Accounting 101 FAQ's

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Accounting 101 for your business

What?

There are many value add things a small business accountant does that provides more clarity and confidence running your. These include: 

  • Providing strategic advice and come up with clever ways to save money or boost revenue.
  • Removing or automating administrative tasks that distract you from your core business.
  • Assisting with starting up a business
  • Helping to improve your business cashflow, manage business risks and grow your business

Whether you run a large corporation or you are a small sole trader, an accountant can be one of your most valuable assets to your business.

If you are unfamiliar with basic bookkeeping or your business is rapidly expanding, an accountant can assist you by relieving the stress that comes with managing a company’s finances. It’s a full-time job in and of itself, and your priorities should be elsewhere if you want your company to succeed and thrive.

Accounting software can assist a lot,  but your cash flow still needs to be  analysed, and your revenue evaluated against your business plan.

Accountants are the primary organisers and operators of a small business’s entire cash flow function.

  • GST returns
  • Income tax returns
  • Year-end financial statements
  • On-going support with business performance
  • Monthly financial plans
  • Budgeting and Forecasting including Cashflow statements
  • Company formation
  • Tax debt negotiation with Inland Revenue
  • Accounting fees
  • Depreciation on Chattels
  • Repairs and maintenance (unless renters improve property)
  • Motor vehicle and/or travel expenses to inspect the property
  • Legal fees up to $10,000
  • Rates and Insurance
  • Interest paid on funds borrowed to buy the property
  • Mortgage repayment insurance
  • Property Management fees & commission

What?

The most critical services an accountant performs for a business is:

  • Preparing and maintaining important financial reports
  • Preparing tax returns and ensuring timely and accurate payment of taxes
  • Assessing financial processes to make recommendations for best practices, identify issues and recommend solutions
  • Assist businesses in running efficiently and profitably

Benefits of having an accountant for your business

  • Accountants can save you money and time.
  • Accountants keep you organised and on track.
  • Accountants help you grow and improve your business.
  • Make good business decisions backed by an expert.
  • Make good financial decisions backed by an expert.
  • Plan for the future.
  • Cost of goods sold (COGS): An expense that represents the cost of producing your offerings. COGS is an important factor in determining your company’s profit.
  • Gross Margin: Is the Net Sales less the Cost of goods sold and is the amount of money a company retains after incurring the direct costs associated with the producing the goods or services it sells.
  • Debits and credits: Are equal but opposite entries in your accounting books (i.e., one increases an account and the other decreases the opposite account).
  • Inventory: Includes the raw materials in storage, items in the production process, and finished goods available for sale.
  • Assets: Your business’s physical (tangible) or non-physical (intangible) property that adds value to your business. 
  • Liabilities: The money that your business owes. You can have both short-term liabilities that are due within one year and long-term liabilities that are not due within one year.
  • Equity: The value of your business after subtracting liabilities from assets.
  • Revenue: The amount of money your business brings in from sales.
Sole Trader

Advantages

  • The simplest and cheapest way to start in business.
  • Any income is taxed at the progressive rates of individual tax

Disadvantages

  • Does not provide limited liability. You are personally liable for the debts of the business. Personal assets can therefore be at risk.
  • Income over $70,000 is subject to a 33% tax rate.

Partnership

Advantages

  • More than one business owner – therefore more skills, experience and management expertise available.
  • Low start-up costs companies to Limited Company.
  • Tax is paid at personal rates.

Disadvantages

  • No limited liability. Partners are liable (jointly and severally) for the debts of the partnership. This means that one partner is liable for debts another incurred on behalf of the partnership.
  • Income distributions may be inflexible.
  • No protection for partners assets which may be seized to satisfy partnership debts.
  • Losses are deductible against other income, subject to certain loss offset limits.

Limited Company

Advantages

  • Once a company name is incorporated no other company can be registered with the same name.
  • It is a stand-alone entity – separate from the owners.
  • Provides limited liability, although most banks will require personal guarantees.
  • Permits splitting of dividend income to shareholders
  • If the company is a ‘qualifying company’ dividends will either have imputation credits attached which will reduce or eliminate the individual’s tax liability.
  • If the company is a Look-Through Company (LTC) losses can be attributed to shareholders.

Disadvantages

  • Does not protect directors from personal liability. If a director continued trading when the company was insolvent one can be held to be personally liable for the debts of the company.
  • Costs of establishing and administering are higher.
  • Business losses have to remain in the company unless the company is an LTC.

Why? or Where?

Setting KPIs, setting short- and long-term goals, and making educated decisions are all largely dependent on budgeting and forecasting. A company’s budget effectively serves as a roadmap for the goals, and revenue they hope to achieve and the costs to be incurred.

It is important to stay on top of your accounting responsibilities in order to avoid other entities like Inland Revenue or creditors stepping in and hitting your business with penalties

An income statement is used to report your company’s profit. Your income statement, also known as a profit and loss statement, summarises your company’s profits and losses over an accounting period.

The income statement is broken down into three main sections:

  • Revenue
  • Expenses
  • Net profit or loss

An income statement is one of three major financial statements you can create to monitor the financial health of your company, obtain outside financing, and make financial decisions. The balance sheet and cash flow statement are the other two financial statements.

If the vehicle used for business is also used for personal travel, sole proprietors and partnerships may be required to maintain logbooks.

A logbook must be kept for three months every three years. 

You start with the distance travelled at the beginning of the three-month period, then note the distance travelled on each day and the purpose of the trip. The percentage of private use will be calculated after three months by dividing the total private kilometres by the total kilometres travelled during that time.

You must complete a new log book if your situation changes within the next three years following the previous 3 yr period. 

How?

Basic small business accounting records can be set up on a spreadsheet, but this process is more labour intensive, time-consuming, and prone to human error vs using small business accounting software package such as Xero or MYOB.

You should at the very least keep track of your costs and earnings on a secure cloud-based platform.

Budgeting is a spending plan for your business based on your income and expenses and is called a business budget.  It determines your available cash, calculates your expenses and helps in forecasting revenue.  Budgeting can help in the planning of your business operations and serve as a benchmark for the establishment of financial goals 

Depending on your business, GST returns start from $170 per return and income tax returns start from $530 per return.

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