When starting up a business it is important to seek professional advice, particularly in the area of accounting.  The following are common accounting questions, the answers to which should not replace the advice of your own accountant. 

1. Do I need an accountant to start and operate a home-based business?
2. When should I get an accountant involved in my business?
3. Accountants are expensive, how can I reduce the cost of this service?
4. How do I select an accountant for my business?
5. How do I account for my business?
6. What is a cashbook?
7. Do I need to keep my receipts? And if so how long for?
8. What sort of records do I need to maintain?
9. What is an invoice?
10. What is the difference between cash accounting and accural accounting?
11. What is a profit and loss statement?
12. Can I prepare my own profit and loss statement?
13. Do all businesses have to produce Profit & Loss Statement?

1. Do I need an accountant to start and operate a home-based business?

Whilst I am a big advocate for Do It Yourself Where Ever Possible, I would highly recommend, seeking the advice and assistance of accountant, especially if you are considering starting a business.  With the introduction of the GST and ever changing accounting rules and regulations, it can become a full time job just keeping up with current accounting rulings.  So why add extra stress to your day seek the services of some one who’s job it is to be in the ‘Know”.  Further more a good accountant will have a network of clients, associates, contacts, and could possible provide you with great opportunities to build your business by networking with their other clientele.

2. When should I get an accountant involved in my business?

Before you set up your business it would be a good idea to get your accountant involved.  You will need to consider how to legally structure your business. For most people this can be overwhelming thought. However if you do a little research, understand the fundamentals of the available structures and consult professional legal or accounting advice, you really won’t go wrong.

The type of structure you select could have an impact on anyone of
or a combination of the following:

Three common business structures ( Detailed in chapter titled Business Structure, Show Mummy the Money)
1. Sole Trader/Proprietorship, 2. Partnership 3. Company

3. Accountants are expensive, how can I reduce the cost of this service?

If you are prepared to get “involved” with the accounting side of the business you will certainly be able to reduce your accountants fee.  Accountants charge by the hour, by doing the initial groundwork when and where-ever possible you will cut down the hours worked and billed by your accountant. Try preparing the accounts for your business, look out doing any relevant bank reconciliations, try preparing the working papers for the quarterly GST returns. 
P.S Don’t panic if this all sounds double-dutch, there are many short course available which will teach you such basics, check out our resource centre to find where to get help.

4. How do I select an accountant for my business?

The yellow pages are full of listings for accountants, if you don’t already have an accountant it can be like picking a needle in a haystack.  When considering an accountant be sure to:

A good accountant will also provide additional advice, such as how you can grow your business, set selling price, cost products or services, manage cash flow and a range of other relevant information for your business.

5. How do I account for my business?

Your accounting system should reflect the type of business you're in.  If you have a very basic business, i.e. a low volume of “cash” sales, then I suggest you keep it simple.  Stick to a basic bookkeeping system, by using cashbooks, manually entering the transactions of the business on a monthly basis.

If you have a high volume of sales, it would be advisable to look at a computer based accounting system.  If you have a complex business i.e. your sales are based on 30 – 60 day trading terms you will definitely need to invest in an accounting software package.

There are some very simple accounting software packages on the market.  Consult with your accountant to discuss your needs and the software package best suited to your business. When deciding whether to use an accounting software package or manual cashbooks, I would suggest you take into account time. Many of the accounting software packages are highly automated, they can save valuable time and resources, through their ability to churn out a number of relevant reports, such as a profit and loss, GST working papers, and so on all at the click of the mouse.

6. What is a cashbook?

A cashbook is a book used to record all business transactions. Generally speaking a cash book is divided into two parts: one section for cash receipts, that is money coming in to the business; the other for cash payments – the money going out of the business. Cash books come pre-formatted, you can purchase a cash book from your local newsagency or stationery store. An example of a cash book can be found on the ATO website, click here to download ATO Sample Forms PDF.

7. Do I need to keep my receipts? And if so how long for?

For all business related transactions make sure you maintain your receipts! At the end of the year you will be able to claim tax deductible expenses against your sales, this will help reduce your tax expense. However with out receipts it will be difficult to prove the expense occurred, and possibly prohibit you from claiming the expense. In some circumstances you may find the expense incurred is both a combination of business and personal expense, you will need to proportion the expense according to the percentage of business related expense. For example, you may use your mobile phone for both personal and business related phone calls therefore you will need to maintain a logbook to demonstrate the proportion of the phone bill related to the business, in order to be able to claim the expense.

All documents, records, receipts and so forth should be retained for five years, from the date of lodgement of your last return in which a claim is based on those records.

You may wish to check out the website for the Australian Taxation Office for more helpful information on recording keeping click here

8. What sort of records do I need to maintain?

Some of the following records will be relevant and others not so relevant. The records you will need to keep will greatly depend on the type business you operate?

9. What is an invoice?

10. What is the difference between cash accounting and accural accounting?

Cash and accrual accounting methods differ only in the timing of when transactions, including sales and purchases, are recognised credited or debited to your accounts. The accrual method is the more commonly used method of accounting. Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. Income is counted when the sale occurs and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money to record a transaction.

Cash based accounting recognizes revenue and expenses when cash is received or expensed (paid). In a business based on cash accounting, revenue would be recognized when the business receives payment from the customer, not when invoiced. Expenses would also be recognized when cash is disbursed, actually paid for and not when the bill/ invoice is received.

11. What is a profit and loss statement?

Essentially a profit and loss statement measures the profit or loss of a business at a specified date. A profit & loss summaries the revenues for a period and subtracts the expenses incurred for the same equivalent period to arrive at the profit or loss for the business.

12. Can I prepare my own profit and loss statement?

You can prepare your profit and loss statement yourself. However if your business is of a reasonable size and the process is more involved, you might need a qualified accountant to help you prepare and, if necessary, audit your accounts.

13. Do all businesses have to produce Profit & Loss Statement?

No. If you are a “Limited (Ltd) company”, by law you must produce a profit and loss account for each financial year. Self-employed, sole traders and most partnerships are not required to create a formal profit and loss account. If you are self employed, a sole trader and or an exempt partnership you will still need to total all your income and expenses for each financial year, for the purposes of completing and submitting a tax return.

There are a number of benefits to producing a formal profit and loss statement. If you are looking to grow your business, or need a loan or additional finance, most lending institutions will request copies of the accounts for the past threes years.

To help you understand what goes into a Profit and Loss Statement we have put together a sample Profit and Loss Statement with explanatory notes and information. Click here to visit our Business Template Section.