Another year is upon us and at a time of world recession, you can not do better than being a bookkeeper. The number of new startup businesses is increasing globally because of redundancies and people unwilling to work for others.

The one thing they all have in common is that they don’t want to learn or do bookkeeping. How do I know? Simple, I have trained tens of thousands of people since I first published ‘Accounting For Everyone’ in 1998, and this site is now in the top ten of bookkeeping tuition sites. yet out of a global population approaching 7 billion, only a very very small fraction are interested in the subject.

One of my missions has been to teach people how to make their businesses more successful through understanding accounting and I know from the feedback that it is greatly appreciated, but I also know that most businesses would prefer to pay someone for doing this task. And that is where you come in.

Now, how do you take advantage of this?

The simple answer is to understand marketing. I know from the many business owners I have talked to over the past 32 years that most spend less than 20% of their resources on marketing. And yet, statistics show that the most successful businesses spend upwards of 50%.

So the answer must be to either devote more time or spend more of your resources on marketing. The great thing about bookkeeping though is that once you have a full roster of clients (ie. enough to give you a full time business) then your marketing spend can come down considerably (unless of course your plans are to expand and take on additional bookkeepers).

This is great news for bookkeepers. But it means at the start you must get a grip on how to sell your business and yourself.

So let me introduce you to my other blog at QuentinPain.com. Everything I have ever learnt about running a business is being added to that site. Take a look and leave a comment if you can. I would love your feedback.

If you are not familiar with balance sheets you should take my bookkeeping course first as I don’t want to put anyone off with this article. OK, with the warning out of the way, let’s press on…

With most accounting systems, things like balance sheets are considered as reports. That is, something you need to compile on such and such a date. The same convention also applies to the profit and loss account etc. What very few people realise is that they can all be expressed as accounts. Radical thinking eh!

Balance Sheet as an Account

A balance sheet usually consists of three items:

1. Assets
2. Liabilities
3. Equity

It represents the accounting equation: Assets = Liabilities + Equity (or ALE to help you remember – imagine yourself drinking an ice cold beer on a hot summer’s day whilst entering a journal or two).

The system of double-entry is based (at its simplest level) on two things:

• Debits
• Credits

Your debits must equal your credits for everything to balance, hence the name balance sheet. But wait a minute, we are looking at three things on most balance sheets (ALE). How does that work?

• Assets = Debits
• Liabilities = Credits
• Equity = Credits

Hence the accounting equation shown above. This is also why a horizontal balance sheet only shows two sides (you wont see this pattern in a vertically oriented balance sheet).

Profit and Loss as an Account

Let’s take a look at an extended Profit and Loss report:

• Sales
• Costs of Sales
• Expenses
• Depreciation
• Taxes

It contains a whole bunch of account groups. But each group consists of accounts with either a debit or a credit balance. When you consolidate those accounts in each group you end up with either a debit or credit balance. Here we go:

• Sales = Credit
• Costs of Sales = Debit
• Expenses = Debit
• Depreciation = Debit
• Taxes = Debit

The final balance of the Profit and Loss ‘account’ will be placed in the Equity section of the balance sheet. All your individual liability accounts will be summarised and placed into the Liability section, and all your assets (Bank, Cash, Debtors, Stock etc.) end up being summarised or consolidated into the Assets section.

The pattern is very simple and clear. Whether an account is some individual thing (like Stationery or Bank) or consists of a group of accounts (like Cost of Goods) you can look at them all as examples of ‘accounts’. Go that one step further and consolidate their balances into balance sheet ‘categories’ and you can see the same pattern.

So the result is quite simply that a balance sheet and a profit and loss report is at its core just another account. That is why I talk about the first rule of accounting as ‘everything is an account, and there are  no special cases’. It is wonderfully elegant.

It’s been an incredibly busy month here on Accounting for Everyone, with many wonderful new comments on the various weeks course material.

It took me many years to really understand double-entry. I did it by reading all the books I could get my hands on, and talking to thousands of business owners, oh, and the odd accountant here and there

There are so many idiosyncrasies in the jargon of double-entry bookkeeping, and of course different countries are bound to use slightly different terms for the same thing. Let’s take a look at a couple of those.

The Journal

This is a great one. Journal = book = diary = log. I.e. a place to write something down. That’s all. But it used most commonly to describe a specific type of transaction. That is where the confusion comes in. There are no ‘special’ transactions. In just the same way there are no special accounts. All a transaction does is move money around. Period. So a transaction consists of a number of ‘entries’. Each entry affects one account. If an accountant or trained bookkeeper needs to make some correction, they say ‘just journal it’ (or something similar). This raises the ‘journal’ on a pedestal to some new height, but it is not like that. In short, you can ‘journalise’ everything and anything.

It is really understanding terms like this that will make you confident in bookkeeping, and that of course is where my bookkeeping course really hits the target (according to all the comments).

Nominal Ledger

Another great one. In the UK we call it the ‘nominal’ ledger. Everywhere else it is called the ‘general’ ledger. What does it mean? Nothing. A ledger is where you place your accounts. That is all any ledger is. If you group all your customer accounts into one place, then you could name it your ‘Sales  Ledger’. If you are in the US you may want to call it ‘Accounts Receivable’. Whatever you want to label it, they are all the same. A place to store accounts and look up their balances.

There are of course a number of different alternative names used around the world, but the most fundamental are covered in the course. What is important is that whatever something may be called, it does not differ in terms of how it is used in accounting and bookkeeping.

A new forum will start here in April 2011, which will be a great place for everyone to get together and discuss anything they like that is connected with bookkeeping and business (and maybe we should also have an off-topic area too). Here’s to all of us

I just had to write a thank you note to all my loyal subscribers. Thank you so much for subscribing to my bookkeeping course. Your comments have been fantastic, and the Facebook recommendations have also been overwhelming. Please DO continue to recommend this course as I know it is helping a lot of people understand something that is core to the success of any business.

As global communication and information increases, so it empowers people to take action. This in turn not only drives economies, but gives people the responsibility needed to ensure their lives are, at the very least, interesting. By that I mean, running your own business or taking control of a particular area of a business. Of course, running a business does not necessarily make you immediately happy, but what it does do is give you the tools (and money) to achieve that end more easily.

I would like to find out what proportion of subscribers and visitors to this site are in business already, thinking of starting a business, wanting to help a friend, improving their career prospects, or are simply fascinated by double-entry (no, it’s not sad, I am one of them LOL). So please add your vote to the poll on the right (you can vote for up to 2 answers). As soon as you vote you will be able to see the result for yourself too.

Feel free to add a comment below. Thanks again.

Quentin Pain

Many business owners stick stubbornly to their policies, claiming that it confuses staff if you give them some room to talk more freely to customers. One of the things I found to win over customers is to listen. And I mean listen carefully. They are the ones with the problem, and for some reason they chose to contact you. That means:

• Your marketing is attracting them
• They believe you can fix their problem

So, if when they ring, you find yourself saying: “Er, no, we don’t do that”, then it’s time to learn that your marketing is sending the wrong message, or worse, you don’t really understand the problem you think you are solving (and without a problem to solve, there is usually no business). So, if you can change, do so, and start saying YES.

I am not a fan of Alan Sugar’s management, but as he once said: I am usually right, but when 10 people are telling you you are wrong, maybe they have a point.

WInning over customers is simple if you solve their problem.

A while back I was watching an episode of Dragons Den that reminded me of the confusion that abounds around the words: turnover, gross profit, net profit, profit margin and a bunch of other terms that have everything to do with how you view the profitability of a business.

Turnover or T/O

This is your total sales figure. Literally, in money terms, how much you sold during a particular period (usually your financial year). Turonver To Date means the turnover so far this year. From this you can start to make a prediction of your total turnover for the year. If you have professional indemnity insurance you will need to know this. Most policies allow a degree of error of 50% (to make up for the uncertainty factor), but check your insurance small print. Never confuse turnover with profit. One last thing, always quote turnover excluding sales tax or VAT. If you quote turnover including tax, any potential investors will run a mile (they will see you as someone who likes to inflate figures).

Gross Profit

If all you sell is a service. And there are no costs directly involved in supplying that service, then your gross profit is the same as your turnover. However, if you resell other peoples’ goods or services, manufacture things for resale or do have costs directly involved with what you do, then you need to remove those costs from your sales in order to arrive at your gross profit. Typically these costs will be held an account called Cost of Goods Sold (aka Cogs). If you sell mainly services, this is often shortened to simply Cost of Sales (COS). Here’s a simple example: You buy a widget at a cost of 100 and you resell it for 200. If you sell just one of these, your turnover will be 200. However, your gross profit will be 100 (because you must subtract the cost of the goods sold).

Gross Margin

Using the previous example, the gross margin is 50%. Gross Margin = Selling Price less Cost Price divided by Selling Price.

Markup

Again, using the previous example, we marked up the product from 100 to 200, which equals a 100% markup.

Net Profit

There are multiple versions of this! The bottom line is your turnover less all costs. Your costs are not only Cogs and overheads but also depreciation of your assets, any amortization of loans and of course your tax liability on the profit made. Accountants use different abbreviations to show exactly what degree of profit they are reporting. The most common is EDITDA.

EBITDA

Earnings Before Interest, Taxation, Depreciation and Amortization. In other words your turnover less Cogs, overheads and other expenses. You can quote on any subset of this. For example: EBIT = Earnings Before Interest and Taxation (so here we are including depreciation and amortization).

Learn the above and you will impress any investor (and bank manager).

We are on the last day of 2010 and for me this year has gone way too fast. I don’t know whether it is simply because I am older – and everyone I know is also a year older! but they all say the same thing. Fast, fast fast!

Luckily in terms of bookkeeping, nothing has changed at all, apart from the fact that ‘modern’ double-entry bookkeeping is now one year older of course. But looked at in the perspective of around 600 years, that is very little indeed.

The recession continues, and pretty much everywhere in the world we are all in the so called ‘austerity’ era! For the poor, it has never gone away. For the rich, it means one less mince pie. For the rest of us, if we have a job, there is not much change really. So my advice for all those weary of the 9-5 working lifestyle… change it starting in 2011.

Start your own business. You will be working much longer hours, but the big difference is that you will be doing it because you want to do it. Once you start you will find it difficult to stop. Be warned about that. As soon as you taste the freedom of running your own business, it becomes an obsession. And that is a good thing.

One vitally important thing you must do is to ensure you surround yourself with enthusiastic and optimistic people. As Tim Smit, the founder of the Eden project in the UK says, get rid of anyone who tells you what you are doing is a waste of time (actually he encourages you to do something much worse with them!). What you are doing is you are doing something for yourself. It is by far the best way to do things. If you get it right, others will follow you. You wont be able to stop them. But you must stay focused. And you must take action.

I have read a number of great books this year. The two I absolutely recommend to anyone are:

1. Dale Carnegie: How to Win Friends and Influence People. If everyone followed his advice, we would all be so much happier with our lives.

2. Drew Whitman: Ca$hvertising. As Lord Sugar said once on The Apprentice: “I have written many books on advertising – most of them cheque books.”. This book explodes the myth of advertising. If you ever need the answer to whether advertising is any good, read this book. Did you know that the only place worth paying a premium for in print advertising is the inside front cover? Forget right hand facing, near content, inside back cover, back cover, they are all pretty much of a muchness. The front inside cover however shows an average 30% increase in response rates. And even that is not great when you think about how much extra you have to pay. As the book says, if what you are selling is not of interest to the audience, you are wasting your money.

So, Market, Media, Message. That is all you need to know. Of all the multiple letter abbreviations (the 7 p’s, the 3 R’s the 101 Z’s etc), this is the only one that really matters.

And finally, for the message itself. Read Dan S Kennedy’s book: The Ultimate Sales Letter.

Good luck and Happy New Year.

Quentin Pain

Any accounting course will take you through the basics, but to really get ahead quickly you should sign up for our free 12 week accounting and bookkeeping course by filling in the form on the right.

Armed with this, you will get the fundamentals of accounting firmly fixed in your memory. From simple transactions right through to the balance sheet, this accounting course and bookkeeping guide shows you what you really need to know to tackle those difficult exam questions.

Most people new to accounting struggle with their debits and their credits, misposting them, but worse, getting them the wrong way round. I know this from the many seminars I give where my first question is always “if I take money from my bank, do I record it as a debit or a credit?”. All those who have never studied accounting before get this the wrong way round. Find out how to ensure you NEVER get it wrong with our beautiful and wonderfully simple memory tricks. Pure logic you will love.

After you have completed the course you can then go on to take further courses and qualifications so you can become a qualified accounting the fastest possible way.

View the accounting video on our home page for more details of our accounting course for bookkeepers and accountants.

If you have not signed up to my free 12 week bookkeeping course yet, then please do so by filling in your email on the right. It will give you the grounding for your bookkeeping career in a way you will not have seen anywhere else.

For the first time you will be able to really understand debits and credits by learning a wonderfully simple concept that ensures you get them the correct way round! (and for those new to bookkeeping, I can tell you right now, everyone gets them the wrong way round at first).

Once you have completed the course, or even after you have finished the first few weeks, if you want to become professionally qualified with a recognised global institute, I can highly recommend and endorse Nathalie Barr’s excellent training at Clevercloggs Bookkeepers Distance Training Course.

I have personally taken her course and gained my own qualifications through her. The course is distance learning and tailored precisely for the examinations you will need to pass. A 100% pass rate is guaranteed. The qualifiactions themselves are gained through the ICB, which is expanding into many countries.

Businesses in the UK can claim fuel or usage as an expense when using a private vehicle for business. There are three choices:

1. Record every business trip and reclaim the mileage allowance. You can also claim back a small amount of VAT from the business mileage. Make sure you have receipts (although HMRC accept that just about all fuel companies are VAT registered!). The amount of VAT you can reclaim varies depending on engine size. VAT 700/64. Here are the published fuel prices: http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm so divide your car size by the VAT rate and you get the deduction (eg. assuming a VAT rate of 17.5%, a 1400cc engine size car is 12p, so the VAT reclaimable on a 40p allowance is 12 divided by 1.175 minus 12 = 1.79p).

2. Claim back all the VAT and pay the scale charge. This is the most common method since it requires no mileage records to be kept, just a fixed amount to pay each quarter. If hardly any business miles are done, then method 1 may be more beneficial. Add up the total VAT and see if it is more than the scale charge.

3. Keep detailed records of all trips (date, from, to mileage, reason for trip) and figure out the business percentage. Only enter that percentage of fuel receipts and claim back only the same percentage of VAT.

There is a lot of FUD spread by (many) software companies about filing online and that you must have some kind of (ie. their) special software. They are using the oldest marketing trick in the book, fear.

Here’s the reality. There is no law that says you must use software. Until there is, neither HMRC or any other Inland Revenue service can force you to use software to file (or even do) your accounts using a computer. In the UK the majority of accounts are still done on a spreadsheet (last time we did a survey it was around 50%, but as software gets easier that figure will be declining). So, will Microsoft (et al) suddenly release a UK specific HMRC uploader for Excel? Not anytime this side of the next millenium!

When HMRC and other Revenue services say you MUST file online by such and such a date, all they are saying is that you need a computer (your library has one if you don’t) to log in and enter your data via a computer by hand. What they are stopping is the paper format, that is all.

Does anyone remember when HMRC said you could have a tax refund if you filed your PAYE online a few years ago? What happened, some software companies started claiming that if you bought their software you would get a massive rebate (as though it was courtesy of them). They pushed the same FUD that you needed special software to file online too! What a cheek.

Maybe I am cynical, but if there is one thing I have learnt about corporates it is that their marketing departments are kept as far away as possible from development (and reality).

Every business will suffer from a bad debt at some point in its life and this short guide will show you how to account for them in your business.

A bad debt is where a customer does not pay you for work done. That could be for many reasons:

• Bankruptcy
• Refuses to pay
• Disputes your invoice
• Ignores your demands
• Disappears

The question is, at what point does an invoice become a bad debt? If you had agreed terms with your customer of, say, 30 days. Then is it a bad debt on day 31? No. It just means you are suffering the same problem as countless businesses around the world: and that is a bad paying customer.

So is it after, say, 60 days. No again. The time is actually irrelevant. It tells you nothing about your customer’s ability or willingness to pay. And that brings me to a subject 90% of small businesses don’t bother to do: Terms and Conditions.

It is imperative that you set out your terms and conditions and ensure your customer agrees to them. Don’t be tempted to copy someone elses. If it contains ‘legalese’ any judge worth his salt will throw it out of court. Terms and Conditions represent a contract between you and your customer. Make it plain and simple.

Spell out very clearly that all invoices are due within 30 days of the invoice date (or whatever your terms are). Say specifically that if the invoice is not paid by 30 days you will charge interest at the rate of 5% a month (or whatever percentage and period you feel comfortable with). Explain that if the invoice is not paid within 60 days you will persue them in the courts. I realise this can seem off putting to a customer, but we are talking about your time and money versus the possibility of not being paid at all.

There is nothing wrong with writing the above in a pleasant style. That is just good business, but you must spell it out and mean what you say. You will get respect for it. And if you don’t, ask yourself if that customer is really worth the gamble.

OK. So at what point does an unpaid invoice become a bad debt? The simplest way to tell is when you get a letter from an administrator explaining that the customer has gone into receivership or administration. You now have proof that something is amiss. It is still not a bad debt though. That is because there is still a chance the business could be saved.

But what if you don’t get a letter? Well, most countries have conditions set by their Inland Revenue services to protect you and let you write off a bad debt after a certain time period. At the time of writing in the UK for example, I believe it is 6 months. Just check with your Inland Revenue service.

Right, so you now have proof or can legally write off the debt. What do you do? Simple. Open a new expense account called ‘Bad Debts’. Enter a journal From Debtors To Bad Debts. In double-entry you Debit Bad Debts and Credit Debtors.

If you want to learn a much faster way to understand double-entry and get your debits and credits sorted properly, sign up for our free bookkeeping course. It has helped thousands already. Fill in your details in the form on the right.

George Osborne announced his long awaited spending review today to reduce Britain’s deficit by around $81bn over 4 years.

All departments will need to reduce expenditure significantly with an overall job reduction in the public sector of just under 500,000.

HMRC have published a series of graphs and charts on the subject available on Flikr.

Quentin Pain, founder of software company Accountz said:

“whilst we welcome cuts that are necessary for the country there was a significant lack of proposals for the SME business sector. It is that very sector that generates the tax that keeps this country going in the first place. If you concentrate on cuts without remedial help for growth, it is a recipe for disaster.”

Quentin also added: “I would predict we will lose a further 500,000 private jobs over the same period as a direct result of a cut on contracts and other factors. This is not good news for the UK’s future.”

Quentin appeared on the UK’s BusinessZone Expert Panel during the parliamentary speech.

In the UK and most of the EU there are rules on what must appear on a sales invoice if you are registered for VAT. Obviously those rules vary from one country to another, and you will need to check with your local inland revenue service, but there are some general rules that you should observe.

In the UK, VAT on sales is known as Output tax. That has always seemed an odd label to me since the tax is coming in to the business!, but the Inland Revenue see it one step further in that it will then go OUT from you to them.

It will come as no surprise then that VAT on purchases is called Input tax. If you are VAT registered, then you can reclaim that VAT, but this is where the rules come into play.

Simplified

In order to claim the VAT, you will need to make sure the supplier’s invoice is valid. This is the minimum it must have:

• Valid EU VAT Number
• Supplier’s name and address
• Description of goods/services
• Tax Point (date of sale)

The above is known as a simplified VAT invoice and is only valid if the supply is £250 or less. It is up to you to check the VAT rate for the items you have bought. For example, if the goods were exempt, then even though you have the VAT number you cannot claim the VAT (because there isn’t any). If in doubt always ask for a modified or full invoice (see below).

Modified

Then there is the modified invoice. The legislation says you can issue this ‘if your customer agrees’. What they mean is, if your customer doesn’t mind an invoice that shows the total VAT for each rate rather than a complete breakdown item by item.

These are the things you need to show in addition to the simplified items above:

• VAT inclusive total for each VAT rate
• The total VAT for each VAT rate
• The VAT exclusive total for each VAT rate

In other words you must show the exclusive and inclusive totals plus the VAT totals for each rate of VAT included in the transaction (eg. standard, reduced and exempt).

Full Invoice

In addition to the above, a full VAT invoice must include:

• Customer’s name and address
• Invoice number
• Invoice date (if different to the Tax Point – which is the actual time of supply)
• The unit price or rate and quantity of items supplied
• Cash discount rate or amount
• A total for each rate (so it is obvious how much of the invoice is zero rated for example)

The Tax Point is crucial. It is the date of the time of supply and it could be different from the Invoice Date. The reason is that the VAT must be accounted for by both customer and supplier at the same rate, and that can only happen if both are using the same date.

The rules state that if you are a retailer then you do not need to issue a VAT receipt (of any type) unless you are asked to do so by the customer. If any supplier fails to issue an invoice having been asked for one, a fine or other penalty can be issued by HMRC.

DISCLAIMER: Remember, ALWAYS check with your local Inland Revenue service or tax authority. Advice issued on this website is simply advice. It is not the law and cannot be used as evidence in any legal matters. Click here for more details: HMRC Website.

Depreciation is the amount an asset has reduced by bearing in mind age and wear and tear. It is a core part of a year end routine (and for larger businesses can be done every month for strict management reporting).

When you record the purchase of an asset such as equipment or buildings for use in a business, you place it in the Fixed Asset section of your chart of accounts. Whenever you look at this section, you will be able to see at a glance how much your assets originally cost.

However, in order to account correctly for your business, you will also need to record the change in value of those assets. This can be simply because the item is no longer new, and thereafter due to wear and tear or damage.

On top of that, an asset could also be stolen, exchanged for another or simply sold. All of this needs recording.

It can be recorded directly in the account itself, so a check on the transactions will show its original value followed by its reduction in value over the years, or, more usually, a separate account will be opened to record those changes. Looking at the two accounts together will show the full picture.

Strictly, any asset should be valued at its actual market price when the depreciation is needed. In reality, that can often be hard to do, so there are a few conventional ways to make this easier:

• Straight Line
• Reducing Balance

Straight line means reducing the asset by a fixed value until the asset balance is zero. For example, at 25% per year, it will take 4 years to reduce the asset to zero. This is the most common way to depreciate assets.

A reducing balance means the asset never gets to zero. Using the same 25% rate, the reduction is applied to the last known value. So if an asset starts at 400, then after 1 year at 25% it will be worth 300. At this point it is the same as the Straight Line method. However, in year 2, it will be  25% of 300 (slightly less than 100 taken in year 1).

The reducing balance method is more accurate since it could be argued that whilst you still have the asset it will always have a value, however small.

Depreciation is a bookkeeping excercise. It has nothing to do with tax liability. Instead inland revenue services around the world offer tax benefits, an example of which is Capital Allowances (UK). You can choose to take the allowance or not depending on whether you have made a profit. That means the allowance will often be completely out of kilter with the book value.

From a business perspective, it is the book value that is important. It tells the business owner how much it would cost to replace those assets should it become necessary to do so.

If you want to know more about depreciation and capital allowances, sign up for our free bookkeeping course by filling in the form on the right. You will be shown exactly how to account for it and also be given fun tasks to try for yourself.

From the 1st October 2010 the national minimum wage thresholds are changing. There are four classes to take into account:

1. Apprentices
2. 16 – 17 Year olds
3. 18 – 20 Year olds
4. 21 and older

For qualifying apprentices it is £2.50 per hour. For 16 – 17 age range it is £3.64 per hour. For 18 – 20 years it is £4.92 per hour, and for 21 and over it is £5.93.

Who can get the minimum wage?

Most adult workers who:

• are working legally in the UK
• are not genuinely self-employed
• have a written, oral or implied contract

Image by ttelyob via Flickr

In the UK, if you allow a discount for early settlement of an invoice (aka prompt payment) then the VAT is calculated on the discounted amount regardless of whether the discount is taken.

Sub Total: 10.00
VAT: 1.58
Net Total: 11.58
10% Early Settlement Discount (ESD)

So the VAT (17.5% at the time of writing) is applied to 9.00, not 10.00.

However, if the customer pays by installment, then you must account for VAT at the actual price paid.

Also, if you offer any incentive to a customer, known as an unconditional discount, then the VAT is calculated on the discounted amount provided the customer pays the discounted amount. Otherwise the VAT is calculated on the full value.

Finally there are contingent discounts. If you offer a discount on some contingency, eg. pay x amount by such and such a date, whatever happens, the VAT is calculated on what is actually paid. That of course may mean an adjustment is required in your accounts to accommodate it (eg. the discount taken).

Bear in mind that laws and regulations are subject to change so always check with UK HMRC if in doubt.

Note: it seems that this VAT rule only applies in the UK as I can find no reference to the rest of the Eurozone. Countries like the USA don’t suffer from this type of beaurocracy, but note that VAT is being talked about actively in the States as an alternative to Sales Tax…

Ever since the terrorist attacks, governments around the world have introduced more and more red tape in the hope of curtailing criminal activities. One of the more obvious ways has been to set up so called ‘Money Laundering’ regulations.

In the UK anyone involved in handling or looking after the finances or accounting of other people needs to register with HMRC on an annual basis (and at a cost) in order to comply with the regulations. This is true in many other territories too. Read more on money laundering here…

Money Laundering

Money laundering is a very recent change in statutory law around the world (although it has been going on since time immemorial) brought on by terrorist events over the last decade or so.

Money Laundering in the UK and elsewhere

In many countries including the UK you are required to record and keep proof of clients if you are a bookkeeper or accountant for money laundering purposes. This serves two purposes:

1. Due dilligence
2. Client Identity Proof

Due dilligence means you have taken the trouble to look at your client more closely by asking them to prove who they are. Client Identity Proof is just the evidence you can supply should something go awry with your client. That is, at some point, your client should become involved with money laundering (ML), terrorism, drug smuggling or any other criminal activity, which is why ML was brought in in the first place.

Many practitioners, and the vast majority of ordinary people see this as a typical example of beaurocracy, and I agree, however it is something you must do with every client you take on board, by law.

Money Laundering Proof

You will need photographic proof (driving licence or passport is acceptable) and proof of name and permanent address. The best source for that is a utility bill (gas, electric, water or telephone). Records should be retained for a minimum of five years, but retain them permanently to be safe.

When photocopying documents make sure you do not photocopy parts that are not relevant (eg. travel pages in a passport). In the UK you cannot use colour photocopies, they must be black and white. We are not sure what the requirements are for the USA, but I suspect they are similar.

Money Laundering and Inland Revenue

Finally remember that you must register with your Inland Revenue service (HMRC in the UK, where there is also a fee to pay). HMRC have a useful section on Money Laundering on their website.

Have you read our guide to running a bookkeeping business, money laundering is just another aspect you need to know about? Bookkeeping Business From Home