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moving from cash basis to traditional accounting

what additional accounting procedures are required?

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Hi,

I run a relatively small eBay based ordinary partnership (not LLP) business using cash basis accounting. The tax return under this system very easy, cash in minus cash out = reported profit. This year our turnover will exceed £150k, which I understand to mean that we will not qualify for cash-basis accounting next year.

I know that the main difference between cash-basis and traditional accounting is when revenue is reported, i.e. the date of invoice rather than when revenue is actually received or paid out. Since we always pay up front for all purchases, receive payment with order and dispatch goods on receipt of payment, this probably makes no difference to our accounts.

My questions are:

what is the minimum additional record keeping and reporting is required for traditional accounting?
do we have to count stock annually?
 

I am quite concerned about doing a stock take because we are a 2 person business selling small craft pompoms. We buy them in the tens or hundred of thousands in many colours and sizes, also we sell them in many small denominations and combinations of sizes/colours etc, so it would be impossible to make an accurate count. Most items come to us in bags of 1000, the best we could do is to count how many full bags of 1000 we have at the start and end of the accounting period but this would not include some large quantities which are in bins of mixed colours and sizes and are realistically uncountable.

Thanks in advance for all comments!
Tim.

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17th Jul 2019 08:58

Congratulations on building up your business to this level, but I am sure that many people here will agree that paid professional advice will be money well spent in the long run (and could even speed you to £300k)...

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to WhichTyler
17th Jul 2019 09:08

Thank you. Actually we don't plan on any further expansion as we are a husband and wife team working from home, we are now at full capacity and we don't wish to employ staff. I was really hoping to continue doing my own tax returns, according to HMRC we don't need a balance sheet so I just need to know what else I need to do that I'm not doing under cash-basis...

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to baldeagle
17th Jul 2019 10:44

baldeagle wrote:

Thank you. Actually we don't plan on any further expansion as we are a husband and wife team working from home, we are now at full capacity and we don't wish to employ staff. I was really hoping to continue doing my own tax returns, according to HMRC we don't need a balance sheet so I just need to know what else I need to do that I'm not doing under cash-basis...

Well, you've a couple of options.

Take an accounting course - because most of us on here didn't learn what we know from a few posts on a web forum - or you can go to a proper accountants and pay for the work being done.

As far as stocktaking goes, I used to act for a supplier of foil balloons. They managed to do their stocktaking OK with their staff of two. If it's low value stuff, you don't have to count everything exactly. Some of the stock you'll be able to weigh, perhaps. Develop your own techniques to suit the type of stock you have.

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17th Jul 2019 09:19

I agree with WhichTyler, paying for professional advice now would be much better than when something goes wrong. It wouldn't even have to be expensive and if set up properly could provide you with the stock figure.

On the stock (and not intended as a criticism) it amazes me how many businesses have no idea of their stock levels. You could, I assume, come up with an estimate, but we have had clients who couldn't even come up with a best guess.

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17th Jul 2019 15:18

Your expectation of £250/month for accountancy services is likely to be a large over-estimate.

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17th Jul 2019 17:05

To add to a few of your points BaldEgale:

- most accruals in a small business are costs incurred not yet invoiced
- as another post pointed out, if you pay your suppliers in advance of the receipt of goods you would have goods in transit which, depending on when they were invoiced, may need to be added to current assets (where would depend on the detail)
- HMRC may say you do not need to provide them with a balance sheet but I would suggest you should produce one. In fact we do balance sheets for all our clients who require accounts, it shows the full picture.
- You will most certainly have things on a balance sheet that you haven't though of. VAT being another example.

Unfortunately, the accrual basis is not as easy as cash accounting and can get particularly complex. This is why many of us on here have recommended getting professional advice. We have seen time and time again the results of people doing their own accounts and, whilst I'm not suggesting you are doing anything wrong now, a lot of people think they are doing fine when in fact things are a mess.

If you feel confident enough to have a go then go ahead, but you need to weigh that up with the potential for a HMRC investigation and how confident you will then feel representing yourself and explaining your accounts.

Prices can vary dramatically - we charge from £500 for a set of accounts and corresponding returns, this will largely depend on the quality of bookkeeping and records.

One final question, how are you getting on with Making Tax Digital?

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to 2003bluecat
17th Jul 2019 17:27

Thank you 2003bluecat for your kind and very informative response, it is very much appreciated. I can see now why I may well need to use a professional accounting firm for accrual basis accounts.
As for MTD, for both tax and VAT most I;ve looked at seem very simple to use for my current cash-basis accounting, although the huge range of software options is a little daunting and it's difficult to figure out which option is best suited to your particular circumstances.
Thanks again,
Tim.

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to baldeagle
18th Jul 2019 09:28

baldeagle wrote:

Thank you 2003bluecat for your kind and very informative response, it is very much appreciated. I can see now why I may well need to use a professional accounting firm for accrual basis accounts.
As for MTD, for both tax and VAT most I;ve looked at seem very simple to use for my current cash-basis accounting, although the huge range of software options is a little daunting and it's difficult to figure out which option is best suited to your particular circumstances.
Thanks again,
Tim.

Another interesting (at least to me) point that you may or may not be aware of is that you can continue to use the cash basis for your VAT returns but will not be able to for your accounts.

As has been said, get some professional advice - the right accountant may even be able to set you up on your own and then just review what accounts you have produced which (could) keep costs down.

Don't be put off the forum by the replies. We see it day in day out. People want to do things themselves then get them in a mess and ask this forum to magically tell them how to fix it, which invariably means going to an accountant which costs them more than if they went to an accountant in the first place. The forum also get a lot of people asking for advice then disagreeing with the advice. That's why people get frustrated with posts like yours.

All the best.

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