Accounting online and how this works

Introduction 

What is accounting online and how does it work when you are a business owner? This could be when you are running your own company or when working as a sole trader. Accounting online is a new way of keeping your business’ accounting records. This comes as an alternative to using a traditional spreadsheet or paper cashbook, as in years gone by.

There are many choices now out there for accounting software for small business and contractors. Therefore, if you changeover to this new way of maintaining your accounting records, what is the best online accounting software that is available? We are now also in a time when Making Tax Digital (MTD) is truly here. Therefore, it is a key decision for your business to choose a great online accounting solution.

When you run your own business, you will need both an accountant and bookkeeper. In times gone by in many cases, a contractor or small business’ accountant may have taken care of both of these roles.

In recent years, contractor accountants have offered in the main, a choice of two systems. The first is an Excel spreadsheet which works well and still does now. The second however is an option through an online portal, and this comes with a plan to keep your records digitally. Many small business owners now do their accounting via a digital platform. Keeping your records online will actually make it easier for you to do the constant updates. A popular choice of online systems for both contractors and small business is FreeAgent.

New era 

We are now in the times where MTD is here to stay. HM Revenue & Customs (HMRC) first brought this in for businesses that were VAT registered and above the VAT threshold. They also gave further time for businesses to adapt so that some could continue with spreadsheets and use a special software tool to file with HMRC. Now, any business that is VAT registered, should be using an online software package that complies with MTD.

With an online digital platform, there is a license fee for using the software. The typical charge is between £10 and £30 per month. Most platforms also offer a free trial so that you can test this out before you sign up. There are also less-familiar free options out there that offer basic plans. These will cover your business up to a certain number of transactions per annum.

The best online digital platforms

Examples of some of the best online accounting packages are:

  • FreeAgent -specialist small business accounting software -this is ideal for contractors.
  • Sage -a package for businesses of all size.
  • Xero -a package for businesses of all size -this is a bit more technical therefore it is more suitable for larger businesses.

The term micro businesses, is given to many small businesses in the UK, including contractors and freelancers. The software solutions given above will be sufficient for most small and even medium businesses. However, if your business has very few financial transactions, there are some free online accountancy packages that are available. This will give those businesses an option for online accounting, as opposed to completing spreadsheets.

The pros of digital software for your business 

When you run your own company and you use online accounting, most popular packages have lots of different accounting features which include:

  • Having an overview of your business finances and its cash flow.
  • Issuing unlimited invoices and tracking of these when they are paid and are still outstanding.
  • Expense management for each employee.
  • Expense tracking for the employees.

Importantly, you will have an overall view of your business’s financial picture. The online system will also show your profit so far in the current year and what funds are in your business.

Advantages 

The main advantages are:

  • Your company bank account can link directly to the online system. As part of this your business bank transactions will import automatically into here. Alternatively, you can also upload your bank statement transactions into the portal. If you have a company credit card or even personal credit card with which you pay for business transactions, this account can be added to the online system and it will import in your transactions.
  • Expenses that you incur personally yourself can be added to your online software. Many also have the option for you to take a photo with your smartphone. You can then upload the expense into your online software.
  • When you are doing the updates yourself, it will involve classifying each entry for income and expenses along with other business transactions such as tax payments and payments to you. In addition, you will need to mark out if there is any VAT within each transaction. What’s more, this is much quicker than entering four or five fields of data for each entry in a spreadsheet type system. Therefore, although there may be a small cost for using an online digital platform, it is certainly easier than using spreadsheets. With this in mind, many non-VAT registered businesses also now use this.

Further advantages

  • You can create your invoices on many online systems and also send them to your customer or client via here too. Some online packages also enable time tracking and this enables you to keep a record of this. This time can then feed into the invoices that you create on here. The platform will also enable you to track which invoices still need paying. Therefore, this will help you keep an eye on which invoices are still outstanding.
  • Some online systems also allow for you to record inventory management. As a result, this will enable you to keep track of any business assets that you purchase.
  • You can file some of your important company tax returns via the digital platform. This is much easier than using the HMRC platform which was the case previously or filing paper returns which was the case prior to this.
  • Importantly, you are in control when you run your own accounts system for your business. In this context, it feels good to be in control, rather than sending everything to your accountant and letting them deal with it. You will have the information for your own business readily online. As a result you can see your business’ financial standing and how its cash flow looks real time, wherever you are at that moment.

Fewer mistakes 

There are fewer mistakes when you are using online software for your business. This is providing that you make sure that your bank feed is working fine.

Under the spreadsheet service, it is possible to miss entries or transpose the figures. These types of errors no longer exist when you are using an online system. Again this is providing that you make sure your bank feed is connected and you update this correctly.

Mobile friendly 

Most of the popular online software packages also now have a mobile app. Therefore, you can view your business position online and on the move.

Mobile viewing is a growing trend and is here to stay. If you travel by train or in a taxi to work, you could do some of the updates on the go. This saves you doing this on your laptop or PC on an evening or weekend when you get home.

Online support 

There is online support if you come across any queries, when you are using a digital platform. Most online systems have good customer service support that help you solve any issues quickly. FreeAgent come back to any queries on the same day in most cases i.e., if you ask them a question during the day rather than towards late afternoon.

Maintaining records 

You can keep all of your records electronically within an online software package, rather than keeping paper records.

Providing that you:

……you will be in good stead should one of the tax authorities need to view these in the future.

With regards to your receipts, it would also take quite some time to scan all of your receipts into an online system. Therefore, we would advise you to have a mixture of both online and offline records.

Current digital reporting and the future

When you are using a digital platform for your business, you can file your VAT returns via the online system. You can also now file your PAYE reports via most online systems.

In the future, it is the aim that a business can also do other tax filings via the online platform. This will include Corporation TaxSelf-Assessment Income Tax return and formal accounts however most of these are some way off due to the complexity of such documents. Currently, the UK income tax return can be filed via some online packages but only for self-employed people.

For small businesses, and this includes contractors, the popular choice as mentioned earlier, is a system called FreeAgent. This system captures all of the above filing capabilities and much more.

Final thoughts

Online accounting for your business is still fairly new but it definitely has its plus points. The system is developing as we move along and it aims to become much better in the future.

If you do not currently use an online software package, we have detailed what you should consider if you are looking to change contractor accountant. One of the considerations of this would be that your new accountant uses online accounting software and is familiar with how this works.

Finally, is you sign up for FreeAgent there is a cost for the licence fee each month. However, if you bank with Natwest, RBS or Mettle they will cover the FreeAgent licence fees.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: March 16th, 2021 / Categories: Accounting, First timer guide /

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