Most small businesses and sole traders, when looking at their accounts, will concentrate solely on their Income/Profit and Loss statement. However, as bigger businesses are more likely to understand, the Balance Sheet of a business can be just important.

While an Income or Profit & Loss Statement can give an immediate snap shot of whether a business is making money for that current year a Balance Sheet can give an indication of the overall status of a business – it’s total value. The Balance Sheet can also give an indication of what monies are owing or are owed, indicate how much money an owner or owners have put into the business, and, when reconciled properly, can highlight errors, missed payments etc.

I will therefore be doing a short series of posts about the Balance Sheet and how it can be understood and used.

Before delving into Control Accounts, Reconciliations etc. it is important to know and understand the different categories of accounts that make up a Balance Sheet. Broadly speaking there are three main categories of accounts that make up a Balance Sheet, but each of these categories can then be further broken down: ·        

Assets are accounts that reflect value to a business. They give an indication of what the business owns, what value is held by the business, and what monies are owed to the business. The Assets category can be broken down into several other categories as follows:

We will look at each of these categories in turn.

The word “Intangible” means “unable to be touched” or “not having physical presence” and this definition holds true with regard to Intangible Assets.

Fixed Assets are much easier to define as they are any items purchased for the business that cost $100 or more.

There are generally several categories of Fixed Assets, most of which are self-explanatory. The more common categories are as follows:

All fixed assets will have a useful life and a depreciation rate as defined by the tax office, and can be written down as per the defined rate.

Most Balance Sheets will show two accounts for each type of Fixed Asset, one account for the original cost, and one account for the depreciation to date. The net of these two accounts will be the current “book value” of the Fixed Assets.

Current assets are those assets that are used on a regular basis and often the account balances of these assets can change on a daily basis. These assets cover money, stock, monies owed etc. The primary categories for current assets are as follows:

This reflects any assets, other than Intangible or Fixed, that are not likely to change in the current year. In general this category of asset will cover any deposits made, e.g. a rental deposit for a lease that has more than a year to run, or any loans made by the business that have more than a year left to run.

In the case of a longer term loan made by the business, there will generally be two accounts, one in current assets to reflect the loan payments that will be made in the current year, and one in longer term assets for the repayments that will be made in more than a year’s time.  

It is not being in debt that is an issue. Most people are probably in debt at some point in their lives, not least due to having mortgages. No, the issue is when you fall into financial difficulty and can’t manage your debt repayments.

Now while some people may have caused their own financial difficulties, by taking on more debt that they can afford to manage (often because they have been enticed by easy access to credit cards, or interest free purchase) a lot of people fall into problems through no fault of their own. There may well have been a change of circumstance that has caused the problem, e.g. loss of employment, or a marriage breakdown.

Whatever the reason that someone has fallen into trouble with regard to their debt repayments, the absolute worst thing that someone can do is to ignore the situation. This is one time when burying your head in the sand is a really bad idea. Ignoring problems with debt will only make matters worse.

If you ignore debt problems, things tend to spiral out of control:

It is therefore important to act as soon as you realise you may not be able to meet repayments:

If your debt is related to a credit contract, you can apply to the lender for hardship provision. It is a legal requirement for lenders under the Credit Contracts and Consumer Finance Act (CCCFA) to consider applications for hardship provisions. If you can come to such an arrangement with your lender, this may mean that you can pay off the debt in smaller amounts, or take a 'repayment holiday' until you are able to afford the full payments again.

In order to apply for the hardship provision, you will have to:

You can apply if your hardship has been caused by illness, injury, loss of employment, or the end of a relationship.

A debt consolidation loan is one new loan that covers all your debts. This would mean that all your individual creditors were paid off and instead you owed money, with just one lot of interest charges, to one financial provider. Debt consolidation loans are offered by most banks and other financial lenders.

If you are considering consolidating your debts, you should:

These days there are several different organisations and agencies who will help you to manage getting your debt under control. They will generally work with you to draw up a suitable repayment plan and will usually negotiate with your creditors on your behalf, not only to plan a repayment schedule but also often to get further interest charges either reduced or suspended.

Some of these organisations will even put together a system whereby you make one payment to them per month and they then pay your individual creditors on your behalf, making it much easier for you to stay on top of your repayment schedule.

Creditors are generally very open towards working with these organisations as they know it means that they have a good chance of getting their money back, the organisations having already achieved a good track record with them.

Some of the organisations who specialise in helping people with debt are as follows:

In analysing clients’ books for their year end accounting there are certain mistakes that I am finding that clients have made with their book-keeping that could easily be avoided:

One mistake that I have quite commonly found, not only in my small client’s books, but also previously, when working for much larger organisations, is duplication. This is particularly so for purchase invoices / receipts.

One of the reasons that this occurs is that there may be two copies of an invoice or receipt. An invoice may have been faxed or emailed initially but then a final invoice sent through the post (maybe with goods ordered), or an initial receipt may have been issued and then followed up with a valid tax invoice. Of course, sometimes the duplication problem occurs even when there is only one copy (as I have seen with a couple of my clients).

There are two effective ways to ensure that duplicate entries do not happen:

Another mistake that I have come across is to miss an entry completely. Of course this could work either for or against the client depending on whether it is a sales or purchase entry that was missed.

The primary way to avoid this error is to reconcile all your entries back to your bank account. In general, if you use an accounting program such as Xero or Banklink, then the automatic bank feeds should ensure that omissions do not happen. However, if you don’t use a program with automatic bank feeds then you will need to manually reconcile all your entries.

The easy omission to make that would not necessarily be picked up by bank reconciliations is that of cash receipts. I know from having a market stall for my jewellery that any sale paid for in cash could easily be overlooked and not included in your accounts.

There are two main ways to ensure that these sales are properly accounted for:

Another common error is to cost all purchases of goods for resale, or materials for making goods, directly to cost of sales. In fact, all these types of purchases should instead be costed to “stock” or “inventory”. The cost of purchasing goods for resale cannot be treated as a Cost of Sale until the goods have actually been sold. Likewise, the cost of materials, cannot be treated as a Cost of Sale until the materials have been used to make a product and that product has been sold. (I won’t go into further detail here as I have a previously post specifically about Cost of Sales).

One common misconception appears to be that meal or refreshment costs can be treated as taxable business costs as long as the meal or refreshments are taken whilst out and about on business matters. In fact, I know of one Franchise Organisation who actually told their franchisees that this was the case. IT IS NOT!

While as an employee, it may well have been possible to claim the cost of a meal or refreshment from an employer while out on company business, that employer would NOT have been able to claim this cost in their accounts as a taxable expense.

If you particularly want to you can treat these costs as business expenses, however, they cannot be treated as TAXABLE business expenses. In other words the costs would have to be added to your accounts after tax and not before.

If the meal is taken with a genuine client, then 50% of the cost can be treated as a taxable business expense but you still can’t claim the whole cost against tax.

Another common error is to write off items that should in fact have been capitalised. If a piece of equipment, or a tool etc. that you have purchased for your business costs $100 or more then it has to be capitalised and you can’t claim the whole cost in the year of purchase. It doesn’t matter what it is, whether it is a mobile phone, a piece of furniture, or a tool, if it cost $100 or more than it has to be treated as a capital purchase.

The thing to really watch out for here is when several items are purchased together, that may individually cost less than $100, but that in total cost $100 or more. If they are all purchased for the same type of thing, i.e. refurnishing an office, or building a computer etc. then it is the total, not the individual cost that is relevant.

We’ve all heard about the ‘shoeboxes’ of papers that are handed in to accountants at this time of the year.  Whether this is still true or the stuff of legend (and it’s something I can remember receiving in the past), I’m sure you can understand that accountants much prefer to do what they are good at rather than sifting through piles of loose, disordered papers.

I’m equally sure that you as a client want to concentrate on what you are good at. You don’t want to mess around with your paperwork at any time let alone trying to sort out your financial information at the end of the year.

Terrace Consulting are offering you the opportunity to purchase a solution that will save you time and money and provide you with a faster, more efficient system for your documents – not only at EOY but throughout the year. It will help you to meet your obligations to Inland Revenue and also to comply with other legislation such as the Companies Act.

There are two options available:

A potentially big mistake that can be made by small businesses is in thinking that the total cost of the purchases of materials etc. that they have made through the year becomes their “cost of sales” figure for the year. This is wrong!

Every purchase of materials that you make is actually a cost against your inventory or stock.

Any handmade business, or indeed any small business that makes its own product, will have two different inventories, one will be for raw materials, and one will be for finished products. Every time you purchase some raw materials you are increasing the size of your raw material inventory. Then, as you use some of those materials to make a product, so the raw material inventory will decrease and the finished goods inventory will increase. Equally, when you sell a product, so the finished goods inventory will decrease.

This of course is just a very simple example of the movements between inventory values when buying materials, making products and selling products.

With regard to the Finished Product stock, this can be costed as either cost price or selling price. Personally I recommend that for accounting purposes that your product inventory is costed at materials cost (plus labour costs if required). For my own jewellery inventory I have two columns, one for materials cost and one for sales value. I therefore have the materials costing of the inventory for my accounts but still know what the sales value of the inventory is.

It is very important to understand inventories because inventory balances and movements are used to calculate the cost of sales for the year.

Cost of sales can be determined in two ways: The best (and probably easiest way) to do this is via the inventory balances. The simple calculations is as follows:

So, to use the figures from the inventory example above:

Giving such simple examples you will see quite easily what the second way of determining the Cost of Sales is – quite simply it is the cost of the product that has been sold (as shown in red).

Now this may seem the easier option when presented with such a simple example, but when there is a lot of product that has been sold during the year, using the balances as shown above becomes the easier option to use.

Of course in reality inventories will be much more detailed than the examples shown above as each material should be listed with descriptions of materials, cost per item, quantities, total cost for items etc., as should each completed product.

So to summarise:

Here in New Zealand, for the majority of employees the answer will be “no”. However, in Australia and the UK, (and probably many other countries) the chances are that the answer will be “yes”.

The simple answer is “if you receive other sources of income”.

Having said that, if your only other sources of income are interests or dividends that you have received from NZ banks or NZ listed companies then you still may not need to complete a tax return as resident withholding tax will have been applied. However it is probably in your best interests to complete a tax return anyway as the tax may not have been withheld at the correct rate.

Well to be honest pretty much any income you have received other than gifts from family and friends. So let us look at the main potential other sources of income that there are and which need to be reported via a Tax Return:

If you have an investment property that you let out, either as a standard rental property or as a holiday let then the income that you receive from this needs to be declared. However, there are certain costs in relation to the investment property than can be used to offset the income such as mortgage interest, rates and insurance, repairs and maintenance etc.

As already mentioned, Resident Withholding Tax (RWT) will already have been deducted from dividends received from NZ companies but it may not have been withheld at the correct rate. Likewise, returns on investments in Portfolio Investment Entities (PIEs) will need to be declared if your returns have been taxed at a lower rate than they should have been.

If you are a beneficiary of any trust or estate then any income that you receive from that trust or estate needs to be declared.

This covers the whole range of potential income that you could receive including interest from foreign banks/companies, dividends from foreign companies, superannuation paid overseas, income from foreign employers etc. However, if you have already paid tax to another country based on any of this income, then as long as you provide the IRD with proof of this tax payment, it will be used to offset any potential tax payment to NZ.

Any income that you have received from a partnership that you are a part of, or from a Look Through Company that you are a shareholder of, excluding of course, any income that was paid to you as a salary with tax deducted.

This only needs to be declared if it was paid to you tax free. If tax was deducted then it is counted as normal paid employment.

Although an employee you may still have your own small business on the side. Any income you receive from this business, less any allowable deductible costs, will need to be declared. This category will be looked at more closely in a future post.

This is basically a cover-all to cover any other type of income that you may have received including tips or gratuities, “cash in hand” jobs etc.

Obviously the above is just intended to convey the types of income that should be declared on an Individual Tax Return and to give an idea to individuals of what they should be looking out for. If you receive any of these types of income, particularly when it is income against which costs can be offset, then it is best to seek professional advice for help with your tax return.  

When it comes to registering for GST there may or may not be an option. Once your business turnover reaches a certain value, or is anticipated to reach a certain value within the next twelve months, there is no longer an option, registering becomes compulsory.

In New Zealand the mandatory threshold is $60,000 and in Australia it is $75,000. If your turnover (total sales) is less than these mandatory figures then registering for GST becomes optional.

Well, to answer that first we should look at what you have to do if you are registered for GST.

The timing of how often you need to complete GST Returns can vary. In New Zealand, if you only have a small turnover then you have three options, either monthly, bi-monthly (which is the most common), or six monthly. In Australia the reporting options are monthly, quarterly (the most common), or annually.

Once you get used to completing GST Returns, and so long as you are keeping good records, completing the returns can be done easily and relatively quickly.

There is one very big benefit to being registered for GST. Once you are registered for GST you can claim back all the GST that you have been charged on your purchases, and this includes GST on imports.

The big con to registering is of course the fact that you have to charge GST on all your sales thus increasing your sales price. This of course is not necessarily a con if all your sales are generally to businesses, since, if they are in turn registered, then they can claim back the GST you have charged them. It can however be a big con if your sales are to end users, the general public. How much of a con this would be would of course depend on how your final sales price comperes to those of your competitors selling the same or similar items.

Of course, the other thing that should be taken into consideration here is whether or not the majority of your sales are to overseas buyers. You don’t need to charge GST if you have goods that you are selling to overseas buyers.

So really at the end of the day you need to weigh up the pro (of being able to claim back GST charged) against the con (of having to increase your sales price by the GST) in order to determine whether it is beneficial to register for GST before you need to.

If the majority of your sales are to overseas buyers then there is a good chance that it would be beneficial to register for GST. If the majority of your sales are domestic then maybe not.

You may have noticed that there are a few different types of accountant out there and wondered what on earth the difference is between them. The types of accountant that you are likely to see are chartered accountant, certified accountant, management accountant and even public accountant. Or of course you may have just assumed that it is only a “Chartered Accountant” who is actually a qualified accountant which isn’t the case.

In fact, the different descriptions, or designations, are usually an indication of the professional accountancy body that the accountant qualified with. In England, where I originally qualified as an accountant, there are several different professional bodies to choose from, all of which give you a professional accountancy qualification, and the majority of which also offer their qualifications on a global level:

Each of these professional bodies has a system of examinations and required professional experience before membership is granted and each body also requires its members to undertake a minimum number of hours “continued professional development” each year.

In Australia there are three professional accountancy bodies:

And in New Zealand there is just the one:

Other countries will have all also have their equivalent accountancy bodies.

So what is the difference? Well, in simple terms, the difference tends to come through in specialisation. All qualified accountants, regardless of which accountancy body they qualified with will cover certain subjects such as Accounting Standards, Financial Statements, Tax, Business Law etc. However, some accountancy bodies, such as CIMA for example, will have a higher proportion of concentration (exam wise) on management accounting, costing, business finance etc. while others such as ICAEW will have a larger concentration (exam wise) on auditing, taxation and law.

Public accountants have, as their name implies, much more learning toward accounting for public finance and are more likely to work in publicly funded environments such as government departments or district councils.

The professional experience required to gain full membership of an accountancy body (once exams have been completed) will also generally have different requirements between the accountancy bodies in terms of the disciplines for which minimum requirements are needed.

As a general rule of thumb most chartered accountants will have started out working in an accountancy practise whereas most management or certified accountants will have started out in the accounts department of a commercial company. However, career directions can change and over time the different “types” of accountants can become much more intermingled with chartered accountants in commerce and management or certified accountants in practise.

So is one type of accountant better than another? While many of my colleagues are likely to argue with me, arguing in favour of their particular institution, the simple answer is no. We are all qualified accountants, regardless of which designation we may hold, and through continued professional development, we are all qualified and capable of doing the work that we do.

Most trades and professions have their own ‘language’ and accountants are no exception. How many times have you heard certain account ting terms or phases and wondered what on earth the person using them is talking about?

Well in order to help you out, here are some of the more commonly used terms used by accountants in alphabetical order:

Amounts companies owe suppliers for goods and services. Listed in the current liabilities section on the statement of financial position.

Amounts customers owe a company from sales of goods or services that the company expects to collect within one year. Listed in the current assets section on the statement of financial position.

A list of expenses that have been incurred and expensed, but not paid or a list of sales that have been completed, but not yet billed

Assets are resources controlled by the entity as a result of past events (usually transactions), from which future economic benefits are expected to flow to the entity.

Summary of a company's financial status, including assets, liabilities, and equity

A detailed plan, over a defined period (usually one year) with dollar amounts

A listing of a company's accounts and their corresponding numbers

A summary of cash received and disbursed, within a specified period of time, showing the beginning and ending amounts

At least one component of every accounting transaction is a credit. Credits increase liabilities and equity and decrease assets.

At least one component of every accounting transaction is a debit. Debits increase assets and decrease liabilities and equity.

Recognising the decrease in the value of an asset due to age and use

Amounts paid to shareholders out of current or retained earnings

System of accounting in which every transaction has a corresponding positive and negative entry (debits and credits)

The money that you take out of a business to either live on and/or pay any personal expenses. Drawings are part of the net profit and not a business expense.

Money owed to the owner or owners of a company

The preparation and presentation of financial reports showing business cash flow, profit/financial performance and financial position. The analysis and interpretation of financial statements to help business owners and managers make informed decisions about their business.

A company's usual 12 month reporting period.

A record containing the balance sheet and the income/profit and loss statement

Long-term tangible property; building, land, computers, etc.

A record of all financial transactions within an entity

The difference between a business’s total sales and its cost of sales. Listed as a category on the statement of earnings. Also called gross income.

The original billing from the seller to the buyer, outlining what was purchased and the terms of sale, payment, etc.

A record for recording transactions

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Provides information about particular activities within a business, including budgets, costing and evaluating business activities.

Money remaining after all expenses and taxes have been paid

The process of entering then permanently saving or “archiving” accounting data

Also known as "Income Statement" A summary of income and expenses

The process of matching one set of data to another; i.e. the bank statement to the check register, the accounts payable journal to the general ledger, etc.

The amount of net profit retained and not paid out to shareholders over the life of the business

Total income before expenses.

A summary of amounts owed to a vendor, lender, etc.

Merchandise purchased or manufactured for resale at a profit

A list of the general ledger accounts and their total balances

Income generated from regular business operations  

Do you sell goods or services online?

In most cases when you’re selling goods or services over the internet, you have the same tax obligations as any other business.

Trading online is no different from doing business from a shop, or from your home. Any income you earn from a business (and this includes online auction or sales sites such as TradeMe or Ebay, or online market places such as Felt or Etsy) needs to be included in an income tax return.

Now of course, not everyone who sells something online is considered to be conducting an online business.

The tax office lists some questions you can ask yourself when you trade online in order to determine if you are conducting an online business. If you answer “yes” to some or all of these questions then it’s likely that you will need to declare the income earned:

The one thing the tax office does state, in addition to posing these questions, is that “There is no minimum income level to be in business”. This is an important point to note if you are debating as to whether you are conducting a hobby or a business.

Another important point to note is the following statement that the Inland Revenue Department has made in relation to conducting an online business:

So if you conducting an online trading business than make sure that you report it accordingly as you don’t want to be caught understating your income.

Further information can be found here: http://www.ird.govt.nz/resources/2/8/289d67804187a5b9951cf5acbc72692e/ir1022.pdf