Examining Accounts: Systems: Small Businesses
Taxpayers running small businesses may not always keep comprehensive records and in those cases where the taxpayer maintains records mistakes may be made. Sometimes, things will go wrong because the books are simply not written up regularly. For the business proprietor the vital records will be those which form part of the day to day control of the business - job diaries and the like. Bank statements are relied upon to indicate the health of the business. Accounts are historical records of little use, except when the business comes to be sold or the bank manager has to be approached for a loan. (Even in small businesses basic computer records are now maintained.)
All the terminology used is relevant to a trader keeping computerised records.
Proprietary record books
Many small traders use one of the various proprietary record books to keep a weekly record of takings, expenditure, banking and drawings. Alternatively, a taxpayer’s accountant may have suggested a simple system which is written up from prime records in a straightforward ledger. This includes using a basic, off the shelf software package.
Books available to an accountant
When preparing accounts the accountant will generally have available
- an analysis of cash and bank transactions, receipts and expenditure (the cash book). In practice drawings and the weekly cash balance are not always recorded. Prime records of takings such as till rolls may not be provided
- a record of sales on credit, possibly an invoice pad or memorandum book. There may be a record of purchases on credit, although this is less likely: the trader may rely on suppliers’ invoices and statements
- a list of stock on hand, a third-party valuation, or at the very least the taxpayer’s estimate of value as at the year end
- the bank statements
- the invoices for purchases and expenses. These may not be complete, the latter are less likely to be so.
From these records a set of accounts will be prepared. Most of the work will be done by unqualified assistants or audit clerks. Any points which need to be resolved with the client will be discussed with the partner or another senior person responsible for the work.
The first task will be to total the various items of expenditure under different headings (purchases, travelling, repairs, capital items, and so on). A check may be made to ensure that no major invoices have been omitted, or that obvious items are not missing. Where necessary, estimates will be included where there is no record or an incomplete record of expenditure.
The bank statements, paying-in books and cheque stubs may be reviewed to identify non-business receipts, business expenditure not included in the records, private expenditure and standing-orders and bank charges which may not appear in the cash book. Once this has been done there should be sufficient information to prepare a cash and bank control account.
If drawings have been recorded or estimated by the trader (for example, £300 a week), a credit side balance on a cash control account will indicate additional drawings or unrecorded expenditure. A debit side balance will have been be treated as additional sales or expenses met by the trader from personal funds (capital introduced). If the drawings have not been recorded there should normally be a credit side balance which is assumed to be drawings.
If you discover that a balance has been treated as either unrecorded business expenditure or capital introduced, you should ask what evidence the accountant had to support either contention. Without convincing evidence neither should be accepted. Where cash drawings have not been recorded at all and are simply a balancing figure, the accountant may not have considered their adequacy. Even if enquiries have been made, unless there is evidence to undermine the figure, or it is so small given obvious lifestyle as to be incredible, the agent will have accepted the assurances given by the client. He or she is paid by the client - you cannot expect the same level of questioning that you, being a third party, can bring to bear. If the agent is dissatisfied with a client’s explanations his or her only recourse is to cease to act.
Once the accountant has drawn up the cash and bank account and control accounts only a few additional figures are needed to draw up the accounts. Assets will be taken from last year (or an opening statement of affairs which will be drawn up in new cases) and adjusted for depreciation, sales and purchases. If the client does not have a full record of debtors and creditors, these will be calculated from the unpaid invoices and the opening bank statement for the following period.