Small Business Accounting 101

Small business finance & accounting

In this Business Moreton Bay Region support module learn the basics of small business accounting.

Key learning outcomes:

  • Introduction to bookkeeping basics
  • Accounting controls
  • Key monthly financial statements
  • Completing your BAS
  • Accounting Systems
  • Record Keeping

Presentation: Small Business Accounting 101

Small Business Accounting 101

Hi, I'm Di Brown. I'm a chartered account and business advisor with SRJ Walker Wayland. I'm passionate about educating business owners on the importance of planning for your business success and working with you to develop strategies, broken down into detailed action items and allocated responsibilities to ensure that you achieve your business growth and profitability goals. Today, I'm going to be talking to about small business accounting.

The importance of a strong financial management system

In today's current economic environment, it's more important than ever to ensure that you have strong financial management systems in place. And underpinning that is a necessity to have an integrated client accounting system. This system needs to be efficient. And accurate and provides you with the relevant, real time data to enable you to make informed business decisions.

So, today I'm going to be talking to you about the basics of small business accounting. And we're going to start with discussing some of the terminology that you might need to become familiar with when you're setting up your accounting systems. I'll talk to you about some of the key accounting controls that you need to ensure that you have in place. We'll discuss some of your key financial reports that you need to be producing on a minimum on a monthly basis. I'll give you some tips on how to complete a business activity statement. We'll discuss small business record requirements, and then I'll talk you through some of the more relevant cloud based accounting system, and associated applications, that you might want to consider implementing for your business to ensure you have a fully integrated accounting system.

The difference between bookkeeping and accounting

So as a chartered accountant, I get asked a lot about what's the difference between bookkeeping and accounting, or where does bookkeeping stop and accounting start? And the key difference is around the trial balance stage.

So bookkeeping records the day to day business transactions that involves gathering all your data, quality checking all the information, and posting that to your relevant accounting system and usually a bookkeeper take your accounting system up to around a reconcile trial balance stage. And I'll explain more about what a trial balance means in a minute.

Once it's at that stage, accounting then tends to look at the analyzing, the reporting, and making those key business decisions based on that information. And obviously part of that also involves attending to your relevant legislative requirements, such as assisting with lodging your business activity statements, your tax returns and your financial statements.

Introduction to bookkeeping basics

1. Data entry

So the first thing that you need to consider when you're setting up a small business accounting system is you need to establish a chart of accounts. So your chart of accounts is just a listing of all of the different accounts that will form your accounting system, where you record all of your different transactions.

So it's broken down amongst your balance sheet items, which record your assets and your liabilities, and your profit and loss statement, which records your income accounts and your expense accounts. And when you're posting to your chart of accounts, every transaction needs to be allocated to the correct account and recorded in your general ledger. So your general ledger then is the balances that go up and are incorporated into producing a trial balance that records all your debtors and all your credits, and it's important that those are reconciled and equal each other. So your debits must always equal your credits.

So in terms of ensuring you have an integrated accounting system, it's really important that you have data that flows into your data system from all of your different systems that you use to process your sales, your purchases, and your expenses. So that means you want to have a system that allows you to integrate your point of sale and e-commerce function (if you have one), you're invoicing, your bank statements should be feeding in. You might want to have an inventory management system and some way of scanning receipts and having those uploaded directly into your accounting system. So whatever apps that you use to run your business, you need to ensure that they are integrated and have that data flowing into your accounting system.

2. Bank Reconciliations

So one of the key controls that every business needs to ensure they do on a regular basis - and I'd recommend doing this probably weekly - is a bank reconciliation.

So a bank reconciliation just reconciles the balance on your bank statement to the cash account balance sitting in your accounting system. And they are usually different, and it allows you to fix any data entry mistakes that might occur along the way. It allows you to pick up any mistransactions and ensure they're recorded, and it detects any incorrect payments that you may have made during that process.

The accounting system itself self will facilitate that by allowing the bank statements to be fed directly into your accounting system. That will then allow you to verify, assign those to that data entry correctly to the correct accounts. And in some instances you can create rules. It will match transactions based on past history, and allow you to verify and reconcile the data that's in there.

3. Debtors/Accounts Receivables

Another key component is your monthly debtors and creditors reconciliation, and ensuring you're comfortable and familiar with your age debtors and age creditors at the end of each month.

So in accounting, we use multiple terms for the same thing, which makes it even harder for non accountants to understand what we're talking about. So when I talk about debtors, another term that you might have heard is accounts receivable. So these mean the same thing. Debtors and Accounts Receivable is simply people that owe you money. So anybody that you've sold a service or a product too, that hasn't yet paid for that service or product will be recorded on your debtors listing.

It's a critical component of managing your cash flow strategy. So by reviewing your age debtors listing on a regular basis, and how often you review that, is dependent on what your terms of trade are. But I would recommend in the current climate, you should be looking at that also on a weekly basis, minimum every month. If you're not on 30 day trade terms and you're on seven or 14 days, then you should be reviewing those every seven to 14 days.

4. Important Debtor Controls

So there's a couple of key controls you need to have in place around your debtors, in your accounts receivable. So one of the things that you need to be really confident about is that you have accurate and timely invoicing. Because when you're recording that sale, the cash isn't going to come in unless you've got that invoice correct in the first place. So you need it to be prompt and you need it to be accurate.

But one of the other things that as a business owner you should be doing, is considering what your payment terms or your terms of trade actually are. For example, I've come across a lot of situations in a number of different industries that may be notoriously bad invoicing promptly. So you need to be considering not issuing an invoice, particularly if you are a service industry, when the service is completed. But you need to be considering in your country checked agreements, that you have upfront payments, or that you are progress billing throughout the performance of that service. The sooner you bill, the sooner you get the cash collection in. So you need to be reviewing your invoicing policies.

In terms of your debtors and your accounts receivable policies. What are your credit terms? Who do you give credit to? And how long do you give them credit for? Do you offer discounts for upfront payments or payments before the due date? And if you do do that, are you ensuring that that still leaves enough margin to ensure that those jobs are profitable if people take advantage of those discounts?

Ensure that you make it as easy as possible for your clients and customers to pay your invoices. So do you offer BPAY? Have you got EFTPOS facilities? Have you got the ability to take direct debits on a regular basis? Have you got a software system or an application in place that will automatically take those payments for you on a regular basis?

It's critical in the current environment that you are monitoring your data's balance regularly, and anybody that is starting to fall outside of your trade terms. And those trade terms should really be, in the current climate, seven days maximum, depending on your industry. Because I know there are some industries where those payment terms are regulated by contracts and you may not be able to negotiate a payment term less than 30 days.

However, whatever your pay payment terms are, you need to be monitoring your debtors to ensure that you're getting that cash in within those payment terms. You need to be identifying any bad debt risks early. And developing and documenting your internal systems around what those payments terms are; who offers credit to your clients, whether it's your sales staff, whether it's the office staff, whether it's only you, who is able to approve that and who is responsible for collecting those debtors; and how is the debtor collection process documented chased, and what record are you keeping in terms of what clients you've spoken to, and when, and what the status is of when you can expect to receive that debt?

So when you're setting up your systems, yes, it might be your accounting system that you're setting up, but you need to be considering all of the controls that go around that system, and debtors controls are important.

5. Creditors/Accounts Payable

Just as important as your Debtor Controls, are you Creditor Controls. So creditors are also referred to as your Accounts Payable. So these are people that you owe money too. And I'm not talking about loans. I'm talking about your suppliers. So who's in your supply chain that provides you with credit terms. It's important that you are paying your bills in time, but also for your own cashflow, that you're utilizing those terms of trade.

6. Important Creditor Controls

So if you're entitled to 30 days before you pay your creditors, then make sure that you're considering using those terms of trade. At the same time, if your creditors are offering upfront discounts or prompt payment discounts, if your cashflow is strong at that particular point in time, you may want to consider actually taking advantage of that discount. Where you may be experiencing difficulty meeting some of your creditor terms. It's equally as important that you start negotiating around any payment extensions.

One of the other controls that's really important around creditors. So who has authorisation to buy things on your behalf? What controls do you have in place for people that are spending your money? So separation of duties around debtors and creditors, and anything that involves payments or receipt of cash for you as a business owner becomes critically important. So reviewing your debtors and creditors on a monthly basis or a weekly basis is a fundamental accounting control that you need to have in place.

7. Payroll

One of the other things that's recently been introduced in the last year or so is single touch payroll. So if you are employing staff there are complex requirements that are legislation and regulation based that you need to be familiar with, and you need to be complying with in terms of your employees, and the payroll associated with your employees.

So single touch payroll involves directly reporting to the Australian Taxation Office, on a pay-by-pay basis, your payroll run for that particular period. So what you need to ensure that you have is single touch payroll or STP-enabled software that's integrated into your system. That will automatically advise the ATO when a pay tun is processed, and it will tell them your salary and wages per individual, the associated pay-as-you-go with holding, and the associated superannuation contribution.

That STP system removes the necessities for that for you as an employer to then issue payment summaries, or what we used to call group certificates, at the end of the financial year. Employees can access their payroll information on a real time basis is through their MyGov ID, and their MyGov logins.

At the moment, there are still some certain extensions for certain employers under the STP system that apply until 1st of July, 2021. So at the moment, there is an extension until that date for what we consider to be micro businesses. So anybody with one to four employees, and also closely held employees. So that's where you have a family business, and they're all closely involved in that business. So those extensions are in place until 1st of July, 2021. So it's only next financial year. So you need to be ensuring that you have your systems in place and ready to roll over to that single touch payroll before that due date.

Accounting Controls

In terms of accounting controls, it's important that you're utilising your financial systems to identify any potential issues before they occur. So that means documenting and communicating your controls around your debtors, and the terms and authorisation and collection procedures, to the relevant staff involved. That means ensuring that all of your expenditure levels are authorised, set, and documented. That you have separated the duties of staff involved around cash payments, cash collections, bank reconciliation, and that you've got additional controls to access that data such as password, and two factor authorisation protection.

Key monthly financial reports

So once you've got your data in for your relevant period. What happens to it? Your accounting system will then collate that data automatically and produce your key financial reports. So the first one you need to familiarise yourself with this is your profit and loss statement. So your profit and loss, or also called your income statement, will summarise all of your income accounts and your associated expense accounts for the relevant period. And at the end of that, it will tell you whether you've made a profit or a loss for that relevant period.

That statement then flows into your balance sheet and forms part of your owner's equity section. Your owner's equity section represents the balance of your profit or loss for an accumulated period. Plus the difference in values between your assets and your liabilities. So an asset account is anything that adds value to your business. So some examples of assets that you would have, would be cash in your bank. It'll be your inventory. It'll be things like plant and equipment. It's your debtors. And liabilities are people that you owe money to. So it's your creditors. It'll be a bank overdraft if you're in overdraft. It'll be your loans. If you've got any loans or leases or anything like that is an example of a liability. Your assets, less your liabilities, are your owner's equity that is left. And that's reflected in your balance sheet, which is a snapshot of those balances at any particular point in time.

So they're your two key financial statements. As I said earlier, some other financial statements that you need to be regularly reviewing is your age receivables and your age payables listing. So people who owe you money, and how long that money's been outstanding for is your age receivables. And people you owe money to and how long that money's been outstanding for is your age payables.

Ideally, every business should also have a cashflow statement. It's a little bit more complicated and not all software is able to complete a cashflow statement, but I would certainly recommend discussing with your accountant, the importance of having a cash flow for you to monitor.

Completing your BAS

Another thing that I get asked a lot is, issues around clients completing their business activity statement or their BAS. So your BAS reports and calculates your outstanding liabilities, in relation to your goods and services tax. Your pay as you go installments or your business tax payments. Your pay-as-you-go withholding, which has the amounts you need to provide for your employees. And any other taxes such as fringe benefits tax, luxury car tax, or fuel tax credits if they are applicable to you.

So how often do you have to lodge your BAS? Again, it depends on your turnover. If your business GST turnover is less than 20 million, you're entitled to lodge on a quarterly basis. It's more than 20 million, you have to lodge monthly.

So your lodgement dates are 28 days after that relevant quarter, unless you utilise a registered BAS or tax agent. In which case you have a further extension until 28 days after month two. So what that means is, if you lodge it yourself through your MyGov ID, or simply through your standard business reporting software, if you have that integrated into your accounting system, then you have until (if it's the June 2020 quarter) it must be lodged by the 28th of July. If you're lodging through a BAS or a tax agent, then you've got until 28th of August to actually get that BAS return lodged.

So it depends how you choose to lodge your BAS on your actual due date.

Tips to completing your BAS

A couple of tips to complete your BAS. One, ensure that you have all of the transactions entered in your accounting system for the relevant period, and your bank reconciliations will assist with that.

Another one (where I see a lot of errors for clients) is they may claim GST on expenses that they've processed through their drawings accounts, for example, or through an account that is not business related. So bear in mind that you can only claim your GST input tax credits on expenses that are business related.

Ensure that your chart of accounts has the correct GST codes set up for each of you different accounts. So every account that's recording data in your accounting system, should have an associated GST code. And whether it's GST, non-taxable for GST purposes, or GST free, that code needs to be established when you're creating your chart of account.

Enter whole dollar amounts only in your BAS. And remember to leave blank any boxes that not apply to your business.

So what happens if you make a mistake? In most cases you should to fix it in your next BAS. However, there are error limits around that. If you're underpayment - so basically you may have underpaid your GST - if some of your underpayments is less than $10,000, you can simply fix it on your next BAS. If the sum of your underpayments is more than $10,000, then you have to actually amend your BAS for that particular period. And there are timing rules around that. So you have 18 months, if your turnover is less than 20 million, to be able to amend that BAS, if your underpayment is more than $10,000. If you've overpaid, you can amend it within four years or amend it on the next BAS. So just bear in mind that there are options for you if you get your best wrong.

Accounting Systems

So one of the things that's really important as a small business owner is ensuring that you've got accounting systems in place that aren't going to limit your growth, or your skillsets, or your staffs skill sets, and are going to allow you to actually access real time information that is on an efficient and accurate basis.

And cloud based technology has been a game changer for the accounting industry to allow you to do that. So it allows the integration of business software to facilitate a seamless flow of information from all of your different sources into that accounting system.

And whilst I'm talking to clients about this, sometimes we might have clients say to us, Oh, but it's expensive to set up. Yes, it is. Initially there is an initial upfront capital cost, but bear in mind that the increased efficiency, the enhanced reporting, and the reduced labor and time it takes to produce reports and information far outweighs that initial capital cost. So it's a worthwhile investment for any business.

Cloud-based accounting systems

There are a number of cloud based accounting systems that are available. Zero and MYOB are some good examples. Both of those contain single touch payroll, and standard business reporting software that enables you to facilitate your single touch payroll, and BAS lodgements.

There's another system that I would strongly recommend to that business owners consider. And that's an app that plugs into your zero and it's receipt bank. And it facilitates your ability to manage your receipts and invoices; allows you to simply take photos and upload them directly into your accounting file; and keep track of all of those relevant bits of pieces of paper, which are important for your financial accounting records.

Another thing that you might want to consider using for your superannuation guarantee contribution payments, is the small business superannuation clearing house. If your turnover is less than $10 million, and you have less than 19 employees, it's a great free service that is available to facilitate your super guarantee contributions on your behalf. And it allows you to just bank one payment for all your staff, and it will do the rest.

One thing that's really important though, is that whatever system you consider, is cloud based and that it's integrated with all of your other financial and operational systems. So that means allowing you to plugin various different applications to integrate, such as a customer relationship management system, your work flow planners, inventory commerce, E commerce modules, sometimes you rostering and scheduling system. So whatever you need to run your business, you need to be considering, can that link to my financial accounting system to ensure that my data is integrated an accurate. And there's an example on the PowerPoint behind me at the moment of a number of different apps that will plug in to Zero that will help you facilitate that.

Another question I get asked a lot is, how long do I have to keep all my records for? The answer is simple. Generally it's five years, unless you have a capital gains tax event, and then it's a bit longer, and you need to talk to your accountant about when that event is for how long you need to keep your records for. Or where you've been subject to amended assessment, but generally it's five years. The ATO prefers electronic records because they don't fade and receipt bank will certainly assist in this this way.

So once you've got your accounting system is in place, what next? The next thing that you need to know about is financial management, and we'll be running a more detail workshop later this year around teaching you how to develop your budget, develop your cash flows, work out what your break even analysis is, and then work with you to develop some key financial performance indicators that all successful small business owners need to know, and implement, and monitor to ensure your business success.

So I hope that gives you a better understanding of what you need to do to implement a cloud based integrated accounting and financial system. If you have any further queries, or if you need more information, please don't hesitate to contact SRJ Walker Wayland. Thank you.

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Basics of Small Business Accounting
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