How important is putting all purchases through the books?

[sevensevenseven]

Hi, we've just started our own business and I'm currently trying to get my head around the book-keeping side of things so apologies if it's a random question.

I understand why all sales have to go through the books but I'm not sure about purchases.

I bought some stamps earlier (and stationary the other day) but had to use my own money as we're not really making anything yet so there isn't much in the business account. As it's our own money anyway can I just leave it at that and not put it through the books, or do I have to pay money in as capital introduced then reimburse myself so it goes through the books?

You need to put purchases through the books so that the expenses are set against your income to reduce the amount of tax you pay.

It is quite common for small business owners to use their own money, credit cards etc. for business purchases: the easiest way to keep track of this is usually to keep a cash book with two sets of columns, one set for analysing expenditure and another set (usually on the left) for where the expenditure was paid from.

So reading across the top, the columns might be headed:

• Personal
• Credit card
• Bank (business account)
• Ref (write on the invoice/receipt)
• Date
• Description
• Amount
• VAT (if VAT registered)
• Purchases (if you are buying and selling)
• Expenses
• Other

These columns usually fit well on 12 column paper/analysis books - ref and date fit in one column, description takes two columns. Use different pages for income (with a different set of columns), if you are using a bound book you can do this by working forwards from the back of the book.

Thanks, so it's just so we don't pay more tax than necessary then?

I've already set up a cash book where I'm recording everything that goes through the business bank account, just wondered if all the purchases needed to be in there.

Yes, there would be no reason not to keep a note of all your purchases for business use. Importantly, you must keep receipts (and get into the habit of always asking for a receipt). You need to be able to prove that you have spent the money on what you claim.

There is often some confusion over this, though in my experience it isn't the same confusion you currently have. I have heard people say "oh, I can claim it all back through tax", which is not true at all. I even came across one person asking how they claimed back their business expenses from the tax office (they were expecting a cheque from HMRC at the end of the year...).

It just means that (as mranchovy says) you can set it against your income to reduce the amount of tax you pay.

At the moment it's on paper only, the business can't "reimburse" you - eventually it will be able to hopefully.

yes, keep receipts for everything.
even if you use your own money, you are still buying things for the business, so those must be kept too.
You will be charged as having more profit than you have if you don't put all your expenses down.

Plus, you can be fined by the inland revenue for declaring false records, even if it works in their favour (ie paying more tax)

If you buy things for the business on the same receipt as things for personal use, then jsut use a highlighter pen to show which are business, and the n mark the business amount at the bottom in biro.
keep that receipt with your business stuff.

I keep a spreadsheet of my monthly expepnses - every time I spend some money for the business, I put it in the spreadsheet. (with the receipt number and a date of payment)
that way, you've got a backup list too.

and remember not all things go through the business bank account - you will most likely use cash for a lot of items.

Thanks for all of the advice, I understand the significance now.

have a look at this
cgi3.ebay.co.uk/ws/eBayISAPI.dll?ViewUserPage&userid=talkinpeace
written for ebayers but generally applicable

also, there is an ebay user called towatessa (who lurks on here) who sells a spreadsheet thing
OR try here
www.ukbusinessforums.co.uk/forums/forumdisplay.php?s=b4dbb6f2951ba66ce8118e19e9b87dad&f=55
thereare lots of accountants on the scout for work ...
but willing to give free advice