Frequently Asked Questions
Accounting is the process of organising, regulating, documenting and evaluating an individual's or business's financial records.
On a personal level, accountants can advise on financial decisions such as investments, loans, savings or potential salaries. On a professional level, accountants can deal with payroll, audits and tax obligations for businesses of any size, from sole proprietorships to large multinational corporations.
Accounting is widely referred to as the "language of business". Just as language allows humans to communicate ideas to one another, accounting allows businesses to communicate certain financial data (such as profit or debts) to other entities, such as investors, competitors and authorities.
This stream of information feeds the economy. The economy is constantly moving and shifting due to the constant flow of money pumping in and out. An accountant's job is to record and communicate each separate flow to the market systematically.
Some accounting decisions have significant and wide-spread effects on the whole of society. For example:
- Government - Accounting decisions within the government can determine where tax-payers' money is invested, whether it be in the education system, the NHS, the army or any other public sector. Where money is spent determines the quality of the service we receive.
- Banks - Banks use accounting information to make decisions about granting loans or mortgages. On a domestic level, these decisions can effect whether or not you get the loan you want for starting a business, buying a car or taking a holiday. On a broader scale, bank decisions essentially determine the course of economic growth or decline.
- Influential corporations - Large corporations can use accounting advice to decide whether or not to buy out other businesses. Due to their size and wealth, mergers can affect the direction of the market and ultimately shift the distribution of corporate power across the globe.
The importance of accounting is not only confined to large-scale corporations and governments. Every monetary transaction made, however big or small, will have some kind of effect on the overall balance of the economy.
You don't have to be the director or proprietor of a business to benefit from an accountant's services. Hiring an accountant can benefit anybody who wants advice about money management.
In order for an accountant to gain a comprehensive idea of your or your business's financial state, you will need to provide certain information. Accountants handle 5 main parts of a business's finances:
- Assets - An asset is anything directly owned by a business. It could be in the form of cash, equipment, property or investments (shares etc).
- Liabilities - A liability is anything a company owes. This could be a loan or a mortgage, or taxes owed to HM Revenue and Customs like VAT, NI, income tax etc.
- Equity - Equity is a company's total assets minus liabilities, or in other words, the sum of what a company owns without owing to creditors.
- Expenses - Expense is the cost of goods or services provided by another company or organisation.
- Income - Income is the excess of revenue after expenses for an accounting period.
Yes, there are two main types of accounting:
1. A financial accountant will gather financial data into financial statements. These statements will be used to organise all records required by internal and external stakeholders, including:
- Annual Return
- National Insurance
- Corporation Tax
- Capital Gains Tax
- Stamp Taxes
- Statutory Pay
- Real Time Information
- P45s, P46s, P35s, P60s, P11s
2. A management accountant will use a business's financial information to aide managers with any business decisions such as expansion, change of direction, merging, collaborations etc.
Having an accountant is absolutely not a legal requirement for small companies, so hiring one is not a necessity. Providing detailed and accurate records of your business, however, is.
The only time there is a legal requirement is if the company is big enough to require an audit.
It is perfectly possible for you to do your own accounting, yes - but only if you know exactly what you're doing. When it comes to DIY accounting, you'll need to know all the rules, all the deadlines and all the standards. For more information about how to handle your own accounts, please visit our accounting services pages.
If you are struggling to keep up with your business's financial accounts, or wish to focus more on other aspects of your business, then you may want to consult an accountant for help. An accountant will undertake all accounting duties and remove the responsibility of tax deadlines from your shoulders, freeing up your time and energy so that you can concentrate on other parts of your business.
There are three important reasons why you may wish to consult an accountant:
1. An accountant could prevent you from getting into legal trouble
Businesses must provide records of their accounts by law. It is a requirement for companies to report their financial performance to the market systematically, informatively and consistently. These rules are instigated so that business performance can be compared in an unbiased way across the market.
Because business is about balance in relation to all other businesses, inaccurate or misleading financial information about one company could have a domino effect on the market-place. According to a survey by Accounting Age, one in 10 accounts filed to Companies House is rejected due to mistakes. Mistakes, such as miscalculations on crucial figures, can result in business having to pay more tax than they really owe.
There are numerous tax deadlines throughout the financial year that, if missed, will result in a penalty. One error or a single delay could result in businesses having to pay interest on top of late fees. It may be worthy to note, however, that the HMRC reward good organisation skills. If you are prepared to pay your tax early, then you could earn interest.
It takes a lot of time, patience and a certain amount of mathematical ability to produce good account records. Managing accounts for limited companies can be particularly complicated. HM Revenue and Customs suggest that Limited Companies seek a solicitor or accountant for help with Corporation Tax.
2. An accountant could help you make profitable business decisions
Accurate accounting is not only a legal requirement, it is essential for the proper functioning of the business world. Experts commonly refer to accounting as the "language of business". Just as language constitutes the framework of civilisation, accounting constitutes the main driving force behind commerce. Accounting is the bridge, the method of communication between business and market.
A single bad business decision is often enough to secure your business's failure. In order to make a good business decision, you will need to have a detailed knowledge of your business's financial history, current state and future forecast - otherwise your business could end up losing more than it could ever hope to make. An accountant will use this information to predict the most profitable path to take, potentially determining the success of your business.
3. An accountant can reduce your taxes
When it comes to paying less, many accountants know certain 'tricks of the trade'. These are all entirely legitimate ways in which businesses can keep their tax rates as low as possible. Many businesses pay more than they need to, simply because they don't know about certain government schemes and initiatives, flat rate schemes or certain expense claims that can end up saving thousands. Accountant know how to make cost-effective business decisions, and they also know how to avoid hidden costs. All of this information can be found across our accounting services pages.
Starting a new business can be a monumental task. A start-up involves, along with a million other tasks, market researching, choosing a company name, designing logos and business cards, branding, networking and product sourcing. It's easy to get carried away with aesthetics and forget about the numbers. An accountant can get your business running, show you the ropes, free up your time and avoid any mistakes that that could be detrimental to a young business.
Proprietors thinking of expanding their businesses, whether to move abroad, upgrade to bigger offices, provide more services or take on more employees, need to handle the transition process delicately. Making the wrong decisions at this transitory stage could ruin the whole business. An accountant will help proprietors control costs by drawing up realistic budgets and using evidence to determine whether or not the planned changes are likely to benefit the business.
Accounting isn't just for businesses. As an employee, you may face certain points in your career where expert financial advice could come in useful. For instance, an accountant could help with tax, pensions or salary and job changes. In day to day life, situations arise where we may need to spend or handle a substantial sum of money- like marriage, planning to have children, getting a mortgage, handling savings, inheritance and so on.
People who earn substantial amounts of money may benefit from consulting an accountant. An accountant can help with distribution, taxes, investments, shares etc. Remember you only have to book a short appointment every once in a while - hiring an accountant is not the same as employing an accountant. Two hours of advice at crucial times in your life could make a positive difference to your life decisions.
This is entirely up to you. How often you see your accountant will depend on your personal or business requirements. If you are an individual seeking personal finance advice, you may only want to see an accountant once a year. Similarly, if you are the proprietor of a small business, you may only require an accountant to help with your annual tax returns. If you wish to have absolutely no hand in your accounts, you may want to be in contact with an accountant on a more regular basis. When you contact an accountant, be sure to state your exact requirements and they will be able to predict the length of the job and how often you will need to be in contact.
The term 'accountant' is not regulated in the UK. Essentially, anybody who wants to call themselves an accountant, can do so. Of course, most businesses would be unwilling to hand over delicate business information to complete strangers without being assured of a certain set of standards. There are a number of regulatory boards for accounting in the UK.
FRC - The Financial Reporting Council (FRC) is the independent regulator for corporate reporting and governance (in other words, it regulates the way financial information is conveyed to the government/market). To ensure high standards, the Department of Trade and Industry and the Bank of England decide who to allocate as the FRC chairman. The FRC regulates the reporting and governance of business data by setting standards for, and supervising, operating bodies such as the Accounting Standards Board and the Auditing Practices Board.
ASB - The Accounting Standards Board, recognised under the Companies Act 1985, issues accounting standards for all accountants in the UK to follow.
The purpose of the regulations are, firstly, to ensure accountants work within legal boundaries, and to secondly ensure that preparers (accountants) communicate their information in a way receivers (those who read the information) can easily interpret. As previously mentioned, accounting is often described as 'the language of business'. The Accounting Standards Board ensures that everybody is speaking the same language.
GAAP - The framework applied by the Accounting Standards Board and supervised by the Financial Reporting Council is called the GAAP- the Generally Accepted Accounting Practice.
The GAAP is a collection of rules outlining the correct methods for recording financial information. The guidelines promote consistency, ensuring that financial statements are prepared in a standardised way for easy interpretation and comparison across the market.
There are a number of different accounting bodies in the UK, all of which have their own regulatory rules, standards and registration requirements. Accounting bodies only accept accountants with certain qualifications and experience, so, whoever you choose, you can be assured of receiving a secure and highly professional service.
Handing over your business's sensitive financial information can be a delicate process that involves a lot of trust. It is advisable to take your time over your decision and find out as much as possible about the services different accountants offer before deciding. Here are 5 tips for choosing a good accountant for your business:
- You are generally advised to contact at least 3 different accountants before you decide on who to go with. All professionals work in different ways and you may find that you prefer one to the other. Giving yourself the luxury of choice is the first step towards finding an accountant who suits you and your business.
- If possible, start looking for an accountant before you start your business. An accountant can help with financial planning and budgeting before there are even any assets to account for.
- Starting your business relationship early will build trust and loyalty and ensure your accountant holds values and goals that resonate with your own.
- Ensure your accountant is experienced. If they are registered with an accountancy body, you can be assured that they have passed certain examinations or worked a certain number of hours to the required standard.
- Ask about your accountant's previous experience. It may be beneficial to choose an accountant who has previous experience working with a business similar to yours. If your needs are more complex than anything your accountant has ever dealt with, you may prefer to hire someone with more appropriate experience.
- Often you can ask to speak to an accountant's existing clients to get an idea of the kind of service you can expect to receive. The research and effort will pay off in the end. When it's something as important as accounts, it's best not to take short-cuts.
Accounting costs can vary widely depending on the practices of the firm or individual you choose, along with the nature of your own accounting needs.
Basic bookkeeping and tax affairs may cost no more than £200-£300 per year, but this really is dependent on your own accounting needs.
For larger businesses with more complex financial accounts, it will cost much more.
Although many people are drawn to DIY accounting because they're put off by the costs, it is widely thought that businesses eventually recoup the cost of a good accountant in the amount of tax and fees accounting expertise can save.
A bookkeeper is a finance professional who takes care of a business's daily cash-flow. This means they must keep track of all the money that has been spent, and all the money that has been made. A bookkeeper's responsibilities include:
- Keeping finance records - usually in computer spreadsheets or via bookkeeping software.
- Chasing up unpaid invoices - customers who pay late or forget to pay at all need to be chased up.
- Keeping up-to-date with regulation changes - tax deadlines are always shifting around and errors can lead to heavy penalties, so it is important that bookkeepers know when the regulations change.
- Feeding financial information to your accountant - for business valuations, audits and tax returns, accountants need clear, accurate financial information from your business. Without this, their work will be harder, longer and far more expensive.
A bookkeeper is essentially an accountant's clerk, meaning that they mostly deal with the administration side of finance. Bookkeepers keep a daily record of cashflow and ensure accounts are organised and up-to-date, whereas accountants take that information and use it to produce evaluations and forecasts.
The cost of hiring a bookkeeper varies widely according to location and the experience of the professional. For instance, an experienced bookkeeper in London will cost significantly more than a junior bookkeeper in a small town. However, you can probably expect to pay between £10 - £20 an hour for most bookkeeping services.
How often you need a bookkeeper will depend on the nature of your business's cash-flow. If you have a large business with lots of money going in and out, you might want a bookkeeper working with you permanently. For smaller businesses, once or twice a week should suffice.