Sole Trader Accounting - Help Required

[AHirons]

Hi,

I've recently started my own business (sole trader) in property maintenance.

I'm currently in the process of setting up my accounts so that they provide me with an accurate picture of how the business is doing, and to enable me to complete my self assessment relatively easily.

I'm pretty comfortable with most of it, but there are a few things I would appreciate some clarification on:

1) Small tools and equipment

Do I need to treat the purchase of all small tools and equipment as capital expenditure, thus depreciating these items in my accounts and claiming AIA/WDA on my tax return, or is there a cost below which such purchases should be treated as revenue expenditure?

If it is the latter, would such purchases be recorded in "Direct Expenses" or "General Expenses" (overheads)

2) There are a number of expenses that I've incurred which I'm not entirely sure whether to treat as direct costs or overheads.

I've treated plant hire as a direct cost as I only hire the equipment on a per job basis. However, I'm not too sure whether to treat the cost of petrol for my own equipment e.g. generator, lawn mower etc as a direct cost or overhead as I don't always know how much is used on any given job.

The same applies to consumables which are not strictly materials as they do not form part of the finished job, but which are used up over a number of jobs. Examples include bits and blades for power tools, line marking spray, white spirit...


Thanks in advance,

Andrew

 

[Scalloway]

1. There is no need to capitalise small tools. I would suggest £250 as a de minmis figure for capitalising but as you can claim 100% as AIA it doesn't make much difference. I would include them as direct expenses.

2. These are direct costs

 

[Johnny Martin]

Hi AHirons - good luck with business. One point to add - there is no legal definition of direct or overhead but its important to be consistent. Also as Financial Fitnesss Coach for Quickbooks, I always say its always a good idea to have an idea of profitability of individual jobs. Your favourite customers wont be your most profitable. And make sure you are charging enough!

 

[AHirons]

Thank you for your replies.

From what you've said, am I correct in assuming that I include these direct costs (small tools, consumabls etc) in the cost of sales box (box 16) on my tax return, along with any materials purchased?

 

[Scalloway]

Yes include these costs in the cost of sales.

 

[axionel]

Hi ,I think by memory if turnover is less than £70K pa then you only use box 30 with the total amount of all expenses, regardless of what they are.

 

[AHirons]

axionel, I believe you are correct there. However I've been setting up my chart of accounts so that they provide me with as accurate a picture as possible of how the business is performing, as well as to make it as easy as possible to complete a full self assessment in the future should the turnover exceed £70,000 which hopefully it will.

When I stated that "I've recently started my own business..." this is relative. I've actually been trading for just over 18 months, but I've yet to process my year end for the first year of trading, and I'm wanting to get on with that as soon as I can now so that I can complete my self assessment before Christmas.

 

[arcon5]

Agreed - producing a full set off accounts is best in case you need to provide proof of earnings in the future. Most banks like to see accounts rather than SA returns, in my experience.

 

[AHirons]

Thanks to everyone for your help so far, I think I'm almost ready to process my year end - possibly a bit late in the year given that my financial year ends on March 31, but still in time for the January 31 deadline.

I understand the principle of prepayments and accruals, but I'm wondering if there are accounting rules/common sense practices that allow certain items to be ignored, especially where the figure are low?

As an example, my public liability insurance starts on May 1, paid annually. Given that by financial year starts on April 1, at the end of the year I will have prepaid one month's PL insurance, do I need to account for this prepayment, or do I just record the annual figure as a cost for that year?

 

[Scalloway]

The accounting term is materiality. Unless your public liablity insurance for a month is a huge figure relative to the rest you can just include the whole sum.

 

[AHirons]

Thanks Scalloway,

Do I also apply the materiality principal to opening and closing stock?

My business does not carry much stock, I generally purchase materials on a per job basis, with any job specific materials which are unused either returned to the supplier, or if its and 'opened pack', the full amount being treated as a cost to that job (even if I am able to use up the remainder in a future job, e.g. part tins of paint, or part bags of cement).

Sometimes however, its more cost effective to purchase regularly used items in bulk, especially if they have a long or indefinite shelf life. For some of these items, it is almost impossible to keep track of exactly how much is used in any one job, or how much is in stock at any given time. How do I account for these?

Work in Progress

I understand that work in progress relates to any project that is started on one accounting period, but is not completed until the following (or later) accounting period. While this is not relevant to my first year, it may be relevant at the end of the current financial year. How would I calculate the value of work in progress, and show it in my year end accounts?

 

[ForbesWatson]

Hi,
Good luck with your business. Have you thought about whether you will be be registering for VAT?
Simon
forbeswatson.co.uk

 

[AHirons]

I've considered VAT registration, and there may be some benefit for me in that I could reclaim the VAT I pay on tools etc. However, I've decided that while the majority of my customers are private home owners its probably not worth my while, as I wouldn't be able to compete with the prices of not VAT registered tradesmen.

 

[Scalloway]

A few pounds worth of stock can be ignored. For physical stock should be counted on the last day of your financial year and valued at either cost or realisable value if that will be less.

Work in progress will be valued at the cost of direct materials. You should not include your own time.

Stock and work in progress at the end of the year should be deducted from the cost of sales for the year and put int current assets on your balance sheet. At the start of the new financial year it is added back to the cost of sales.

 

[AHirons]

Thanks again. I didn't do a physical stock take at the end of the last financial year, but I doubt I even had £50 worth of stock so I'm guessing that's small enough to ignore?

You say work in progress is valued at the cost of direct materials, do other direct costs (those discussed earlier in this thread)play any part in that value? Also, what about labour costs?

 

[Scalloway]

Yes I should have said direct costs, including labour.

 

[AHirons]

Thank you.

 

[AHirons]

Something else I just thought of, some of my direct costs cannot be exclusively associated with any specific job, especially small tools and certain consumables, how do I account for this at the end of the year, and how do I apportion them when working out how profitable individual jobs/projects are?

 

[teddys]

specially small tools and certain consumables, how do I account for this at the end of the year, and how do I apportion them when working out how profitable individual jobs/projects are?

This depends on how you go about doing this property business. There are several ways:

1. Turnover basis (assuming the tools are used in all the cases): Divide the cost by turnover for each property

2. Labour Hour basis - apportion based on hours spent on each property

3. Or if you want to be more accurate raise a ticket (like the IT guys do) each time there is a call out on a particular property.

 

[AHirons]

Isn't that the same method I would use for apportioning overhead costs to a specific job too?

So far I've not really done costing reports for individual jobs, but its something I feel would be beneficial to the business. I'm trying to come up with a simple but effective method (my accounts package doesn't have any built-in job costing). I'm beginning to wonder if I'm making things more complicated than they need to be.

 

[AHirons]

Am I just over complicating things?

 

[Scalloway]

There is nothing wrong with wanting to know what you are spending on an individual job to ensure that you are making a profit. However as I said earlier this is a sbject in itself. You could try reading Chapter 16 this book from page 204.

http://books.google.co.uk/books?id=...ods of apportioning costs job costing&f=false

And this article

http://www.principlesofaccounting.com/chapter19/chapter19.html

 

[AHirons]

Does job costing involve entering any additional information into my accounting software? I'm currently using Sage Instant Accounts, which does not have any built-in job costing capabilities. Or would I just be extracting the information from the existing records and producing job costing reports manually?

 

[Scalloway]

IF you don't have job costing already in your accounting system you would need to do it manually.

 

[AHirons]

Thanks Scalloway,

Am I therefore correct in thinking that I do not need to make any additional entries in Sage for the costing aspect?

Also, how do I best apportion my direct costs which are not necessarily specific to one job? If I don't apportion these costs, then the gross profit shown on my P&L won't match the totals of the gross profits calculated in my job costing reports.

For example, I construct a fence for a customer. Materials for the job would include the timber, screws or nails, and possibly some other fixings such as brackets, and some fence stain.

I can calculate the quantities required, and these are purchased - there will probably be a few useful items left over - particularly screws and the like, as I will probably estimate that I need lets say 250, but as they come in boxes of 200, I need to purchase 400, but I would just treat the full amount as a cost to that job, the rest would be used up on odd jobs, and not charged for, they wouldn't be counted in closing stock either, too small.

Would I also factor in a proportion of other direct costs, such as tools and consumables, even though I wouldn't really know how much has been used?

Or am I just over-thinking things as usual?

 

[Scalloway]

It depends how much detail you want to go into. Just looking at a random sample of a box of screws

http://www.screwfix.com/p/goldscrew-countersunk-5-x-50mm-pack-of-200/16497

Those are £2.98 per box of 200. At that price I would just add a small allowance for thema nd other consumables.

 

[AHirons]

Ok, that makes sense. But is there a good method of apportioning the cost of tools to jobs? Over the course of a year, I would expect to spend a few hundred pounds on tools, and as these are a direct expense, I was thinking the cost would need to be distributed over the various jobs.

 

[Scalloway]

Teddys has already suggested this

specially small tools and certain consumables, how do I account for this at the end of the year, and how do I apportion them when working out how profitable individual jobs/projects are?

This depends on how you go about doing this property business. There are several ways:

1. Turnover basis (assuming the tools are used in all the cases): Divide the cost by turnover for each property

2. Labour Hour basis - apportion based on hours spent on each property

3. Or if you want to be more accurate raise a ticket (like the IT guys do) each time there is a call out on a particular property.

What you can do when you set a method for calculating the charge out is work out perdiodically the actual cost in the period against the amount charged out. The two will never match but you will see if you are charging enough to cover your costs.

 

[David Griffiths]

Ok, that makes sense. But is there a good method of apportioning the cost of tools to jobs? Over the course of a year, I would expect to spend a few hundred pounds on tools, and as these are a direct expense, I was thinking the cost would need to be distributed over the various jobs.

I don't agree that these are a direct expense. Unlike materials, it is not possible to accurately relate the cost of tools to an individual job. Trying to do so would involve some silly calculations - for example if you buy a hammer, do you count the number of nails that you knock in on each job until the hammer is worn out, and then work the cost back? What about a saw - do you count the number of pieces of timber and apportion? Or do you take into account the length of the cut - in other words 30 pieces of 2x2 cut across the piece = the same cut as one plank 5 feet long cut down the length?

The options chosen are deliberately silly but I think that you are in danger of getting bogged down in trivial calculations, which won't produce any meaningful information.

Treat them as an expense which will be covered by all of your jobs done in the period

 

[AHirons]

David, from what you've said there it sounds as though I should treat the purchase of small tools as an overhead expense, which is contrary to what I previously thought, but it does make sense from a job costing point of view.

Would the same be true for consumables which get used up over a number of jobs, or are these direct costs? Examples include rubble sacks, white spirit, petrol for machinery. I guess on a large project I may use all of the consumables purchased for that job, but for smaller jobs I will probably only use a small percentage of them, the remainder then gets used on another job.

Example A: I build a 100 metre fence for a customer. Materials are easy to calculate (though there may be a few useful bits left). Consumables might include 10 litres of fuel to run a generator for power tools, 1 can of marking spray. Lets say I use up most if not all of the fuel, so that will be charged to the job, but I've only used approx quarter of the can of marking spray, so I have 3/4 left to use in other jobs.

Example B: I purchase fuel for my lawn mower, and 5 litres (the volume of my can) will last for several jobs, but I don't measure out how much is used on each job, as that's just not practical.

What is the correct treatment of these costs (a) in my accounting records, and (b) in doing job costings?

As I've said before, I may just be over-complicating things, but I want to get it right, and I want it to make logical sense too.

 

[arcon5]

Personally in example A I'd apportion all the fuel - sounds like anything remaining is negligible. For the spray is it even worth apportioning? And if so then apportions it monthly.... Say you've spent £20 on spray in month one and 40 jobs then 50p per job.
Personally id expense the latter in the same way as youd expense pen and paper.

With example B you could I suppose just overhead fuel as maintenance.

A lot of job costing would be down to management accounting as opposed the financial compliance

 

[AHirons]

Thanks, I think I'm almost there with working out what I'm going to do. I'll put tools in general expenses, as there is no realistic way to determine the apportionment. All materials that will become part of the finished job or that are used to make formwork specific to the job will be treated as "materials purchased", this includes screws and nails etc. I still feel that consumables are a direct cost, and am wondering if I should include these as direct costs in the financial accounting, but just place an estimate in the costing of how much has been used.

 

[AHirons]

Also, some jobs are not really worthy of doing detailed costings for. Lets say I do a building job, for which a detailed costing report is produced. There may be some materials left over (unopened packs or complete items could be added to stock, and not included in the job). There would probably be an open bag of sand and of cement left over say, which I could then use on a small repair job, such as replacing a couple of ridge tiles. I wouldn't do a costing report in this case, as I've already charged the materials to a large job.

 

[teddys]

Whilst this discussion looks more academic I'm happy to provide some more insights in to costing.

At the very basic level cost accounting is about:

Nature: Direct and indirect expenses
Elements: Materials, labour and expenses go in to making a product
Behaviour: fixed (e.g. rent, salary etc) and variable (e.g. direct material)

Direct items are allocated whereas indirect items need to be apportioned using appropriate methods. Such methods would differ depending upon what the work or product is about.

Tools used as an example:

This is an indirect material. If you were to use standard costing you would charge a standard rate for the tools. Such standard rate could be worked out something like this:

Cost of the tool - £100
Life of the tool - 500 hours, so standard rate is 20p per hour.
No of hours used in a job - 10 so indirect material cost is £2
You also need to account for cost of breakages, damages, likely loss of screw,nuts, bolts etc etc as may apply to your work or product. This is again more likely to be an estimate.


When do you need cost accounting?

This is normally used in medium/large set ups where you need to price a job/product etc upfront. Going by your fencing example if you were to quote for it you would know from your standard costing records what level of material, labour and expenses required and the cost thereof. You could then decide if the price offered by the client gives you the desired level profit you have in mind.

Accounting:

If you were to use standard costing method, then you do need to have a system that should reconcile your cost accounting with financial accounting records to ensure accuracy as there will be 'variances' from standards. Cost accounting is forward looking whereas financial accounting is post-mortem work. If you're not an accountant or otherwise passionately involved in accountancy, this may be a subject difficult for you.

Other methods of costing

Standard costing is just one method. Depending on your work you could go for 'job costing' (house building) in certain situations. There are several other modern methods too.

Software

Most of the software out there may not have in-built cost accounting systems because most of the small businesses do not use costing, but definitely there may be one with such features.

Closing remarks

If your business is a micro or a small one (say with a turnover of about £100/£200k) as a businessman you would be far better off spending your precious time promoting your business and leaving the accounting part to an accountant. Even if you were to micro-manage your costs the resultant gain could be next to nothing when compared to promoting your business using the same man-hours of yourself. However, there is nothing wrong with spending a few early hours in to the business understanding the nuts and bolts of the accounting part though!!