Bookkeeping within a limited company forms the basis of the company’s financial health. As a director or owner in the UK, you must comply with stringent rules to meet HMRC and Companies House requirements. Proper bookkeeping helps you to keep track of income, expenditure, and profits. It will also enable you to file proper tax returns and avoid fines. This guide breaks down the basic accounting rules of a limited company into seven simple steps. We made it simple for you to read and do. Whether you have a small startup or a successful business, these rules allow you to get the most out of your money. Let’s discuss the rules. Talk to our best accountants and bookkeepers in the UK at CruseBurke. You will get instant help about bookkeeping rules for limited company. Rules About Bookkeeping for a Limited Company As a separate legal entity, a limited company is subject to specific legal and financial reporting obligations from HMRC and Companies House. Here, we’ll discuss 7 important rules for bookkeeping for a limited company: Rule 1- You Are Not Your Limited Company You must treat your limited company as a distinct entity. This is a rule that separates your own funds from your company’s money. Your company includes its assets, liabilities, and financial activities. You will be acting for the company as a director, but you are not personally owning the company’s money. For example, if your client pays an invoice into the company’s bank account, it belongs to the company. You can withdraw money for your personal use, but it must be properly recorded in the company’s books, usually through a director’s loan account, and formally authorised by the board of directors. If you take money from the company without properly authorising and recording the transaction, it constitutes a breach of your fiduciary duties as a director and can lead to serious legal consequences. This separation provides limited liability protection. Creditors cannot pursue your own savings even if the company is in debt. But you should keep detailed records to ensure this protection. Directors who mix the funds make themselves vulnerable to personal liability through the courts. To apply this rule in bookkeeping for a limited company, review all transactions periodically. Ensure that all payments or receipts are related to the business, not for personal use. In case you realise a private expense on company books, correct it immediately by reimbursing the company. This habit keeps your accounts clean and compliant. Experts indicate that keeping oneself informed about this rule prevents traps. It is the foundation for all other accounting rules. Rule 2 – Bank Account Your limited company must have a separate business bank account. Avoid mixing up the company and your own banking. The use of a separate account makes it simple to post transactions and ease audits. Open a business bank account as soon as you’ve registered your company at Companies House. Banks offer accounts specifically for limited companies, typically with features such as online banking and integration with accounting packages. Deposit all company income into this account and pay out company expenditure from it. At times, you will pay company bills with your personal money, especially when you are at the start. You buy office supplies, for instance, using your credit card. In this case, reimburse yourself out of the corporate funds, but only for eligible business expenses. You should generally avoid putting personal expenses on the company account. Having a separate account for business prevents complications when accounting for a limited company. You don’t need to dig through personal transactions for business ones. It also provides clean bank statements for HMRC audits. By making a mess of accounts, you confuse tax returns and run the risk of fines. Choose a bank that is most suitable for you. Take into consideration low charges, easy access, and good customer service. After opening the account, you should reconcile the account every month so as to ensure that you have the same records as bank statements. This practice picks up mistakes early and maintains your books accurately. Rule 3 – Director’s Loan Account Directors borrow money from or lend money to their business. You record these in a director’s loan account. The account maintains a record of loans to ensure clarity and satisfy tax authorities. By paying a business expense in cash, it turns into a loan to the business. The business owes you the money. Record it as a liability on your books. Later, the business reimburses you, paying off the loan. On the other hand, if you borrow funds from the company, for example, for a personal reason, account for it as a loan from the company to you. If you borrow funds from the company, you must record this as a loan from the company to you. If the director’s loan account (DLA) is overdrawn by more than £10,000 at any point during the tax year and the loan is interest-free or charges interest at a rate below HMRC’s official rate, a Benefit in Kind arises. This is taxable on the director, and the company will also have to pay Class 1A National Insurance contributions on the benefit. For example, in a cash-trapped start-up, you paid a supplier invoice out of your own funds. Treat this as a director’s loan. Pay yourself back when the company funds get better. Always enter these with dates, amounts, and purposes. When accounting for a limited company, maintain the director’s loan account under strict control. Overdrawn accounts trigger corporation tax charges at 33.75% if not paid within nine months of the year-end. Monitor balances automatically through efficient bookkeeping. Maintain records for all loans, such as agreements if necessary. This avoids conflicts and shows compliance. If loans get complicated, seek advice from a consultant to steer clear of tax traps. Rule 4 – Recording Transactions You record transactions as and when they occur, rather than as money is exchanged. Limited companies use accrual accounting, whereas sole traders might …

Read more