ACCOUNTING WOOOOO!!! Okay I'll calm down... Let's be honest to most people (math and number wizards aside) accounting is one of the more boring sections of business. When you hear words like tax, receipts, audits, balance sheets... it doesn't exactly make you jump out of your chair. BUT it is still spectacularly important and cannot be skipped. It's also not too difficult once you know what you're doing SO in this article I am going to outline the basics when it comes to accounting for your new business! Hooray!
Accounting is quite a large topic meaning this is a bit of a chunky article, so for the sake of simplicity I am going to keep this as brief as possible. So if you want to know more like how to avoid tax in Hong Kong or how to hide that sack of stolen money somewhere... just kidding (the less I know about that the better) you'll have to do some more research or speak to an accountant. Also, I am not a tax wizard, I just know a little bit about the basics which is what I'm here to show you!
The Financial Year.
For most things in life, a regular year is January 1st to December 31st. In Australia the financial or 'fiscal' year is from July 1st to June 30th the following year, split up into four quarters. You record your income, pay tax and organise your finances within this period.
Tax is a portion of your income that you have to pay to the government. Tax is AWESOME! :D Just kidding, it fricken' sucks especially in Australia where it is tremendously high. There are several ways you can reduce the tax you pay, however do NOT under any circumstances try to avoid it. That is a very productive, fast and efficient way to end up in big trouble.
"But do I really have to pay tax?". Actually not always. You don't pay tax in jail! Winning!
OKAY FINE HOW MUCH DO I HAVE TO PAY?
The first $18,000 of your annual income is tax free, from there the fees and percentages due go up based on your level of income. If you are just over the tax bracket (meaning you've entered a higher income level where you are required to pay even more tax) the best way to reduce your bill is by making an investment or buying necessary business expenses to bring your taxable income back down (more on this in the next point).
The amount you have to pay will vary depending on your business structure (e.g. if you're an individual or a company). That is more about legal so I won't go into detail here, but to see more about those, click here. The main thing worth noting is that companies play a flat 30% tax rate.
To see how much you owe based on what you earn or are projecting, click the button below.
Your taxable income & business expenses.
If you are an employee of a company, your tax is automatically taken out of your pay without you having to take care of it. If you are self employed and sending your own invoices, you will not pay tax as soon as you get paid. You will have to handle your own tax either annually or quarterly in a larger chunk. This takes a bit more effort and it seems painful to kiss away a few thousand dollars, but it's actually way better. If you're an employee you get paid, pay tax, and then you can pay your expenses. You don't even realise how much is being taken out. If you're self employed you get paid, you can pay your expenses, and THEN you pay tax. ALL business related expenses LOWER your taxable income.
Business expenses include anything that's relevant to your business; If you're a plumber it might be tools, if you're a designer it might be a laptop, if you're a DJ it might be headphones. Make sure you record ALL of these because it all adds up! I'm talking everything down to a pen. Take photos of the receipts and store them in your accounting program as well, that way if you ever get audited (an inspection of your financial records) you can have them all there rather than a huge box overflowing with faded paper receipts.
So let's say you invoice for $70,000 in a year. You have $20,000 of business expenses. Your taxable income is now $50,000 instead of $70,000. That's $20,000 you aren't pay tax on and that makes a big difference, so make sure you record ALL of your business expenses!
GST stands for Goods & Services Tax, another little delight from the ATO. It is a 10% tax on most things sold in Australia. You must register for GST is you are earning a GROSS income of over $75,000 a year. Even if your NET income (your profit after expenses) is lower than this, you still must register. This means that it will be added to your invoices.
NOTE: If you're registered for GST, you must write 'Tax Invoice' on your invoices. If you are not registered for GST, you do not add this, it is simply 'Invoice'. Info on invoices coming in the next few points y'all.
GST is recorded in your Business Activity Statement (or BAS: for more on a BAS reporting click here). This is where people can get really confused so I'm going to make it super simple. If you PAY GST then this is taken OFF your total amount payable. If you GET PAID GST then it is ADDED to your amount payable. I'll do some seriously basic math to show you.
SCENARIO ONE: BREAKING EVEN
One year you invoiced $110. $10 of that (10%) is GST.
You paid $110 in expenses. $10 of that is also GST.
You broke even and owe no money to the ATO.
SCENARIO TWO: YOU OWE MONEY TO THEM
One year you invoiced $110 ($10 is GST). You paid $55 in expenses ($5 is GST). You owe $5.
You are running at a profit. You received more than you paid and you owe the ATO the difference (made $10 - paid $5 = $5 leftover).
SCENARIO THREE: THEY OWE YOU MONEY
One year you invoiced $110. You paid $220 in expenses.
You are running at a loss and the ATO owes you the difference of $10 in GST and you will get a refund.
Basically, if you COLLECT MORE than you have PAID then you owe the ATO money and vice versa for the opposite scenario. If you still don't get it well I don't know, go play with some lego.
Cash vs Accrual Accounting.
These are two different types of accounting that you will need to choose from:
Cash accounting tracks the actual money coming in and out of your business. In cash accounting, if you get an invoice for something, you don't record the cost in your books until you've paid the invoice. Similarly, when you send an invoice to a customer, you don't record the sale in your books until you receive the money from the customer. For example, if you send an invoice on Tuesday, and don't receive the payment in your account until Thursday, you record the income against Thursday's date in your books.
This is a simple system and shows how much you have in your till and bank accounts, although it doesn't show you how much is owing to you or others.
If you use accrual accounting, you record expenses and sales when they take place, instead of when cash changes hands. For example, if you're a builder and have sent an invoice for a project you've completed, you record the sale in your books even though you haven't received payment yet. This way of accounting shows the amounts you owe to people and the amounts owing to you.
This is more complicated than cash accounting, but is better suited for businesses that don't get paid straight away. It tracks your true financial position as it shows money that is owed to you and to others. Helpful if you're dealing with contracts or lot of money.
If you have a small business or you are self employed providing a service, it's very likely you will be sending invoices. The definition of an invoice is "a document that is issued by a seller to the buyer. An invoice indicates the quantities and costs of the goods or services rendered." If you're doing contract work like a designer, musician, coder, artist or the like, you will need to invoice your clients in order to get paid.
An invoice should have the date, your information, the receiver's information, the items you are selling or billing time for, the terms and your payment information. This is all done instantly in programs like Freshbooks, Xero and Quickbooks. Personally, I prefer Freshbooks which I have used for years. Cheaper, easier and sexier. Try it for free at the bottom of this section.
Invoices are not required for eCommerce websites or transactional businesses selling merchandise like t-shirts. After the purchase you just provide them with a receipt.
PROFIT & LOSS REPORT
If you are self employed, in order to know how much tax you have to pay you will need to send a profit and loss report to your accountant. This basically shows how you much you were paid, and how many tax deductible business expenses you had.
An expense report outlines the details of all your business expenses you've made. Your accountant will look at this to make sure they are all applicable and all legit. Don't be sneaky. Claim everything you can but don't add in fake expenses to reduce your tax. You can get audited anytime up to five years of your records so keep it clean!
This report gives you a summary of the value of the tax you have collected along with how much you have paid on Expenses. This is where you track GST and will help you lodge your BAS (Remember this one? It's a Business Activity Statement. Click here if you missed it.)
With programs like Freshbooks, these are incredibly easy to make, you simply put in the date you need a report for and SHAZAM there it is.
Some accounting terminology for companies.
Here are bunch of funky words that may also need to know when it comes to accounting, however these apply to companies and if you are a small self employed sole trader these are not necessary but it's still worth knowing.
A BALANCE SHEET is the financial statement that presents a snapshot of the company’s financial position as of a particular date in time. It’s called a balance sheet because the things owned by the company (assets) must equal the claims against those assets (liabilities and equity).
ASSETS are the things a company owns in order to successfully run its business, such as cash, buildings, land, tools, equipment, vehicles, and furniture.
LIABILITIES are all the debts the company owes, such as bonds, loans, and unpaid bills.
EQUITY is all the money invested in the company by its owners. In a small business owned by one person or a group of people, the owner’s equity is shown in a Capital account. In a larger business that’s incorporated, owner’s equity is shown in shares of stock.
There was a lot to take in just then and to be honest it was all pretty damn boring so here is a recap on the few things you need to know:
- The financial year is June 30th to July 31st.
- You can choose between cash and accrual accounting.
- You have to pay tax every year. Fo real.
- You have to register for GST if you're gross revenue exceeds $75,000 a year. You report and pay your GST in your BAS statement.
- Use programs like Freshbooks to send invoices, record expenses and create reports.
There is a lot more to accounting, however these basics should help you get on your way for carrying out your small business and being a self employed rockstar! Got some of your own tips? Let me know in the comments!
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