allowed!)
Given that the Inland Revenue only want to know your total turnover and do not want to know the different ways in which you earned your money, this means that at its simplest, your accounts should have ten nominal accounts set up for sales and purchases:
The first is your Sales nominal account into which all your sales go, so that at the end of the year the figure in this pot is what makes up your turnover.
The other nine nominal accounts are for each of the areas of detail shown above that the Inland Revenue require about your expenses.
These ten accounts, combined with your standard debtor, creditor, and bank account nominals, will be sufficient to not only provide a basic balance sheet, but also immediately give you the figures that you need to put into your self-employed tax return supplement.
If you´re self-employed and need advice on the easiest and quickest way to get up and running with some affordable software that will make the completion of your tax return a doddle, and enable you to quickly and easily create and send out invoices to your customers, then give us a call on 01707 65 75 81 - we can help you!
Bookkeeping does not need to be complicated, and we can show you how you can keep good accurate books without having to think about it!