Sole Trader Accounting issue

[houman1979]

Dear All,
Maybe my question is so simple. I just registered as sole trader by HMRC and they sent me the welcome letter alongside my UTR. I opened my business account last week as well. Now, I have some start up expenses. I want to put some money (say 2000 GBP) in business account and then pay the expenses by that. Then, how could I show that this 2000 GBP is not a revenue and it is a payment from myself to cover the start up costs? I have some problems regarding its accounting.

Thank you in advance.

 

[BensteadBookkeeping]

Hello

In double-entry bookkeeping there are two entries for every transaction (debit and credit). For this transaction you debit bank £2k and credit capital/equity £2k. In effect, your business now has £2k of assets but owes your £2k as a liability. You can now record the expenses against the bank. Likewise, if you have pre-trading costs, you can record these as debit expense account, credit capital.

By the way, no question is simple unless you know the answer so please ask away

 

[Jenni384]

How are you recording your books? In excel? Or a bookkeeping package?

As Benstead says, this is "capital introduced" by you. If you're using excel then you add in a column called capital and put it in there. If you're using accounting software, then there will already be an account called capital

 

[houman1979]

Thank you for your responses. I only have a doubt that I am as a sole trader should have anything like Capital in my account? I know it about the companies but about self employed I am not sure.

Therefore, should I use your suggestion or debit bank and credit Houman as a creditor of the company?

Regards

 

[BensteadBookkeeping]

Hello Houman

You should credit the capital account as this is what you are doing, introducing capital into the business.

 

[Truemanbrown]

Benstead is correct that you should be treating the £2000 lodgement, as well as pre-trading expenses, as 'Capital Introduced'.

If you want to know what pre-trading expenses you can claim then read this.

 

[houman1979]

Thank you for your responses. And then what if someone else such as a friend gives me the money? In that case, debit bank and credit s/he as creditor?

 

[houman1979]

Dear Truemanbrown ur link is not working. Could you please send me the correct one?

 

[Arch Stanton]

This one?

 

[houman1979]

Yes thank you.

 

[houman1979]

The other question which I have is that I registered in May and now I have not started to trade actually and doing some pre-trade activities such as getting some agency agreements, applying for some licenses and advertising. Then, can I claim these expenses in my accounts?

 

[Deleted member 59730]

You can claim everything you spend which is used solely for your business. This means parking charges, travel, Evening meals away from home if working late, and hundreds of other items.

What you cannot charge is speeding tickets and other things like that.

In time you will learn many ways of allocating expenses.

 

[InPrintImaging]

You can claim most business expenses against profit including pre start up expenditure. The pre start up costs should be treated as incurred on the first day of actual trade.

As mentioned above, certain things arn't allowable eg fines, entertaining of clients, cloths. Also, capital expenditure (things that you will use over the course of more than one accounting period such as equipment) has different treatment (capital allowances/annual investment allowances). The exact treatment of capital expenditure varies dependant on what the item actually is.

 

[Deleted member 59730]

As mentioned above, certain things arn't allowable eg fines, entertaining of clients, cloths.

Except foreign clients! I found this on http://www.oakacc.co.uk/what-expenses-can-i-claim-against-tax

The European Courts are not all bad news! They have ruled that entertaining of foreign customers is allowable and this ruling is binding on all member states.

 

[InPrintImaging]

I'd probably wait untill you see that specifically allowed on the HMRC website before claiming it:

http://www.hmrc.gov.uk/factsheets/expenses-allowances.pdf
http://www.hmrc.gov.uk/manuals/bimmanual/bim45020.htm

The entertaining thing is complex anyway. You can claim "reasonable" expenses for entertaining of your own staff (christmas party) but if you go over £150 per head you have to declare benefits in kind (P11D)

 

[globes]

Thank you for your responses. And then what if someone else such as a friend gives me the money? In that case, debit bank and credit s/he as creditor?

Ya in that case you can debit cash or bank and creditor as your friend he/she..

 

[houman1979]

I have another question. How should I treat any withdrawal from my business bank account? In other words, I do not want to pay myself a regular salary and occasionally draw some cash from bank account. Is it possible? If possible how to treat it and if it is not possible then should I establish a regular salary for myself?

To be honest, I am confused a bit regarding accounting of sole trader as there is no separation between the shareholder and the business.

Thanks in advance.

 

[Jenni384]

Just mark any monies you pay yourself as "drawings". It's not an expense and doesn't affect your tax bill (other than the availability of money to pay it!). You can pay yourself a regular amount, or ad hoc as the business can afford, it is not a salary.

 

[Deleted member 59730]

I have another question. How should I treat any withdrawal from my business bank account? In other words, I do not want to pay myself a regular salary and occasionally draw some cash from bank account. Is it possible? If possible how to treat it and if it is not possible then should I establish a regular salary for myself?

To be honest, I am confused a bit regarding accounting of sole trader as there is no separation between the shareholder and the business.

Thanks in advance.

I have been a sole trader since 1965 and I have never paid myself a regular salary.

What you take out is 'Drawings'. Leave cash in the business and your bank manager will think you are a genius. Open another bank account for personal spending only, if you don't already have one. In practice, and only when you can afford it, make a monthly standing order from the business to the personal account. The amount should be just enough to pay your monthly domestic bills. If you need to top it up make a special payment.

By keeping as much as possible in your business account gives you more flexibility over how you spend it.

 

[houman1979]

Very good answers. I am really thank you all. And then it is better that I pay NI from my business account or personal one? Or there is any obligation in this regard? I think NI is something personal and do not relate to business and therefore it may be better to pay it through personal bank account

 

[Jenni384]

Very good answers. I am really thank you all. And then it is better that I pay NI from my business account or personal one? Or there is any obligation in this regard? I think NI is something personal and do not relate to business and therefore it may be better to pay it through personal bank account

Yes, you can pay your Class 2 (£2.50 a week) NI from your personal account. Many self employed people put it into their books as an expense, but you are quite right, it's a personal cost.