There are a few different reasons.
Taxes
You need to know how much profit you made so that you pay income or corporation tax on that amount. You don’t need to pay these taxes on your entire turnover, just on your profit. To find profit, you want to remove the allowable expenses from your revenue; to do that, you have to keep accounts.
Less well understood, though, is why. Successive governments of all stripes in basically all countries use the tax code to provide carrots and sticks to nudge the population into whatever the desired behaviour of the day is.
We’ve all encountered these carrots and sticks, probably most frequently at the supermarket. Many foods attract no VAT, and others now attract an extra sugar tax: both a carrot and a stick to nudge us.
When you set up your accounts, you’ll want to itemise expenses based on the type of expense.
Once you’ve done that, later on when you learn (or your accountant or qualified bookkeeper tells you) that you can’t claim OK! magazine as a business expense for your sewing business, then you are able to move the entire lot in one go out of your business accounts so you don’t file the wrong amount with HMRC and pay too little tax, which could result in fines.
Also, by breaking things out into separate accounts, you’re able to more easily glance through the lists and make sure they’ve been entered correctly. For example, insurance does not attract VAT, so if you’re VAT-registered, then before you file your VAT return, you’ll be able to look at your insurance account and just quickly make sure you haven’t accidentally entered any with VAT. Again, you’d then be reclaiming more VAT than you should (more than you’d actually paid), so that too could result in fines.
I think you get the idea. Stay tuned for more reasons to keep your accounts in future blog posts.
Hi, I’m Sara-Jayne Slocombe of Amethyst Raccoon. I help your small business thrive using the power of your numbers, empowering you so that you have the confidence and knowledge to run your business profitably and achieve the goals you’re after.
I am a UK-based Business Insights Consultant, which means I look at your data and turn it into information and insights. I separate the noise from the signal and translate it all into actions that you can actually take in your business.
I also facilitate the Power Pod Roundtable, which is a business discussion group, and the AIM HIGH Mastermind, which is a small group of business owners who want to move their businesses forward.
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