Accounting for Business Setup
I’ve spent the first fours days of my company time on miscellaneous tasks, and I thought I’d share.
The main thing is getting the accounting setup right. There is no legal reason why I needed to spend four hours with my accountant understanding business accounting, and then produce a document and spreadsheet to work out my balance sheets, but the time I spend here will hopefully save me time later.
I decided to write an opening balance sheet for my company. This shows the amount of money the company is worth, what it owes me and what items belong to the company.
I’ve also racked up some expenses before I started the company, and a few after.
For example, I have given / sold my laptop to the company. I purchased this laptop with the intention of it being for this business about a year ago with money invested for me by my grandfather. Working out the depreciation, we reckon the laptop is now worth about £800. I also have a server that is wholely dedicated to the company, it has tape backup, raid hard drives, ubuntu linux, the whole shebang. We valued it at £0 as I was very kindly given it by my previous company when they were disposing of computing equipment.
So, the company has assets worth £800, and didn’t pay for them. it also currently has no cash as I’m waiting for the bank account to be setup. So In order for our balance sheet to actually balance, I have to work out that the company owes me £800. Now I paid some startup expenses, the company formation costs and so forth, which are about £80, so company now owes me £880. Finally, I started my company and took 100 shares, valued at £1 each, so I owe the company £100.
The balance sheet now tells me that the company owes me £780 at startup, and that it owns one Dell server and one Laptop.
So why is this important, well, it means that when I give the company cash to get started, it will owe me even more, but it’s cash will increase. When I get some money from sales or contracting, I can now do one of three things.
- I can retain the profit in the company, and pay Corporation tax at end of year on my Net Profit (Sales - Expenses), and pay myself a dividend after Corp Tax.
- I can pay myself the money, paying income tax on that amount, but it counts as an expense which reduces amount of Corp Tax that I’ll pay.
- I can repay the company loan, which is an expense, so reduces the amount of Corp Tax, and is not counted as income for personal taxable purposes.
So that means that working out what I’ve invested in the company, and calculating the amount the company owes me for that gives me a tax free cash bonus that I can take out of the company at a later date, when it’s wildly profitable.
Now I’ve also created a spreadsheet to account for business expenses. For legal and tax reasons you must keep every reciept for anything purchased for the company. I’ve purchased a few office things, a white board, some suspension files, paper for my printer that kind of thing. I can account for all of this with a years worth of reciepts when it comes to doing my year end accounts if I want, or I can do them monthly, and when I do year end, simply put my monthly’s together, and then
check them all over. It seems easier to me to take a couple of hours every month to do that than spend a week in January doing it.