There are three main types of purchases that a business makes:
Direct Costs - costs which relate directly to the sale of the product e.g. wages
for the labour used to produce the product, materials used to produce the product.,
the goods you purchased to sell on etc.
Indirect Costs - Rent, Office Staff Wages, Stationery - these are usually costs which
have to be paid whether or not you produce or sell any products and the price does
not fluctuate much with the number of products sold/produced.
Capital Expenditure (Fixed Assets) - Most things purchased or paid for by a business
will be used up within a period of a year or less e.g. Materials used to produce
a product, but other things are going to last much longer than a year e.g. If you
purchase a new van you will still expect to have it in good working order after
a year. Therefore in accounting terms it would be wrong to include the total cost
of the van in only one year’s accounts. These types of items are known as Capital
Expenditure or Fixed Assets and the cost of them is spread over several years and
the term used to spread their cost is known as Depreciation.
A Bookkeeper can not only help you decide where to record each item of expenditure
but also on how much to break it down in order to provide the most useful information
for your particular business.
Whatever the type of expense, you should receive an Invoice or Receipt from the person
you purchased the item from. Without this Invoice/Receipt you will be unable to
claim the expense against your Profit, so you may have to pay more Tax.
How to handle your Purchase Invoice/Receipts.
When you pay an Invoice you should write on it when and how it was paid, Cash, Cheque
etc. This will help you when reconciling your bank account.
If you always pay at the time of purchase then you should simply file the Invoices
in order of date.
If however you have credit terms with some of your suppliers then it would be best
to keep 2 files, one for Unpaid and one for Paid Invoices. When you are ready to
pay an Invoice write on it the date and method of payment and then file it in the
paid file. This way you can easily see from your files what Invoices have still
to be paid..
If all you do is stick to filing your purchases paperwork in some manner similar
to this and writing down the payment details then you are well on your way to either
making the recording of your bookkeeping transactions a lot easier on yourself, or
saving money if you are getting a bookkeeper to do it for you. (Of course you will
also have to keep copies of all your bank/credit card statements etc.).
So What if you want to do your own Bookkeeping?
Well all the information would be taken from the files you have already created.
You could use a spreadsheet to record the Date, Supplier Name, Amount and Payment
Date of each Invoice/Receipt. You would then want to break the amounts down into
separate categories depending on the type of business expense. E.g. Cost of Goods
Sold, Capital Expenditure, and Business Expenses. You would further breakdown the
Business Expenses into Admin Costs, Wages, Hire of Equipment, Advertising etc. The
categories you choose would be determined by the information which would be most
useful to you, as the business owner, but you may also want to consider what is required
by HMRC to fill out your Tax Return.
See here for copy of Tax Return Form (if turnover over £68K)