Am I obliged to keep records for tax purposes?
YES. You must keep full and accurate records of your business from the start. You need to do this whether you send in a simple summary of your profit/loss, prepare the accounts yourself, or, have an accountant do it. It is important for you to remember that the figures which are contained in your tax returns, your accounts, or your summary of profits/losses, must be correct.
The records you keep must be sufficient to enable you to make a proper return of income for tax purposes.
You should bear in mind that you may need to keep accounts for reasons other than tax. For example, your bank may want to see your accounts when considering an application for a business loan.
What records must I keep?
The type of records you will need to keep will depend on the nature and size of your business.
The records kept must include books of account in which:
- All purchases and sales of goods and services,
- All amounts received and all amounts paid out,
are recorded in a manner that will clearly show the amounts involved and the matters to which they relate.
All supporting records such as invoices, bank and building society, merchant banking statements, cheque stubs, receipts, etc. should also be retained.
What information will I need to prepare my accounts?
At the end of the accounting period you will need to have details of:
- Your business takings,
- All items of expenditure incurred, such as purchases, rent, lighting, heating, telephone, insurance, motor expenses, repairs, wages, etc.,
- Any amount of money introduced into the business and its source,
- The amount of any cash withdrawn from the business or any cheque(s) drawn on the business bank account, for your own or your family’s private use (these items are normally referred to as drawings),
- Amounts owed to you by customers, showing the total amount owed by each debtor,
- Amounts owed by you to suppliers, showing the total amount you owe to each creditor,
- Stocks and raw materials on hand.
How should I record these transactions?
The manner in which your transactions are recorded will vary from a full ‘double entry’ book-keeping system if you want to keep precise control over all business matters, to some system which falls short of a double entry system in one or more respects. Whatever manner in which your books and records are kept they must be capable of showing the amount and source of:
- All income,
- All purchases and other outgoings.
Simply keeping the bank statements for the business is not enough – it does not fulfil your requirements to keep proper books and records.
Your accountant, will advise you on a book-keeping system suitable to your circumstances. Examples
of some typical books kept by a trader are
- Sales Book
- Purchases Book (*Note)
- Cash Book
- Cheque Payments Book
In the case of small businesses, there is no need to keep a separate purchases book if a claim is made for VAT input credits on a cash paid basis. The cash/cheque payments books should show the VAT paid to suppliers separately.