Bookkeeping For A Limited Company: 7 Rules
Limited companies are governed by more regulations than sole traders or partnerships. This can make bookkeeping for a limited company a more challenging task. Regardless of whether you’re planning to take up this challenge and do it yourself or outsource it to a professional bookkeeper, these 7 rules will help you understand the key principles.
Bookkeeping for a limited company: Rule 1
You are not your limited company
First things first; this is an absolute foundation that every owner of a limited company has to know. A limited company is a completely separate entity from its owners and directors. Although you own your limited company, what a limited company does is done in its own name. This means all the transactions within a limited company belong to that company and not to its owners.
What does it mean in practice? Let’s illustrate it on an example. You invoiced your client for your service and they paid the money into your company’s bank account. This money belongs to the company, it doesn’t belong to you. If you keep taking this money as you please, especially if there’s no clear records explaining why (e.g. a loan from the company), you are basically stealing from the company.
Bookkeeping for a limited company: Rule 2
Bank account
This is a result of what we described in the paragraph above. Because your limited company is a separate entity, it needs to have its own bank account to manage its money. You can’t pay money that belongs to the company into your private bank account. You can, however, sometimes use your private funds to pay for some expenses and then be reimbursed by the company for your costs. But this is only when you are buying something on behalf of the limited company. You can’t be reimbursed for things bought for your personal use.
You may think it’s a big inconvenience but actually having a separate bank account makes your bookkeeping much easier and less time-consuming. Bookkeeping for self-employed where private money and business money is kept in one bank account, can take even twice as much time as bookkeeping for a limited company.
Bookkeeping for a limited company: Rule 3
There will be situations in your business when you will pay for some company’s bills out of your own pocket. It’s quite common at the early stages of running a business when cash inflows are usually quite low or even non-existent. You already know that your limited company has a separate entity. So if you pay for any expenses that the company incurred, you are lending the money to your company. This becomes the company’s liability and it will be settled at some point.
A completely opposite situation can also happen and you may borrow money from your limited company. In this case, you will have to pay the money back. To keep track of these types of situations, you will be recording these transactions while doing bookkeeping under an account (category) called director’s loan.
Bookkeeping for a limited company: Rule 4
As a limited company you can’t do bookkeeping using a cash basis accounting. Cash basis accounting is when you record your transactions based on the actual cash movements. It basically means that you look at your bank statement and the dates when you received the money and when you paid for something.
With a limited company your costs are recorded in periods when they are incurred. The same applies to your income and it’s recorded when it’s earned.
Example
- You received an invoice from your supplier dated 30/05/2021 for services in May 2021.
- You have 30 days payment terms.
- You pay on 28/06/2021.
How do you record this transaction?
You record it as a cost incurred on 30/05/2021. It doesn’t matter when you paid the invoice. The lack of payment until 28/06/2021 only means that until that point that invoice creates an outstanding liability you have towards your supplier.
The dates when you record your transactions are important for tax and reporting purposes. You have to record your transactions in financial years they relate to.
Bookkeeping for a limited company: Rule 5
Because bookkeeping for a limited company has to be based on when costs and income was incurred and earned, sometimes you will have to make adjustments to your accounts.
Example
- Your year end is 31/05/2021.
- Your accountant does annual accounts for your limited company and corporation tax after the year-end and they will invoice you once they finish.
- Because the work relates to your year that ended on 31/05/2021, you will include this cost in your books. It’s called an accrual. It doesn’t matter you haven’t received the invoice yet.
Bookkeeping for a limited company very often requires adjustments like this. The same principle relates to your income.
You can also have a completely opposite situation.
Example
- Your year end is 31/05/2021.
- You received an invoice for electricity that covers a period of April 2021-June 2021.
- Because only one third of this expense belongs to the year ended 31/05/2021, the rest has to be moved to the next year.
These adjustments can be done either by your accountant or a bookkeeper. The frequency can depend, but they definitely have to be done before you submit annual accounts for your limited company and a company’s tax return.
Bookkeeping for a limited company: Rule 6
Bookkeeping for a limited company is more complex than for sole traders and it’s due to reporting standards and regulations. Using Excel for recording your transactions can work if their volume is low. However, you need to remember that each transaction will have two effects. It’s called double-entry bookkeeping.
Example
- Invoice you received from your supplier will update balances for two categories (accounts):
- Your expense account, e.g. marketing costs
- Creditors account (accounts payable) - this will be the amount you owe to your supplier.
When using Excel, make sure you account for double-entry bookkeeping. If you’re not confident doing it yourself, our highly trained bookkeepers in Oxford highly recommend outsourcing this to an experienced bookkeeper. Incorrect bookkeeping will produce incorrect annual accounts and incorrect corporation tax calculations.
If you start growing in terms of a number of your business transactions, our expert bookkeepers in Oxford highly recommend switching to accounting software. Accounting software, like Xero accounting software, will handle double-entry bookkeeping for you. This will significantly reduce the time involved and minimise potential errors.
Bookkeeping for a limited company: Rule 7
Always keep proper business records as a confirmation of each transaction happening within your business. A limited company must keep business records for at least 6 years from the end of the last financial year they relate to. Organised business records will help you do proper and correct bookkeeping and also calculate a correct corporation tax liability. Also, you may be audited, which means you will very likely need proof of your transactions. Keeping business records organised isn’t that difficult once you have useful tools and a process in place.
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