Tax

How do I keep books for a small business?

 

Running a business can be unpredictable, but an excellent record-keeping system can make things easier. On this page, you’ll learn about record keeping – what you need to keep, how to keep records and how long to keep them for.

Many start-ups, as well as existing business owners, tend to neglect this aspect of their business until the end of the financial year (EOFY) is upon them.

By law, every business is required to maintain accurate and timely records.

I can’t stress enough how important it is to organise your accounts from the onset by setting up and using simple accounting software that suits your needs.

As soon as you start a business, you have to deal with numbers. Every business, no matter how small, must keep a record of its every transaction. That includes sales, expenses, salary payments – in fact, every movement of money into and out of your business.

Although it’s possible to do this yourself, most entrepreneurs aren’t trained in bookkeeping. So it’s common for businesses to outsource this everyday work.

In this guide, we’ll explain why hiring a bookkeeper is a great idea or even an essential part of doing business. Then we’ll look at how you can hire the right bookkeeper for your business.

What Is Bookkeeping?

Bookkeeping involves recording and classifying all the financial transactions in your business. It’s keeping track of what your business spends and what your business receives.

These tasks used to be managed using books and ledgers, hence the name ‘bookkeeping’. Originally the transactions would be recorded in daybooks, cashbooks, or journals and then transferred to a ledger.

Bookkeeping software has now pretty much replaced the need for physical books.

What makes a good bookkeeper? Qualifications help, but what separates the wheat from the chaff is attitude. A good bookkeeper cares when something doesn’t balance and gets upset when stuff goes missing. A bookkeeper cares that the financial statements make sense, and feels responsible when it comes to getting customers to pay on time. A good bookkeeper, in other words, is worth his or her weight in gold.

Benefits Of Record-keeping

There are many benefits to keeping good records. It can help you to:

  • keep track of your business’ health, so you’re able to make good business decisions
  • meet your tax and superannuation obligations
  • manage your cash flow
  • demonstrate your financial position to banks or other lenders

Tax and superannuation records you must keep

You must keep records of all transactions related to your business’s tax and superannuation affairs, including records that support the information you include in your tax returns and reports.

The records you need to keep depend on the tax and superannuation obligations of your business and the structure of your business (sole trader, partnership, company or trust).

The Australian Taxation Office (ATO) requires that:

  1. Your records must not be changed and must be stored in a way that restricts the information from being changed or the record damaged.
  2. You need to keep most records for five years, starting from when you prepared or obtained the records, or completed the transactions (or acts they relate to), whichever is the later.
  3. You need to be able to show the ATO your records if they ask for them.
  4. Your records must be in English or able to be easily converted to English.

Three Reasons Why You Need A Bookkeeper

If you’re just starting out in business, you might think you don’t need someone to look after the books. Perhaps you feel that it’s enough to let your accountant sort out the numbers once a quarter or once a year. But there are good reasons for hiring a bookkeeper. Here are three of them:

They save you time

Unless you already know a lot about bookkeeping, it’s unwise to take on this work yourself. Processing receipts, expenses and payments is only part of the work. They know how to assign expenses to particular clients. They’ll take all the numbers, enter them into your accounting software, and make sense of them. A good bookkeeper knows how transactions should be treated to provide useful business reports. It’s a skilled job, and your bookkeeper will do it much more efficiently than you can.

They understand your business.

Because they deal with the day-to-day accounts, bookkeepers have a deep insight into your company’s finances. By sharing this insight with you, they can help you work out where your business should be going. They can flag any issues in time for you to do something about them. A good bookkeeper watches over your finances and helps you steer clear of trouble.

They help manage your cash flow.

Accountants provide a valuable service, particularly when it comes to strategic advice, annual returns, and tax issues. But they don’t usually see your accounts every day. A good bookkeeper will keep a close eye on your accounts regularly. This will help keep your cash flow under control, which is vital for business growth.

Bookkeeping Basic: Understanding Account Types

Understanding the difference between account types is the secret to coding transactions correctly. Here’s the cheat’s guide to understanding the difference between assets and liabilities, equity and income, bananas and apples.

  • Current asset: Anything that a business owns that can realistically be converted into cash within the next 12 months.
  • Non-current asset: A physical asset such as office equipment, land, buildings, computers or motor vehicles that aren’t expected to be converted into cash within the next 12 months.
  • Current liability: An amount owed by the business that is due within the next 12 months, including scary stuff such as credit cards.
  • Non-current liability: Anything you own that isn’t due to be paid out within the next 12 months, such as hire purchase debts or bank loans.
  • Equity: The ‘interest’ that shareholders or an owner has in the business, including both capital contributed and the profit or loss built up over time.
  • Income: Money generated from sales to customers or returns on investments.
  • Cost of sales: What it costs in raw materials, supplies or production labour to make the goods that you sell (also called cost of goods sold or variable expenses).

Bookkeeping Checklist

This step-by-step bookkeeping checklist should help you sleep easy at night knowing that you have done what you needed to do to get your books in tip-top shape.

  • Ensure you set up bank feeds for every account.
  • At least once a month, reconcile every bank account against bank statements.
  • Look for pre-dated or future-dated transactions.
  • Eat a family bar of chocolate in one sitting (oh yes, and clean up the debtor’s list).
  • Sweep through the creditors’ list.
  • Check tax codes on all transactions.
  • Reconcile your GST liability accounts.
  • Give inventory the once over.
  • Reconcile all payroll liability accounts.

Choosing the Right Accountant

How To Do Bookkeeping?

The two most important tasks in small business bookkeeping are recording and reconciliation.

Recording every transaction

Record your sales. This was traditionally done by writing them into a cash book or punching them into a spreadsheet. Business owners are now more likely to download sales data directly into their books from point-of-sale or invoicing software.

Record your transactions. Every business-related purchase needs to be noted. You should also hold onto the proof of purchase if you plan to claim that expense as a tax deduction. Again, you can write these details into a book or spreadsheet. Or you can automate the task so all the debits from your business bank account stream into your bookkeeping software.

You can record income and expenses at different times, depending on whether you do cash or accrual accounting.

Reconciling every transaction

Reconciliation involves regularly cross-referencing your business books against your bank statements to check that the transactions and balances match – and identifying the reasons if they don’t. Often bank fees, interest payments, deposits, and payments that haven’t yet hit your bank accounts will need to be accounted for.

You might do bank reconciliation daily, weekly, monthly, or less often, depending on the number of transactions going through your business. However, you will probably be required to reconcile your books before submitting tax returns at the very least.

The sooner you reconcile transactions, and the sooner errors can be found and corrected. It’s better to do it often – even daily – so the work doesn’t pile up. You can learn more in our guide on how to do bank reconciliation.

Other small business bookkeeping duties

If you’re acting as a bookkeeper for a small business, you may also be responsible for:

  • accounts receivable (issuing invoices and making sure they’re paid)
  • accounts payable (paying bills on time)
  • payroll (paying employees)

Professional bookkeepers also provide other services, like helping with financial reports (profit-and-loss, balance sheet, cash flow report), and measuring business performance. Bookkeepers are also often BAS agents and can help file your taxes.

What Do Bookkeepers Do?

Here are some of the tasks of bookkeeper that will help to keep your business running smoothly:

Keeping track of daily transactions

A bookkeeper can handle the recording of day-to-day bank transactions. If the accounting software you use has daily automatic bank feeds, this is a great tool for your bookkeeper to use. When your bank statement lines are fed into your accounting software, it’s much easier to keep an eye on cash flow, and it also saves on data entry time.

Sending out invoices and managing the accounts receivable ledger

Preparing invoices and sending them to clients is usually the bookkeeper’s responsibility. Managing the accounts receivable ledger – and chasing late payment – is also likely to be done by a bookkeeper.

Handling the accounts payable ledger

Up to a certain dollar amount, it’s usually bookkeepers who will make payments on behalf of the business. This includes payment of supplier invoices, expenses and petty cash.

Keeping an eye on cash flow

One of the most important tasks for a bookkeeper is making sure the company doesn’t run out of day-to-day money. They can do this by watching the balance of revenues to expenses. Then they can take action or offer advice if it looks like the company needs more ready cash.

Preparing the books for the accountant

It’s the bookkeeper’s job to ensure that the accounts are valid and up to date when the accountant needs them. This allows the accountant to use their skills and knowledge to make business recommendations, report to the board and complete company tax returns.

In summary, it’s the bookkeeper who does the day-to-day work so that the accountant can concentrate on strategic financial operations. So bookkeepers play an important role – without them, accountants can’t do their jobs.

How to keep records

You can keep records electronically or in paper form. The ATO recommends that businesses use electronic record-keeping if possible, as they are progressively moving towards electronic reporting for tax and super obligations. Keeping your records electronically should make some tasks easier and save you time once you have your system set up.

If you keep your records electronically, there’s no need to also keep paper copies unless a particular law or regulation requires a paper copy.

You can also store and keep paper records electronically. The ATO accepts images of business paper records saved on an electronic storage medium, provided the electronic copies are a true and clear reproduction of the original paper records and meet their record-keeping requirements. Once you have saved an image of your original paper records, you don’t have to keep the paper versions.

Whichever you choose, make sure you store your records in a secure place. Back up your documents and, if possible, have a secure off-site storage location, which may include cloud storage.

The records must also be on a computer or device that:

  • you have access to (including all passwords)
  • is backed up in case of computer failure
  • allows you to control the information that is processed, entered and sent  tips for finding a bookkeeper

There are plenty of bookkeeping services available. These tips will help you narrow down your choices.

  • Think about whether you want a consultant or a firm?
  • Bookkeepers often work independently so that they may have several clients at a time. You might choose to hire an independent consultant or a bookkeeping firm. If your business is large enough, you may even hire a full-time employee. There’s no right or wrong approach – it depends on the size and needs of your business.
  • Location, location, location – decide if it’s important
  • With online accounting software, you can share access to your accounts data remotely. But you may still want to meet your bookkeeper in person from time to time. Decide how important this is to you, and adjust your search accordingly. You can find a nearby advisor now if you’re in Sydney.
  • Make use of your social networks
  • Use online social networks, especially LinkedIn, to find bookkeeping professionals. It’s great if your friends or acquaintances have recommended them. Talk to local chambers of commerce and business advisors too. They will probably know someone suitable.
  • Look for experience
  • Accountants need professional qualifications before they can legally do accounting work. Bookkeeping doesn’t have the same restrictions, but certification is available. It’s also worth checking if they are part of a professional governing body like a bookkeepers association. Look for experience and a substantial number of past clients – preferably ones in the same field of business as you. Talk to some of those clients if you can, as they’ll give you useful information.
  • Choose the right person
  • Talk to as many people or firms as you need to. Interview them twice if necessary, and be sure to check their references and qualifications. It’s also essential to think about personality and culture fit. Your chosen bookkeeper will be communicating a lot with you and your staff, even if they aren’t employed full-time. It pays to hire someone who works well in your environment. Trust your instincts here, and hire someone friendly, helpful, and above all, keen.

Your financial co-pilot

Bookkeepers create order out of chaos. They take all the numbers, receipts, bills and other accounts data that flows through your business. They funnel it all into your accounting software – into the right reports and the right account.

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