ListenToTaxman.com

UK PAYE Tax Calculator / Salary Calculator

The number 1 free UK salary calculator tax calculator since 1998. Calculate salary, national insurance, HMRC tax and net pay

Bookkeeper v Accountant

Are you paying your accountant to prepare your books? Could you save some money by hiring a bookkeeper? Clare Doherty explains the key differences…

Clare DohertyThis Guide was written by Clare Doherty, Small Business Tax Expert at TaxKings Accountants. Clare now writes for Listentotaxman.com on matters relating to small business tax. She is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.

After last years less-than-favourable tax bill, you decided it was time to get an accountant. You’d absorbed all the tax tips (from your favourite website ListenToTaxman) that you could, but in the end you decide that you’d be better off going with a professional. You agreed a fee of £500 for the accountant to prepare your accounts, and in a month or so, you’re going to drop off all your receipts, invoices and bank statements for the accountant to work with.

Anything sound wrong about that? If not, you better read on, because it sounds wrong to me.

What am I doing wrong?

For simplicity’s sake, let’s assume your accountant’s billing you (and all their other clients) £100p/h to prepare your accounts, and they’ve estimated it’ll take around 5 hours to complete them. Side note: not all accountants will bill you hourly, some charge a flat-fee which is dependent on things like business turnover, complexity, etc.

But here’s the catch - they agreed that fee to prepare your accounts, not to prepare your books. They’re not bookkeepers after all, they’re accountants. While many of them may have learned the skill throughout their careers, it’s not uncommon for chartered accountants to qualify without much (if any) experience using bookkeeping software!

What happens next?

That’s right – they’re going to bill you to prepare the books. And if they’re over-qualified for the job, you’ll most likely be paying more than if you’d gone to a bookkeeper in the first place.

But I thought Accountants did the Books?

Unfortunately, the term “books” gets thrown around a lot, and not everyone seems to know where “the books” end and the accounts begin; some even think they’re the same thing. It’s an all-too-common misunderstanding, and it can cost you time and money. But don’t worry; I’m here to make sure you know who you’re hiring, and what you’re paying them for.

What’s the difference?

Well here’s an analogy for you:

I think we’d all agree that the cameramen who recorded the film footage for The Lord of The Rings trilogy did an outstanding job, and without them the film wouldn’t have been the same. But you can rest assured they didn’t just eject the tape and send it straight to the cinema reel.

The task of taking the recorded footage and turning it into a finished film, is left to the director/producer (and a whole team of editors… we’ve all seen film credits). They’ll decide what needs to go, what needs done again, and make sure the film is as good as it can be.

And that’s kind of similar to the main difference between an accountant and a bookkeeper; a bookkeeper’s job is to record & organise the financial data of a business, whereas an accountant’s job is to analyse, scrutinise, adjust and finalise the data which has been recorded and organised by the bookkeeper.

Sadly, neither are qualified to make blockbuster movies. However, just as the director cannot complete the movie without the footage, an accountant cannot do their job until the bookkeeper has done theirs.

While both are essentially comprised of the same data, there’s quite a difference between how the books and the accounts are put together.

Books

The term “books” comes from the old days of paper ledgers & sales/purchases day books. As an almost fully digital firm, we don’t see so much of those, however, the principle is still the same whether it’s a pile of receipts, cheques, & invoices or digitally recorded records in the cloud. The transactions are noted down into ledgers with totals for each given period. This can be updated daily, weekly, or monthly depending on either the transaction volume, or the need for up-to-date information.

The books are useful for any business, as they help give you an idea of the basic financial situation e.g. monthly sales and purchases of supplies. As an example, let’s say you were trying to keep an eye on company costs, the ledger allows you to look at both purchases in general for overall spending and individual expense categories e.g. rent or motor costs, for further scrutiny. The principle is the same if you are using digital software and apps, in fact, these make it very easy to get meaningful reports at the click of a button.

Lastly, in order to make sure the figures are accurate, the bookkeeper will perform what we call a bank reconciliation. This is the last step in the process, where they will match each bank statement line to its corresponding document (receipt, invoice or other). These are done based on the volume of transactions. A business with 100 transactions a month might perform a reconciliation once a month, whereas a business with 1,000 transactions might perform one once a week. If that sounds overwhelming, almost all modern cloud software will have a function for an automatic “bank rec”.

Fun fact: with a budget of ninety-three million dollars, we estimate the bookkeeper for The Lord of the Rings reconciled every 6 minutes on average.

At the end of the accounting year, a final bank reconciliation will be completed, and the bookkeeper will draw up a trial balance. The trial balance lists the totals of all credit & debit accounts now that they are matched. At this point, the trial balance is complete and the books are ready to go to the accountant.

Accounts

The accounts are a snapshot of the business’s financial position at your financial year end. The main pages we’ll focus on are the balance sheet and profit and loss, but there are other pages too.

  • The balance sheet shows the financial health of the business e.g. what it owes and what it is owed
  • The profit & loss details its total income and expenditure within that period to calculate the final profit (or loss).

I know what you’re thinking; can’t we just figure all this out from the books? Indeed, some companies are happy to throw their trial balance figures into a set of accounts, submit the totals to Companies House/HMRC and just leave it at that. So why would you need an accountant, you ask? Somebody hold my drink…

Scrutinising

Let’s have a look at the worst-case scenario. HMRC have selected you for a random tax enquiry. Revenue officials are sifting through every transaction, to see if they can recover some unpaid tax. Nobody likes these, not even accountants as they can be very time-consuming. Indeed, one of our clients remarked that he’d far rather have avoided the investigation in the first place, despite the fact that he had actually overpaid tax and received hundreds of pounds in a tax refund.

I should clarify that HMRC were investigating previous years, before he joined TaxKings!

A good accountant should already have assessed the books before anything was reported, making sure your accounts were “watertight”. Unless you’d hidden anything from your accountant, HMRC would struggle to find anything wrong with what had been reported to them.

Without an accountant… who knows what could have been missed? A trial balance doesn’t catch everything, and there are certain errors and omissions that may not necessarily be caught by a bookkeeper. I can’t list them all here, but here are some examples and likely outcomes:

  • Payments to/from the director had been dealt with incorrectly or personal expenses have been included as business expenditure; HMRC may then want to investigate the director personally.
  • No adjustment has been made at year end for business mileage or work done at home on behalf of the business; in this case, you end up overpaying tax.
  • Entertainment or fuel (when the business does not own a vehicle) have been entered as an expense, artificially reducing business profit; this kind of error can mean you are underpaying tax.

A quick adjustment at our end and you’re back in the good books; pun obviously intended.

If your accountant sees something that doesn’t make sense, they may delve through the original records to find the problem. They may request the odd receipt or bank statement if there is any doubt about whether costs are a legitimate business expense, or if they were paid from a separate account. But generally, they’re not working with the original documents in the same way a bookkeeper would.

With a wealth of tax knowledge, access to the latest software and apps, and a high degree of professional scepticism, you’ll find an accountant helps to protect you from the taxman and save you tax in the process.

Adjusting:

There are other year-end adjustments which could be made to give a more accurate representation of the company financials. Your accountant will usually begin by assessing the totals for each account and searching for any inconsistencies. For example, they might ask:

  • Have you recently bought any business assets, such as a new van? If the invoice falls into the relevant accounting period, you can still claim the tax deduction even if you have not yet repaid a single penny.
  • You have £5,000 of unpaid invoices; could any of this be written off, thus reducing your tax bill by almost £1,000?
  • You have made £50,000 worth of capital expenditure on your business property – can any of this be assigned to revenue to save tax further?

Tax Advice & Planning

While accountants and tax advisers are not necessarily one and the same, a good accountant should be able to give you useful tax advice. Bookkeepers will have knowledge of how tax works, but again their purpose is to record business transactions. A good accountant will not only have knowledge of tax law but can also help with tax-planning.

Once the accounts are drafted, your accountant might look to see if you could save tax. I’ve already written an article about the top ten best tax-reducing expenses for limited companies but there are many more things we accountants watch out for. We can check if there are any schemes or allowances your business can take advantage of. We can even look at your personal income, to tell you whether it would be more tax-efficient for you to take money out of your company now, or to wait until a later tax year. So many things vary from company to company and individual to individual, it’s so easy to overpay tax if nobody’s checking your books.

I don’t recommend calling your accountant up if you’re just trying to settle a family argument about VAT, but we’re always happy to provide advice if it’s related to the businesses we act for. For example, we’ve lost count of the number of times that a car salesman has told a client about the tax savings of buying a car through their company, yet omitted to mention the personal tax the client would pay as a benefit in kind. Funny that.

Tax planning is another example of the services an accountant can offer. Based on the information we hold, and your future plans, we can help put together a strategy for the next few years or longer that will ensure you can reach your goals in a tax-efficient manner.

Summary

Hopefully this article has demonstrated the key differences between accountants and bookkeepers. While both parts of the process require the same level of attention to detail, the tasks carried out are very different. The company bookkeeping records can be invaluable, helping you keep an eye on the business financials in-year. But often these don’t portray the big picture. When it comes to the year end, you will find that an accountant can save you tax and protect you from HMRC. Finding a good bookkeeper and a good accountant who utilise the latest apps and software really is the most time and cost-effective way of keeping your financial reporting stress-free and helping you manage and grow your business.

Ultimately, the wider point is that you should make sure you know what services your accountant is providing and how much they’re charging you for it. You don’t want to ask your accountant for draft accounts only to be told that they are waiting for your bookkeeper to provide the company records; especially if you don’t actually have a bookkeeper, and your company accounts are due in a month!

While most accountants will handle your books in this scenario, you may end up paying more than you need to for the service. You are also losing out on any ongoing business and tax saving advice through the year. Our advice? Speak to your accountant. As many routine tasks are now automated by cloud accounting apps and software, you may not even need a bookkeeper, let alone paying your accountant to be one.

This Guide was written by Iain Rankin, Landlord Tax Adviser at TaxKings Accountants. Iain now writes for Listentotaxman.com on matters relating to property tax and landlord tax. He is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.

This article was published in our Guides section on 24/06/2019.

Some Guides you may be interested in

More from our Guides section

340