Launching a new limited company marks a thrilling milestone in any business journey.
But, before getting carried away with your visions, pause first to implement strong accounting practices. It’s the strong foundation you need for future growth.
This guide explores key accounting considerations for startups and small businesses, examining cash vs accrual accounting, selecting software and key compliance considerations.
Your immediate accounting responsibilities
First things first, once you incorporate a company, the following basic responsibilities apply immediately:
- Maintaining accurate records: Companies must keep detailed financial records for at least six years. This includes all invoices, receipts, wages, and other financial documents.
- Annual accounts submission: Limited companies must submit annual statutory accounts to Companies House. These accounts should clearly show the company’s financial activity and status.
- Tax returns and Corporation Tax: Companies need to file a Company Tax Return with HMRC and pay any due corporation tax.
- Filing confirmation statements: Each year, a confirmation statement must be filed with Companies House, confirming the accuracy of the company’s registered information.
All of these procedures link to your accounting system, which will be the foundation for how you account for your business activities and report them to HMRC and Companies House.
So, what does your accounting system require?
Key steps in setting up your accounting system
1. Accrual accounting
Limited companies must use accrual accounting.
This accounting method records financial transactions when they occur rather than when cash is exchanged, providing a more accurate account of a company’s profitability.
Why accrual accounting matters
Accrual accounting aligns revenue and expenses with their corresponding periods, offering a true reflection of financial performance.
For instance, if your company completes a service in March and invoices £10,000, this revenue is recorded in March, regardless of when the payment is received. This ensures that your financial records reflect that period’s actual earnings and activities.
On the expenses side, imagine your company orders supplies in April for £5,000 and pays in May. Under accrual accounting, this expense is recognised in April, the month it was incurred.
Again, the timing ensures that expenses are matched with the revenues they help generate, providing a clearer view of the company’s profitability during that period.
Consider a scenario where your company starts a project in January and completes it in March, billing the client £15,000 in March. In cash accounting, this would only appear in your accounts when the cash is received, say in April.
However, accrual accounting reflects this income in March, aligning it with the project’s completion.
Similarly, if your company commits to a marketing campaign costing £3,000 in February, but the bill is settled in March, accrual accounting records this as a February expense.
Again, this ensures that you are assessing the profitability of your business based on when the economic activities actually happened, not when the cash flows in or out.
2. Implementing a bookkeeping system
Software like QuickBooks, Xero, and FreshBooks can hugely simplify bookkeeping.
These enormously popular software tools automate many accounting tasks, from invoicing to expense tracking, and offer real-time insights into your financials.
They also help manage cash flow and prepare for tax season more efficiently, as you can use them to help generate your financial reports for submission to Companies House.
Legal and compliance responsibilities to be aware of
Staying on top of legal and compliance responsibilities is a pivotal aspect of managing company finances.
At the start, it might feel like a lot to manage, but it’ll become simpler with strong accounting habits and routines.
- Adherence to GAAP or IFRS: Companies generally follow Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). GAAP is more common among smaller companies.
- Tax compliance: Corporation tax management involves ensuring timely payments and accurate filing of tax returns. It’s important to stay updated with the current corporation tax rates and reliefs available.
- Avoiding penalties: Late payments or inaccurate filings can result in penalties. Setting up reminders for deadlines and using professional tax services can help in maintaining compliance.
- Appointing a company secretary: A company secretary handles important administrative tasks like preparing and filing annual compliance documents. They also serve as an advisor on governance issues and can take meeting minutes. Appointing a qualified, organised secretary provides legal oversight.
- Shareholder agreements: Shareholder agreements establish ownership percentages, distribution of responsibilities, dividend rules, voting rights, mechanisms for selling shares, and provisions for disputes. These legally binding agreements govern the relationship between founding partners.
- Data protection: Financial data relating to customers, employees, and partners is subject to GDPR for storage, usage, and protection protocols. Companies must implement cybersecurity and access controls around sensitive accounting and payroll information to avoid regulatory fines.
Implementing robust accounting practices early when starting a limited company provides a vital foundation for growth. Taking time early on to get the accounting basics right saves headaches down the road.
Don’t skimp – take the time to understand the steps to building an effective system.
If you’re confused or feel like you’re hitting a brick wall, contact our professional accountants at Fairman Keable. We’ll help you determine how to set up your accounting system for success and growth.