Accounting For You
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|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.
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.
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.
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.
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.
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.
|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.
|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.
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.
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 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.
|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.
|Posted on 12 October, 2014 at 23:07||comments (0)|
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.
|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:
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.
|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:
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:
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):
Current Period Transactions
The next thing to do is to create the current period reconciliation, working down the remaining transactions in order:
Accrual balance of Accountant Invoice -100.00
Accrual of Legal Fee - 50.00
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.
|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 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.
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.
|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.
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.
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.
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.
|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.
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 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 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