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Accounting and Bookkeeping for Small Businesses and Sole Traders
Chartered Management Accountant, Certified Practising Accountant
and Registered Tax Agent
My Blog
Blog
Measures to Minimise Risks on Payments
| Posted on 17 July, 2015 at 0:06 |
comments (3)
|
A few years ago I joined an international
company as a regional Finance Manager and managed to uncover the fact that my
predecessor had been embezzling funds from the company. Unfortunately you only
need to watch the news to know that this kind of thing happens all too often.
What companies need is better measures in place to minimise the risks of this
sort of thing happening. Having had personal involvement in such a
matter, discovering the ways in which the embezzlement happened, I now have
some good examples of the security measures that should be in place to help
ensure that this type of fraud can’t happen or go undetected: Corporate Credit Cards With any employee using a corporate credit card
it is important that all the costs expended on the card be approved by a
manager. However, it is especially important that checks are put in place when
it is the Accountant, or the Finance Manager, or someone senior in Finance
(depending on the size of the company) who has a corporate credit card. Since
they would usually be the ones who are verifying the use of any other employee’s
cards, ensuring management approvals etc. it is important that someone independent
to the finance department, another senior manager, be the one to approve and
verify the Accountants use of the card. Online Banking Any online banking payments should require two individual
approvals before the payment can be made. One of the approvals can be from the
accountant but the other should be from a different manager, someone outside of
the finance/accounting team. This manager should be given the payments report
from an accounting system and/or copies of all the relevant invoices/paperwork.
This will allow them to verify the payments being made before approving them.
It is always a good measure to have at least three people with online banking
approvals so that if one is away there are still two who can do the approvals. At no time should
online banking passwords ever be shared. Suppliers and Invoices Where possible, the person who sets up a new
supplier/vendor on the accounting system should be a different person than the
one who enters the purchase invoices. This helps to ensure that no “dummy”
suppliers or invoices can be entered. Suppliers Bank
Accounts Random checks should be made by those approving
the payment of invoices to ensure that the bank accounts that the payments are
being made to match the bank account details given on the invoices. Petty Cash Ensure that the petty cash tin is audited by
someone other than the person who issues the cash on a regular basis. Ensure
that all issues of cash have been duly authorised and that the receipts and the
cash total up to the balance of the float. Cash Flow Allowing for seasonal adjustments the cash
flows of most companies will be reasonably consistent with the occasional spike
for such things as income tax payments. Keeping a check on the cash flow should
therefore help to indicate if something is amiss, especially if the expenditure
suddenly starts looking high in comparison to the income. Expense Accounts Are the costs on any of the expense accounts in
the P&L suddenly looking much higher than they usually do? While there
could be a legitimate reason check it out as potentially it could indicate “dummy”
costs being entered and paid for. Follow Through Above all, follow through on any queries you have made to the accountant (accounts department) about any concerns you may have. Insist on an answer and don’t just let your query be ignored. |
Starting Up In Business - FAQ
| Posted on 29 May, 2015 at 1:59 |
comments (1)
|
Q: I'm thinking about turning my hobby into a business. Do I
have to form a company? A: No, you don't have to form a company to start a business.
There are three basic business structures: Sole Trader, Partnership, and
Limited Liability Company. Most businesses start out as sole traders and then
progress to becoming a partnership or LLC later. Q: Are there any rules around how I name my business? A: The primary rule with regard to naming a business is that
the name hasn’t already been registered by another business and that it isn’t a
legally protected trade mark. There are also some banned words or phrases that
can’t be used when choosing a business name. As soon as a business name is reserved on the companies
register, it is impossible for others to reserve the same or a similar name
within the next 20 days. That name protection becomes permanent once the
company is registered. Unlike companies, sole traders and partnerships don’t have
any protection over their business names. However, they can apply for a trade
mark from IPONZ (Intellectual Property Office of New Zealand) for their brand
or logo to give them exclusive rights to use it in a unique way. Q: How do I check if someone else is using my preferred
name? A: ONECheck
is an online search tool that combines a company name, domain and trade mark
search all in one place. It is designed for people who are looking at starting
a new business, renaming their current business or just wanting to check their
existing business name is secure. ONECheck packages all the relevant
information in one place, so you don’t have to work from three different
websites. For names not protected as register company names or
trademarks check by searching online and searching local business directories.
If all these avenues show no one is using your preferred business name, you
should be in the clear to go ahead. If by some unfortunate chance someone else
is using the same name, you can at least show that you made a serious attempt
to find a match. Q: Must I register my business before I start up? A: A company needs to be registered with the Companies Office
as it starts up but sole traders and partnerships do not need to be registered.
However, a partnership will need to register with the IRD as a partnership will
need its own IRD number. Q: If I'm starting as a sole trader, should I open a
separate bank account? A: Although there is no legal requirement for a sole trader
to have a separate bank account for their business it is much better to do so.
This will make life much easier for you and for your accountant, because it
allows you to separate your business income and expenses from your private income
and expenses. This separate business account will typically be named something
like Sharon Williams trading as Accounting For You, for example. Your business’s
bank statements are usually the prime source of information for your accountant
when they put together your accounts at the end of your first year in business. Q: Should I use an accountant or lawyer? A: Although you can file your own tax returns an accountant
should be able to save you money and stress by advising on what you can claim
and how. It's also a good idea to consult a lawyer about your
business intentions, particularly if you intend to sign a lease or any legal
document. Depending on your business, a lawyer might advise you to take out
public liability insurance or other forms of protection. Q: Should I approach the Internal Revenue Department? A: Part of the Internal Revenue Department’s (IRD) job is to
offer help and information, including to new businesses. You'll find the
Internal Revenue Department’s website useful for answering your basic questions
about setting up a business and you can phone to ask business tax questions.
The IRD website also lists various helpful publications you can order, pick up
from your local IRD office, or download. Q: How do I register a limited liability company, and can I
do it myself? A: In order to register your company yourself you will first
need to register as a user of the Companies Office website. Once you have done
this you will then need to reserve your business name with the Registrar of
Companies. You can then use the online application
process in order to register your company. The Companies Office will send out Shareholder
and Director Consent forms and these will be need to be returned within 20
days. Once these forms have been returned the company registration is
finalised. At this stage you will also be given the option to register as
appropriate with the IRD. Q: Should I write a Business Plan for my business? A: Creating a Business Plan is a good idea, for several
reasons. First, the research and thought you'll have to put into writing the
business plan will help you to sharpen and/or adjust your ideas. In addition,
any lending institution that you approach for funds, such as a bank, will want
evidence that you've done your homework and thought through your business
concept. Finally, the business plan provides a road map for your
business. It lays out what you intend to do, how you intend to do it, the
resources you need, and your action deadlines for each stage. The business plan
forms a 'living document' that you can then revisit at regular intervals and
modify according to your progress or changing circumstances. Q: Do I need business skills or experience to start a small
business? A: While the most important ingredient you need to succeed
is enthusiasm, persistence and a determination to achieve your goals no matter how
much hard work is involved, you'll greatly improve your chances of success if
you have good business skills. These include the skills to market your business
in a creative and sustained way and the skills to build and manage efficient
business systems that enable the business to operate smoothly. Many people start small businesses because they're good at
something or can offer specialist knowledge in a particular area. They often
fail because their other business skills are poor, or they spend too little
time on the ‘boring’ aspects of their business. It seems more fun to do what
you enjoy doing than to keep the book work up to date, chase debtors, invoice
promptly, do a cash flow forecast, or manage tax liabilities, so these tasks
are neglected, and the business suffers. |
New Business – What Structure Should You Have?
| Posted on 9 November, 2014 at 18:01 |
comments (1)
|
When starting a new business a decision has to
be taken as to how the business will be structured. There are various options.
Each option not only has its own implications for tax purposes but of course,
each option also has different legal/compliance requirements and also presents
to potential clients and to the public in different ways.
You need to be aware of the different options
available to you when starting your own business so that you can make an informed
decision as to which option is likely to be best for you.
We will therefore look at each of the different
options in turn.
Sole Trader Many new businesses start out as Sole Traders
because it is the easiest option, especially when the business just consists of
the one person. Basically the business is structured around you – you are
responsible for the business’s liability and debts but you also retain full
control of the business and its profits. The sole trader is the easiest option because
there are no formal or legal requirements for setting up the business, also
making this the cheapest option.
Tax for Sole Traders Is also straight forward
because the business and the sole trader are considered to be just the one
legal identity and so you pay the business tax, as part of your own tax,
through your individual tax number. Although most sole traders are individuals who
are in business alone, there is nothing to stop a sole trader from having
employees, they just have to register as an employer with the IRD. When doing the business accounts it is
important that a sole trader keeps their legitimate business expenses separate
from their personal living expenses and for this reason it is beneficial to
have a separate business bank account. The one thing that you can’t do as a sole
trader is protect your business name. You can however trade mark your brand as
protection. Partnership A partnership is when two or more individuals or
entities join together to form a business. A formal partnership agreement is
drawn up and this outlines that share of responsibilities, profits/losses and
liabilities.
In contrast to a business a partnership is made
up of individuals/entities who agree to pool their resources and/or skills into
one collective offering. There are no shares because the business doesn’t exist
as a legal entity. Potentially the major disadvantage to a
partnership is that partners can be held liable for business debts incurred by
their partners.
Although a partnership is required to have its
own tax number the partnership itself is not taxed. Rather each individual
partner pays tax on their share of the profits through their individual tax
returns. Although any individuals or entities can enter
into partnerships they are traditionally used by groups of professionals such
as Doctors, Lawyers, Architects and Accountants.
Companies Companies are separate legal entities to their
shareholders (owners). They have to be registered for incorporation with the
Companies House and declare their director and shareholder details. There are
two types of company, private and public. Private companies have their shares
owned within a private group (e.g. an individual or a family) while the shares
of a public company are listed on the stock exchange. Shareholders in a company have limited
liability which means that they can lose the value of their shares in a
business but that is all. They’re not responsible for any other debts or
liabilities that a company has. As the company is a separate entity it owns all
its own assets and liabilities and can potentially continue trading regardless
of change of ownership. Shareholders of a business are taxed separately
to that business. The income that the shareholders receive from the business
can either be paid as a salary or it can be paid as a dividend (or as a
combination of the two). Salaries are treated as a business expense and so are
deducted before tax whereas dividends are deducted after a company’s tax
liabilities have been calculated and paid.
A company is taxed in its own right and there
is a designated company tax rate. Any losses are carried forward to be offset
against future year profits.
Shareholders can receive salaries with PAYE
deducted or can opt for shareholder salaries where the tax is not deducted at
the time it is paid, however, with the latter option the shareholders will have
to pay the tax at a later date.
Look Through
Companies (LTC)
A company that has five or fewer shareholders
can apply to the Inland Revenue to become a Look Through Company. While the official designation of a Look
Through Company remains the same, i.e. a Limited Company registered with
Companies House, what changes for a look through company is the tax treatment. Rather than the company itself paying tax at
the company tax rate, the profits or losses flow down to the shareholders (the
same as with sole traders and Partnerships) and it is the shareholders who pay
the tax at their individual tax rates. Losses can either be carried forward by
the LTC or can be used by the shareholders to offset their own tax liabilities.
|
Cash Flow Forecasts
| Posted on 20 October, 2014 at 3:00 |
comments (1)
|
One of the
things that is even more important to a business than profit is cash. Even a
business that is making a profit can potentially fail to survive if the cash
position is not good.
Since nearly
every small business will at some time find itself suffering from cash flow
problems it is important to try and plan ahead and figure out when a cash flow
problem could potentially arise. This is done
via a Cash Flow Forecast.
Most
businesses will have a Cash Flow Forecast that looks ahead for a minimum of 3
months and often for a whole 12 months. These Forecasts are generally “rolling”
forecasts which means that each month you drop your actual month and add the
next month in sequence doing any adjustments to the months already forecast as
appropriate.
The main
difference between a Profit Forecast and a Cash Flow Forecast is that a Cash
Flow Forecast specifically looks at the cash position of a business. In other
words it doesn’t take into account those costs, such as depreciation, which
have no direct impact on the cash position. All
businesses benefit from having a Cash Flow Forecast, and even more so if their
sales are seasonal. Many businesses can be quiet just after Christmas or during
a summer holiday period. By planning for these downtimes in cash flow, and adjusting
purchasing as necessary it will be much easier to keep your business afloat.
How to create a Cash Flow Forecast
Cash Flow
Forecasts can be created very easily using spreadsheet programs such as Excel.
Decide whether you want it for three months or for a whole year, set up the
monthly columns as appropriate and then look at your bank account to get your
starting balance.
Once all the
incomes and expenditures have been estimated the figures should be entered into
the forecast. The incomes for each month should be added to the cash position
and the expenses deducted from it. Once all the
data has been entered you should be able to clearly see if there are any months
when the cash position looks like it is likely to go into the negative. If so
then you can determine what you need to do about it. You may need to delay a
planned purchase or alternatively try and source some finance to get you
through. Cash Flow Forecast Template Available
Please email
me with your email address if you would like me to forward you a template to
use for your Cash Flow Forecasts.
|
Freelace Websites - A new way for students to cheat?
| Posted on 12 October, 2014 at 23:07 |
comments (0)
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The last
few years have seen the birth of freelance websites. I first heard about them
at an accountancy conference while attending a talk given by the founder of
Freelancer. The aim
behind Freelancer was very good, connecting businesses that needed work doing
with freelancers who could do the work. Initially the idea was that there were
many people in third world countries who could do the work at a fraction of the
price than you would pay elsewhere but who would still, at the same time, be
getting much more money than they could earn locally. In other words a win-win situation. Of course
over time this has developed with freelancers just as likely to be from the
Western world. However, as
someone who keeps an eye on what freelance work is available, one of the things
that I have been most surprised about is the number of “assignments” that are
being put up for work. Now when I say assignments I am talking about students
who are contracting out their study related assignments. Students, who instead
of properly following their course and doing the work themselves, are actually
paying other people to do it for them. What I don’t
understand is if someone is not prepared to do the work themselves, then why
are they doing the study in the first place? How on earth does a student expect
to learn their subject properly if they don’t do any of their assignments
themselves? It would seem some students have found a new way to cheat. They no
longer need to copy someone’s work they just pay for it to be done for them. Concern has
often been expressed at the number of young adults who leave school unable to
read or write. Should we now be concerned about future graduates as to whether
or not they actually know their subject?
Then of
course there is the whole work ethic. If these students are too lazy to do
their assignments themselves then what kind of employees will they make?
So while freelance websites are a great idea I just
think it’s such a shame that there are cheating students out there taking
advantage of them. |
Understanding Your Balance Sheet - 6. Using to Check Business
| Posted on 5 October, 2014 at 23:11 |
comments (0)
|
This is the
6 and last in a series of posts that have the aim of helping you,
the business owner, to better understand your Balance Sheet so that you can use
it to work for your business. So far we
have looked at all the categories of accounts that make up a Balance Sheet. We
have also looked at Control Accounts, those accounts that are “controlled” by,
or are the “summary” of, other ledgers. We have also looked at how to do
Balance Sheet reconciliations.
Now finally
we will look at how the Balance Sheet reconciliations can be used to help your
business. Using Balance Sheet Reconciliations to Better
Control Your Business When
Balance Sheet Reconciliations are being completely properly and in a timely
manner they can then be used to ensure that you are properly controlling
different tasks and payments that form part of your business. To help you
understand what I mean, I will give you two examples of errors I found in a
client’s books thanks to doing a couple of Balance Sheet reconciliations:
Balances re Payments to be Paid or Received
In both
examples given above the accounts on the Balance Sheet represented payments
that were either due to be paid or to be received:
For both of
these accounts, if the balance does not equal your next return then you need to
use a reconciliation to identify why not. It could simply be that you have not
yet received a refund and if that is the case then this should easily be
identified. However, it could also flag that mistakes have been made and if
that is the case then they need to be found and corrected. There are
other Balance Sheet accounts that also represent payments to be made or
received:
Depending
on your business you may have other accounts that also fall into this category.
The main
point here is that if the balance on the account is not as expected then a
reconciliation should be able to identify where the errors are. The most common
types of errors that can be identified in this way are:
By
identifying these errors you can make the appropriate corrections and hopefully
avoid late payment penalties etc.
Balances re Assets
While both
Fixed Assets and Stock were identified as Control Accounts in my last post, and
both should have registers and/or inventories to back up the reconciliations,
these types of accounts can only be fully reconciled when physical inventories
are undertaken.
Any
business that has a stock inventory valued at $5000 or more should know that
the tax office require a physical stocktake to be undertaken at least once per
year. However, even if your inventory has a value of less than $5000 it is
still worth doing a stocktake on a regular basis.
A physical
stocktake requires you to actually identify and count each item of stock that
you have checking this back against a list of the stock that you expect to
have. By doing this you can identify any stock items that are less (or
potentially more) than you expected them to be. Once errors have been flagged the
first thing to check is your paperwork in case any purchases or sales of stock failed
to be processed. Any remaining errors will then need to be written off.
Unfortunately
of course it is possible that stock is being stolen and a regular physical stocktake
should help to identify if this is the case.
My
experience in working in larger organisations has taught me that doing a
regular inventory of Fixed Assets is also a good idea. The most common problem
with Fixed Assets is that old obsolete assets are often disposed of without the
Asset Register being updated as appropriate. Adding new assets is never usually
a problem but doing the paperwork when disposing of an old asset is so often
overlooked. Doing a regular inventory would help to identify this thus enabling
you to keep your Asset Register up to date.
Balances re Value of Business Of course
one of the more common uses for Balance Sheet accounts, and the one that most
people would be familiar with, is to value a business – to find out what it is
worth. By properly
understanding what each of the relevant Balance Sheet accounts represents, be
it assets, stock, shares etc. and by ensuring that these accounts have been
properly reconciled, you can then gain a good understanding of what a business
is worth.
In order
for you to be able to trust the relevant accounts the whole of the Balance Sheet needs to be properly reconciled. It is
only then that you can check that the figures on the Balance Sheet account look
correct and can be verified. By seeing that ALL of the Balance Sheet accounts
can be verified you can gain a greater certainty that the relevant accounts are
correct. Since
valuing a business is a whole topic in its own right we will only have a brief
look at some of the relevant accounts in this post:
Summary
In summary,
for ongoing businesses, the most useful check that properly reconciled Balance
Sheet accounts can provide is that of ensuring errors and/or omissions have not
been made re payments, postings etc.
For
businesses that are being sold, the Balance Sheet can be used to verify the
value of a business (less of course any goodwill value etc. that may have been
added).
I hope that this series has given you a good
understanding of the Balance Sheet and of how it can be used to ensure that
your business is running smoothly. |
Understanding Your Balance Sheet - 5. Balance Sheet Reconciliations
| Posted on 29 September, 2014 at 1:14 |
comments (1)
|
This is the
5 in a series of posts that have the aim of helping you, the
business owner, to better understand your Balance Sheet so that you can use it
to work for your business.
So far we
have looked at all the categories of accounts that make up a Balance Sheet. We
have also looked at Control Accounts, those accounts that are “controlled” by,
or are the “summary” of, other ledgers.
Now we will
look at Balance Sheet Reconciliations. This is one of the major steps towards
using the Balance Sheet to work for your business. Balance Sheet Reconciliations One thing
that has never failed to amaze me through my career is how many companies, and
we are talking large organisations here, fail to stay on top of their Balance
Sheet reconciliations. I have regularly found that either the reconciliations
have not been done at all, or that they have not been done properly. At times,
when starting a new job in a large organisation, it has taken me several months
(in between all my other duties) to get the balance sheet reconciliations up to
date. The annoying thing about this is that as long as reconciliations are up
to date and are done correctly, it is a relatively quick and easy task to keep
them up to date.
What a Balance Sheet Reconciliation Should Show
Unlike
other sorts of reconciliations, i.e. bank reconciliations, where you are
reconciling one source of figures to another, a Balance Sheet Reconciliation
should show the exact detail of how
the balance of an account on the Balance Sheet is made up. In other words, it
should show all the transactions that, added together, total the balance of
that particular Balance Sheet account.
A Common Mistake With Balance Sheet
Reconciliations
I mentioned
earlier that I have often found that Balance Sheet Reconciliations have not
been done properly. This is because of one common mistake that I have found all
too many people make, even qualified accountants who should know better. The
mistake is in using “Brought Forward” and “Carried Forward” balances in doing
the reconciliations. “Brought Forward” and/or “Carried Forward” balances should
never be used in Balance Sheet Reconciliations and I will show you why: Accruals Account
Now, if,
using the above example of how NOT to do a Balance Sheet Reconciliation, you
were asked exactly what transactions made up the balance of -500.00, you would
not be able to answer. In order to provide an answer you would have to calculate
back through previous ‘reconciliations’ until you managed to figure it out. Effectively
what you have here is not a Balance Sheet Reconciliation at all. Rather, what
you have is merely a detailed analysis of the movements of that particular
account for a given period. (Or a snapshot of the Trial Balance).
How To Do a Balance Sheet Reconciliation When doing
a Balance Sheet Reconciliation, and these should be done each and every period
(be it month, quarter or year), you will need the reconciliation from the previous
period and details of all the transactions that have occurred in the current
period:
That is it
in a nutshell. You may however find that with certain accounts you use
spreadsheets to help show the movements. Or you may find that with large transactional
accounts, such as the Control Accounts talked about in the previous post, you
will just put a total that can in turn be backed up by another report – i.e.
GST on Current Period Sales. Example of Doing a Balance Sheet Reconciliation Using the
same example as used above, the previous reconciliation of the Accrual Account
now looks like this:
Accruals Account
The
transactions for the current period are as follows:
So, as stated above, the first thing that needs to be done if the
offsets, matching off those transactions that can be (including the partial):
Accruals Account
Balance -600.00 Current Period Transactions
The next thing to do is to create the current period reconciliation,
working down the remaining transactions in order:
Accruals Account
Accrual
balance of Accountant Invoice -100.00
Accrual
of Legal Fee - 50.00
Balance -550.00 As you can
see from the current period reconciliation, you can now tell exactly how the balance of -550.00 is
made up without having to look back through previous reconciliations. It doesn’t
matter how many transactions there are in an account, if you follow the basic
principle shown above then your Balance Sheet Reconciliations will be correct.
Example Using a Control Account GST Inputs Account (Previous Period Reconciliation)
(Backed up by Report
on Creditors Ledger that shows the breakdown of the invoices) Current Period Transactions
GST
on Current Purchase Invoices 6000.00 (Again, backed up by
Report on Creditors Ledger that shows the breakdown of the invoices) GST Inputs Account (Current Reconciliation)
Generally
when using either a report or a spreadsheet to back up any of the figures in a
Balance Sheet Reconciliation you would attach a copy to the reconciliation.
Well, I
hope that has given you an understanding of how reconciliations should be done. Next Week – Using Reconciliations to check on
transactions. |
Understanding Your Balance Sheet - 4. Control Accounts
| Posted on 21 September, 2014 at 23:39 |
comments (0)
|
This is the
4 in a series of posts that have the aim of helping you, the
business owner, to better understand your Balance Sheet so that you can use it
to work for your business. So far we
have looked at all the categories of accounts that make up a Balance Sheet.
However, within these categories of accounts there are certain accounts that “look
after” details from other ledgers. These are called ‘Control Accounts’ and we
will now look at these in more detail.
Control Accounts Control
accounts are identified as those accounts on the Balance Sheet whose
transactions are “controlled” by other ledgers. The
majority of Balance Sheets will have at least two Control Accounts. Whether
there are more than this will depend on the other ledger modules that an
accounting system has access to and also whether a business has assets, stock etc. The two usual control accounts that most
companies will have are:
Potential
other Control Accounts are as follows:
Understanding Definition of Control Accounts I defined a
Control Account as being an account ‘whose transactions are controlled by another
ledger’. In order to better understand this let us look at the Trade Debtors
Account. The Trade
Debtors Account on the Balance Sheet represents the balance of ALL outstanding
sales invoices. You don’t see the different customer balances on the Balance
Sheet, just the total of all the customer balances.
So how does
it work?
Every time
that a new sales invoice is generated by, or entered into, the sales ledger the
customer balance on the sales ledger is debited. Conversely, every time a
customer pays an invoice, the customer balance is credited. Now, these
transactions, both the sales invoice and the payment of a sales invoice, are
also posted to the appropriate Profit & Loss Account and to the Balance
Sheet accounts:
Depending
on your accounting system this will either happen in real time, or it will
happen when the Sales Ledger is rolled over at month end. Either way the
postings to the “Control Account”, the Trade Debtors account, will happen
automatically. The postings are “controlled” by the Sales Ledger. Control Accounts Ledgers As
mentioned, postings to Control Accounts are generally “controlled” by the
ledgers to which they relate. The list of potential “ledgers” (or Modules
attached to an accounting system) and the Control Accounts that they generally
control or feed postings into is therefore as follows:
Manual / Journal Postings
When
Control Accounts have Ledgers (and/or Accounting Modules) attached to them
there should usually be NO manual or journal postings to these accounts. This
is because these accounts need to have the same balances as the ledgers that
control them. A posting to one of these accounts that was not done via the
appropriate ledger would change the balance on the Control Account without changing
the ledger balance. This would therefore cause a discrepancy between the two.
Some
accounting systems have been designed so that they will not allow you to code/post an entry directly to a Control Account.
Unfortunately some systems do allow direct postings to these accounts so
you need to ensure that you do not inadvertently do so. Of course,
if you don’t have the appropriate ledgers or modules, for example, you did not
have a Fixed Asset module, then you can post directly to appropriate accounts.
Manual Systems It all
works slightly differently if you do your accounts manually, or do not have
certain ledgers or modules, but the principles remain the same. You will
still have and use Control Accounts for Debtors, Creditors, Assets, Stock etc.
After all, you still don’t want to have a separate Balance Sheet account for
every single customer or supplier, asset or piece of stock.
The
difference with a manual system would be that you would back up all entries
posted to a Control Account with a manual ledger. This would often be kept on a
spreadsheet. So, for
example, a lot of companies would have Sales and Purchase Ledgers but would not
have a Fixed Asset module attached to their accounting system. The cost of each
asset would therefore be coded/posted directly to the appropriate Fixed Asset
cost account. The assets details (description, date of purchase, cost etc.)
would then be entered into a spreadsheet. Reconciliation of Control Accounts
I will be
looking at Balance Sheet Reconciliations in detail in my next blog post so for
the purpose of this post we will just be looking at how the Control Accounts
should be agreeing with the appropriate Ledgers/Modules.
As already
mentioned, the Control Accounts should have the same balances as the
Ledgers/Modules that control them. So exactly
what balances on the ledgers should you be looking at?
Hopefully I
have now been able to give you a good understanding of Control Accounts. Next week –
Balance Sheet Reconciliations. As with all
my blog posts, please let me know if you have any queries.
|
Understanding Your Balance Sheet - 3. Make Up - Equity
| Posted on 14 September, 2014 at 21:32 |
comments (3)
|
This is the
3 in a series of posts that have the aim of helping you, the
business owner, to better understand your Balance Sheet so that you can use it
to work for your business.
Make Up We are
currently looking at the different categories of accounts that make up the
Balance Sheet. The last two posts explained the Assets category of accounts and
then the Liabilities categories of accounts that can be found on the Balance
Sheet. In this post we will be looking at the final category of accounts that
can be found on a Balance Sheet – Equity. Equity
The Equity
category of accounts effectively make up the “other side” of the Balance Sheet:
Assets – Liabilities = Equity The Equity
represents the money that has been invested in the business and can be shown across
several different types of accounts:
We will
look at each of these in turn.
Retained Earnings/Profit This
account represents the net value of Profits less Losses from previous years’
worth of accounts after taxes and, for companies, dividends have been paid.
Effectively the profit has been retained by the business in order to continue
to help finance the business. For
businesses using a computerised accounting system, when the year-end accounts
are ‘rolled’ over, all the “Profit and Loss” accounts are cleared of their
balances, and the net balance of these accounts gets posted to the Retained
Earnings/Profit account.
Shares (Companies Only)
Whatever
the size of an incorporated company, whether it be a small sole owner company
or a large multinational company listed on a stock exchange, there will be
shares, the value of which will be represented by share accounts on the Balance
Sheet.
Share
accounts on the balance sheet represent the value that an owner of a business,
whether one owner or multiple owners, have invested in the business. In general,
unless a business is expanding, and alters its share structure in order to
release more shares to obtain more investment income, then the book value of
the shares shown on the Balance Sheet should remain the same. (Market value of publicly
listed shares is of course another matter).
Owner Current Accounts Owner
current accounts are usually only seen on the Balance Sheets of smaller
privately owned businesses. As with shares these accounts represent the monies
that owners have put into a business. However, unlike shares, these accounts
can fluctuate in value on a regular basis. Owners may invest funds into the
business in order for the business to pay costs etc., but then, when the
business is making money and can pay its own costs the owners may choose to withdraw
some of their funds. As long as
the current accounts remain in credit, i.e. more money has been put in then
taken out, the drawings by an owner are seen as just that (withdrawing own
money) and are not taxed. However, once an owner withdraws more money than they
originally put in the drawings are then seen to be a salary and are taxed
accordingly. This then
completes our look at the types of accounts that make up a Balance Sheet. In
the next post we will look at Control Accounts on the Balance Sheet.
|
Understanding Your Balance Sheet - 2. Make Up - Liabilities
| Posted on 7 September, 2014 at 21:58 |
comments (0)
|
This is the
2 in a series of posts that have the aim of helping you, the business
owner, to better understand your Balance Sheet so that you can use it to work
for your business.
Make Up We are
currently looking at the different categories of accounts that make up the
Balance Sheet. The last post explained the Assets category of accounts and
looked at the different types of Assets that can be found on a Balance Sheet.
In this post we will be looking at the next category of accounts that can be
found on a Balance Sheet – Liabilities. Liabilities
Liabilities
are accounts that effectively reduce the value of a business. When a Balance
Sheet is being looked at to determine the value of a business the Liabilities
are deducted from the Assets in order to determine the value. Liability
accounts represent monies that are owed by the business both short and long
term. There are two categories of Liabilities represented on a Balance Sheet:
We will
look at each of these categories in turn.
Current Liabilities
Current
liability accounts, as with Current Asset accounts, can change value on a daily
basis. They represent money that is owed by the company and will obviously
change in value as new costs come in or as monies are paid. There are three
principal types of Liabilities:
Longer Term Liabilities > 1 Year The most
common types of longer term liabilities are bank loans or mortgages since these
can run over several years. As with
Longer Term Assets, there will often be two different accounts to represent a
loan: one for the loan repayments that will be made over the next year; and one
for the loan repayments that will be made in more than one year’s time. Next Week -
Equity |
