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Keeping Proper Company Records Print E-mail

There is a significant volume of legislation dealing with the subject of company records, but for most smaller entities, making up 55% of UK's GDP, there are actually very few hard and fast rules.


Perfect records are time consuming and expensive to produce, therefore the ideal is to have records that are sufficient to meet all the requirements of compliance, allowing a business to trade with a minimum risk of breaking the law and incurring unnecessary penalties.

The minimum records that have to be maintained must enable the following:

  • Meeting obligations to creditors when they fall due

  • Meeting Companies House deadlines

  • Meeting obligations to Her Majesty's Revenue & Customs when they fall due

Failing to meet the above will lead to immediate fines and penalties, ultimately affecting the goodwill of these organisations, and quite often leading to investigations that are very costly to bring to a close.

On the positive side, good company records can make a significant contribution to planning, execution and delivery of growth and profitable performance.

The aim of this website is to assist directors to comply with minimum requirements. By making sure they are met, money can be spent on professionals that add value to the business, as opposed to fighting the fires of non-compliance.

The most important consequence of not keeping proper company records, including but not limited to company receipts, payments and other bank transactions, is to be accused of money laundering or tax fraud, whether or not it has been intentional. Money laundering regulation for 2007 has introduced legislation that effectively puts all individuals who own, know about, transact with or account for business transactions in the United Kingdom at risk. Punishment for committing money laundering or tax fraud can lead to imprisonment. For instance, a false declaration on a VAT return can earn a sentence of seven years.

It is therefore imperative to ensure that proper accounting records are kept on a day to day basis, but the cost of keeping the records must be viable for the business to continue as a going concern.  Please contact me for more detailed guidance on money laundering regulation 2007 or conduct your own Google search.

Opening balances

The production of accurate figures is dependent on the correct starting point at the beginning of each accounting period.  It is surprising how many companies fail to ensure that opening balances are correct. The issue is that if opening balances are not correct, there is no way reconciliations can work and the resulting closing balances at the end of the accounting period will not be an accurate reflection of the company assets and liabilities.

It is difficult to 'test' opening balances in any accounting package for a various number of reasons.  The ultimate test is that the prior period closing balances should agree to the audited balance sheet that has been filed at Companies House. If a figure does not agree to the documents filed at companies house, or the legal agreements signed by all parties to an agreement, the balance simply does not exist.

The first difficulty arises because some audit journals do not affect the underlying records, but are merely processed for 'presentation' of gross assets and liabilities in the balance sheet. Therefore, trade debtors may contain some credits in the underlying records due to payments in advance of work performed, but in the statutory accounts these credits need to be reflected in trade creditors as a liability. There are also temporary provisions (such as bad debt provisions) at year end that may be reversed at a future date when the abilitiy of a customer to repay becomes certain. In most cases, the closing balances on the trial balance of a company will not agree with the audited financial statements.

The second difficulty is down to reporting ability of software. In most accounting packages, it is not possible to print trial balances at a cut off date within a month such as 1 January 2013. The easy way around this problem is to check closing balances in the previous accounting period (in this case 31 December 2012). The reserves will not include the current year's profit or loss, so this will need to be added to opening reserves in the trial balance to obtain the correct reserves figure.

Audit journals are usually posted in the period after the relevant accounting period because the audit is usually finalised after year end. Some packages do not allow back-dated entries.  The problem with posting audit journals in subsequent financial accounting periods is that the opening balances cannot be tested. There would be no way of telling whether all audit journals have been reflected accurately in the underlying records of the company.  Therefore, where ever possible, audit journals should be posted at the end of the period for which they are refelcted (for example, for year ending 31 December 2012, audit journals should be posted on 31 December 2012 and not in the 2013 year end). 

Consolidations

In a consolidation package, it is important to post audit journals in the correct entities. Usually, each entity has a unique company number. The trial balance for each company number should agree to the audited financial statements in each case. Any consolidation entries to eliminate intercompany transactions and investments or introduce group goodwill should be posted as a layer on top of the underlying results. It should be possible to reconcile group reserves by adding together all the reserves of underlying companies statutory accounts, less amortisation of group goodwill and a few other minor adjustments, to reach the group reserves figure published in the group accounts. The lack of such a reconciliation can lead to serious problems during an audit. For more information on consolidations please visit our Preparation of Accounts section.

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