Sole trader basic accounts income and expenditure basic tax account
Author: Terry Cartwright

In order for a sole trader to be able to keep basic tax
accounts certain conditions regarding the status of
business accounts must be satisfied. Sales turnover should
be under the vat threshold limit, a balance sheet not
required, a business bank account not used and no employees
employed. If the conditions are met then a simple income
and expenditure statement is all that is required greatly
simplifying the bookkeeping.

Self employed businesses are not required to maintain a
balance sheet. If a balance sheet is maintained then to
produce one the business needs to operate an accounting
system based upon double entry bookkeeping and involving
technical features such as debtors and creditors control
accounts. Sole traders who do not need to produce a balance
sheet can then maintain their basic accounting using single
entry bookkeeping which is basically making lists of the
financial transactions.

If a balance sheet is not produced the sole trader must
keep a record of all capital expenditure items as part of
the basic tax accounts to enable the capital allowances to
be claimed each tax year. Receipts need to be retained as
part of the basic accounts to enable the annual investment
allowance to be claimed in the first year and writing down
allowances in subsequent years.

More detailed financial records are required to be kept by
the sole trader if they are vat registered. The vat
threshold for the financial year starting April 2008 is
£67,000. Part of the vat rules state that when a
business is vat registered they should maintain an audit
trail of transactions to support the vat return.

A sole trader does not have to operate a business bank
account however if a business bank account is used then
accounting records should be kept as the taxation
authority, HMRC can ask to see details of the account. This
inspection is to verify the transactions support the basic
accounts produced. If a business bank account is not used
then HMRC do not have a statutory right to view the sole
trader personal bank account and that personal; account
does not have to be a feature of the sole trader basic
accounts.

When a sole trader has employees then as an employer a PAYE
system is required which involves maintaining accurate
wages records of employees, gross wages, income tax and
national insurance deductions and net pay. Various PAYE
records must also be maintained such as the working
deductions sheet and also payslips must be issued to
employees. The payroll records form part of the financial
accounts of the sole trader who would actually be better
called self employed if they have employees.

In the circumstances where a sole trader has no employees,
is not vat registered and does not maintain a business bank
account then formal accounts are not essential and a simple
income and expenditure account statement can be produced.
It is still essential that those sole trader basic accounts
are supported with copies of invoices given to customers or
records of amounts taken plus documentary evidence to
support the payments made to suppliers.

On the sales side the basic accounting can consist of a
list of the sales which when totalled produces the sales
turnover of the business which is the income side of the
income and expenditure statement. As not all sales may be
received at the time of sale it is useful to keep a record
of the date of the sale, the customer, amount and when and
how much the customer has paid for credit control purposes.

Similar to the income side the expenditure can consist of a
list of the amounts paid out to suppliers. It is advisable
to perform a small amount of analysis of this expenditure
as when reported on the self employed tax return the
expenditure may need to be analysed according to the type
of expense. All expenditure items claimed as business
expenses should be supported with documentary evidence of
that expense for basic tax purposes.

At the end of the financial year the sole trader income and
expenditure account statement will state the total sales
with the expenditure side being a list of all the
expenditure by type of expense including any capital
allowances claimed. Total the expenditure and deduct the
total from the sales turnover to produce basic accounting
record showing the net taxable profit.

A simple method of keeping the information to produce the
income and expenditure account statement is to use an
accounting spreadsheet with preset columns for sales and
the expenditure types. The sole trader should also consider
maintaining a separate list of the assets purchased as part
of the basic tax accounts.


About the Author:

DIY Accounting incorporate tax software in the tax
accounting software producing basic tax returns at
http://www.diyaccounting.co.uk/ for self employed business
which include an income and expenditure account in the sole
trader basic accounts at
http://www.diyaccounting.co.uk/basic.htm