How do i separate direct debits for tax purposes?

Question

I run a small electrical business and do my own book keeping. I have set up some direct debits such as van insurance, advertising,etc. So as an example, i have an invoice in Feb for £400 but will be paying 10 monthly installments via direct debit. So, do i enter £400 for Feb or do i enter £40 a month. I am keeping all receipts and entering these on a monthly basis but Feb will look like a bad month even though i havent paid any money yet. And also the reason of separating the cost between the tax year. Hope someone knows and gets back to me.

Answer 1

Tax has no real rerlationship with methods of payment. Tax is accounted for on invoices received and invoices or receipts issued . An adjustment is made on your P&L account and your balance sheet for debtors and creditors but only bad debts (with will not be paid) can be reclaimed against tax.

It doesn't matter that the current month will look bad when you are still holding money to be paid by direct debit in the future because in this case looking good or bad is about cash flow, not about tax liability.

Answer 2

tma gives a good answer for the USA but as you have mentioned pounds, I assume you are in the UK. Consequently, you have to use the "true and fair" basis, which means you must record the expenses that you should have paid in the year, whether you paid them or not, and you must record income for jobs you did, whether you have received it or not.

It will be easier to record the 40 pounds as you pay it as you don't then have to go back through your books and make adjustments at the end of the year.

If you are going to do a balance sheet, you should record the insurance (all 400) as a debt (a credit in your books). Then, when you get your bank statement, record the direct debit by debiting the insurance account and crediting the bank account.

Have you thought of engaging a Chartered or Certified Accountant? A good one will tell you how best to keep your books so that they can easily do a tax return at the end of the year. If you find a good CA you can get along with, ask them what software would be best to use. That makes it easy to put your books on a disk at the year-end for your CA to import into his system.

Answer 3

Subject to materiality (which I'll explain below) you are expected to prepare your figures in accordance with GAAP (Generally Accepted Accounting Principles).

GAAP requires you to match your purchases with your sales, i.e. any materials bought in one year for a job which is carried out in the next year must be carried forward and claimed in that second year.

Also expenditure such as van insurance should relate to the year in question. So if your premium covers a period ending three months after the accounting date then only three-quarters of that premium should be included. This is independant of the way in which you pay for it. Whether you record it as one amount or as the monthly direct debits you should end up with the same amount charged in the accounts.

Now to get back to that point about materiality. If any adjustment will be relatively small in relation to the other figures on your accounts then you can get away with not bothering and just claiming the amounts actually paid. Just be aware that this method is not officially sanctioned but acceptance is purely a practical matter.

Answer 4

Well I've read all the answers, and I bet you're more confused than you were at the outset.!!!
When you record the DDs, you do so on a monthly basis, as they clear your bank account. It doesn't matter whether this is done electronically or manually.
When the accounts are prepared, the premiums etc are apportioned to the correct year (whether that be your accounting year or the fiscal year to 5th April). This is so that the appropriate charge is made against the income for that year only.
This is normally done by your accountant when he prepares the accounts, but you could do it yourself with a simple accounts package such as Cashbook.

Answer 5

ok here goes matey...i also run a small roofing business and have been doing my own tax for two years ....i use online self assessment (uk)@ government gateway...on there you can ask questions and they reply to your inbox as best they can...when i get my tax return or download it i can then start to fill it in....you need to keep records and reasons why you entered amounts in a certain box for reference if they check on you later...they are not interested in looking at your accounts just what you put in the tax return ......they work out your tax as you enter amounts ....it,s up to you to look what you have paid out and put in correct boxes .....you are doing the tax return so all you need to do is add up your expenses and enter them as i said....as long as you pay them the tax you can keep your records how you like as long as they would be able to understand them...DO NOT count the tax and national insurance contributions you paid as an expense..basically you are a sole trader and the amount of money you take in less the amounts you claim as business expenses leaves you with your taxable profit ....you can get help sheets from your local tax office ......once you have done it a couple of years it becomes quite easy....if you take a loan you would not show it in receipts as its money you put into your own business and you can,t claim it as an expense but you would claim any interest paid on it...same goes for any money you pay in of your own..i made all these mistakes and dont want you to as you would have to pay interest on mistakes since starting your own accounts...the fact that you pay dirct debits means nothing at all to the tax man just what you entered in your return......so read up and get it right first time and ask them your questions ONLINE it,s the best thing i did ...another tip for you..you need to charge £1.45 for every £1.00 wage you need to take from business as in uk the government take 22% tax and 8% national insurance=30% from your £1.00 so from £1.45 you will get £1.00..phew...i need a nap lol.....best of look matey........FOXY...






when i get to the level where i can give you the thumbs down TMA miss know it all ill do it....your not a small business so dont shove jargen at us and by the way you charge us too much and have BO