How do I prepare my business accounts?

If you don't understand what HMRC mean then I must question whether you are sufficiently competent to prepare small company accounts and am concerned at what other errors you might make.

I will try and answer your question with an example: -

assume sales £2,000 plus VAT of £300, expenses £1,000 plus VAT of £150 and flat rate scheme of 10%: -

the P & L would be: -

Sales  £2,070  (2,000 + 300 - 230(10% of 2300))

Expenses  £1,150   (incl VAT)

Net profit  £ 920

Using Stephen's example, I agree that is how HMRC have said it should be accounted for, but I can't help feeling it's just stupid. How can you have a set of accounts that does not have a proper sales/turnover figure in it ? Surely that is the most relevant/important figure in a set of accounts.

So I would show the VAT FRS profit separate, so I show:-

fees receivable     = £2,000

profit on VAT FRS = £70

Expenses             = £1,150

Profit                    = £920

Similarly, if the expenses are £1,000, do they really suddenly increase to £1,150 by going onto the scheme. Obviously not. So I would argue that they should also be net, and then the accounts should look like:

Fees receivable     = £2,000

Loss on FRS        =   -£80 (the profit above less the £150 they lose out on)

Expenses             = £1,000

Profit                   = £920

So in this example, you can see the accounts consistently with the accounts prior to going on the scheme, and also show exactly how much has been saved (or in his example lost) by going onto the scheme. Surely that makes a lot more sense and is far more transparent and the profit is the same in all 3 accounts so why would HMRC give a hoot ? I suppose they know best though.

Also, if the accounts are shown with net figures, how did the accounts balance ? you must have had some VAT FRS balancing figure shown somewhere in the P+L, in which case the abbreviated accounts don't change.  

Kenny

HMRC advice makes sense.

You sell something for £1,175 and have a deduction based on this sales figure so why not show the sales after the deduction? You could always keep the sales as £1,175 and have a separate amount in expenses for the payment to HMRC.

If you make a payment of £117.50 for stationery why not show that figure as expenses?

It's more stupid to still have the hassle of identifying the VAT and working out a profit/loss on the FRS.

Gross Sales

Less Flat Rate VAT due:

Sales

Cost of Sales

.

.

.

So Peter, do you not agree that your income (net of VAT obviously) is in any way meaningful in a set of accounts ?

 The HMRC suggestion is net of VAT.

If you make a sale of £117.50 (inc VAT) and pay VAT of £15.00 then HMRC say you show sales of £102.50. That's the amount you receive as well. What's wrong with that?

because it's wrong ?

You'll have to be more analytical to convince me.

How about this?

Stationery expense of £100 + VAT

Non-VAT registered trader - expense in P & L a/c: £117.50

VAT registered trader using the FRS which is only based on sales and expenses are not relevant - expense in P & L a/c: £117.50

VAT registered trader not using FRS - expense in P & L a/c: £100.00

Do you disagree with any of the above and if so WHY?

You're a new small business - fantastic! - good luck!

But it's all the more important to be able to focus on doing what you're good at (and what people pay you for) than on the inevitable admin.

You've clearly had some advice on joining the VAT FRS - did you speak to an accountant?  Can they also not help you on the bookeeping?

The right bit of software can also largely eliminate all of these headaches.

Have a look at FreeAgent - (It's what I use - I have no other stake in it than that).   It'll let you enter up clients, invoices, expenses and bills, and it'll take care of the reporting (including FRS) for you.   It'll tell you when your VAT return is due (and what the figures are). It'll generate a P&L and a Balance Sheet  for your accounts.  It'll even take care of your payroll and dividends.

www.freeagentcentral.com

I completely take your point re expenses and agree (I was just suggesting a way that in my opinion woul be better, because you can quantify the savings by being on the scheme and so know if the scheme is preferable or not).

Its the fees receivable figure that I have an issue with HMRC about. I keep tabs on the fees I invoice and that is the figure is in my accounts. It's the figure that interests me the most and let's me know how well I'm doing compared to last year. I don't really want, and definitely do not care, what my fees receivable + a random flat rate VAT fraction is.

You should care what your fees receivable and “a random flat rate VAT fraction” is. This is because your fees receivable (inc VAT) is what you will receive and “a random flat rate VAT fraction” is what you’ll pay to HMRC.