FAQs

Answers to your frequently asked questions about bookkeeping
What is Bookkeeping?

Bookkeeping is the front-end component of ‘Financial Accounting’ which starts with the entry of individual financial transactions into an accounting system. The system can be a set of manually maintained set of ledgers and journals, or, more commonly these days, a computerised system. Bookkeeping systems can range from simple computerised cashbook systems to large enterprise systems used by big companies and government departments.

The majority of freelance bookkeepers provide services using low-end to mid-range financial record keeping systems for small-to-medium businesses. The well-known MYOB range is an example of these systems.

The bookkeeping process begins with the entry of individual transactions into the financial recording system. While this may seem like a relatively easy task, there are pitfalls for the unwary. A prime example is the treatment of GST components of the transaction. Incorrect entries can result in too much or too little GST being reported to the Australian Tax Office (ATO), resulting in either the individual or organisation missing out of GST credits or incurring penalties from the ATO for under reporting.

After data entry, bookkeepers proceed to a periodic reconciliation process. This process consists of applying various checks and balances to the data to ensure overall correctness and to identify any errors which may have crept in.

When the bookkeeper is happy with the accuracy of the data, they prepare and lodge the required BAS or Activity statement. They will then usually prepare end-of-period financial reports in accordance with the needs of the business owner. A competent bookkeeper will be able to help the business owner to understand what the reports indicate about the business in terms of profitability, liabilities which need to be met, and cash flow (where the money is going; how it may be leaking out of the business, etc.)

The level and frequency of reporting required depends on the individual situation of the business. A business which is profitable and has no cash-flow problems may only require basic reports to confirm the situation has not changed and that there are no negative trends developing. On the other hand, a business experiencing financial trouble may require frequent and detailed ‘drill down’ of information in order to identify specific problem areas.

A Bookkeeping Client Case Study

Zenith Accounts was recently engaged by a sole trader who believed his business was making a profit. However, he was continually in debt and had problems paying the bills. We discovered that his existing chart-of-accounts did not have sufficient detail to provide information that would allow him to identify problem areas. As the business had several different aspects (processing, materials and external services), we redesigned the chart of accounts to provide more detail about charge-out against the cost-of-sales for each of these areas. We discovered that while he was more than covering his expenses and had a good mark-up and margin in the areas of materials and external services, the business was barely covering labour expenses in the processing area. The owner is now aware that he needs to examine labour costs/efficiency in his business.

What is BAS Agent Registration?

BAS Agent registration is all about protecting your financial interests!

Up until 2010, the bookkeeping industry in Australia was largely unregulated. People were able to call themselves bookkeepers and prepare BAS and similar returns for their clients without any formal qualifications or training. At the time, this practice was technically illegal but business owners had little way of determining whether their returns were being prepared accurately.

From 1 March 2010, the Federal Government commenced regulating the bookkeeping industry and passed new legislation which required anyone providing a ‘BAS service’ for hire or reward to register as a ‘BAS Agent’. The definition of ‘BAS services’ is currently quite broad and effectively includes any data entry activity where the practitioner makes a decision as to the GST treatment of the transaction. It also covers most payroll processing activities.

Under this federal legislation, a practitioner providing ‘BAS services’ must be registered with the Tax Practitioners Board (TPB). Registration as a BAS Agent requires qualifications, including minimum education qualifications, relevant recent experience and ongoing professional development. Registered BAS Agents are also required to have a certain level of professional indemnity insurance and adhere to a professional code of conduct.

Anyone providing a ‘BAS service’ as a contractor (non-employee) and who is not registered with the TPB is in breach of the law and subject to heavy penalties. This guarantees means peace-of-mind for you as a business owner. When you decide to engage a bookkeeper, you should ask them for their BAS Agent registration number and cross-check it on the TPB website. You can also learn more details about the requirements for BAS Agent registration and the code of conduct from the Tax Practitioners Board website.

What are the standard reports of the Financial Accounting process?

There are three standard reports that are always produced as the output from the Financial Accounting process:

  1. the Profit and Loss (P&L)
  2. the Balance Sheet
  3. the Statement of Cash Flow.
What information is presented in a Profit and Loss report?

The Profit and Loss (P&L) report is arguably the easiest of the three standard financial reports to understand and the one that is most commonly studied by business owners.

As the name suggests, the bottom line of the P& L report shows the amount of profit or loss made by the business within a given period of time. The P&L report is split into three basic sections, each with its own sub-total. These sections are:

  1. Income – primarily the operating income (sales) of the business, but also other income such as interest received.
  2. Cost of Sales (or Cost of Goods Sold) – used mainly by retail and manufacturing businesses. Shows the purchase price of goods actually sold or purchase price of raw materials for goods manufactured.
  3. Expenses – the overhead (or fixed) expenses of the business (i.e. those which recur regardless of the level of sales).

The difference between Income and Cost of Sales is referred to as Gross Profit, which must at least cover the fixed expenses (for break-even) or exceed those expenses for a profit to be realised. The Profit or Loss figure is transferred to the ‘Equity’ section of the Balance Sheet.

What details are displayed in a Balance Sheet?

The Balance Sheet is less well understood in comparison to the P&L Report but is equally important in understanding the financial ‘health’ of your business. It shows a snapshot of your business at a point in time – usually aligned with the ‘to’ date of the associated P&L.

The Balance Sheet is generally subdivided into the following sections (shown in simplified form here):

(1) Assets (things of value to the business)

  • Cash & bank accounts
  • Accounts Receivable
  • Other receivables e.g. GST refunds, loans to other entities.
  • Fixed Assets – physical assets, plant and equipment, etc.

(2) Liabilities (what the business owes external entities)

  • Accounts Payable
  • Loans Payable
  • Other payables e.g. GST payable.
Net Assets = Assets – Liabilities

(3) Equity (what the business ‘owes’ the owner)

  • Owners net capital contributions
  • Cumulated Profit or Loss
Equity = Net Assets = Assets – Liabilities

Simply put, the Balance Sheet allows you to work out whether (and by how much) your business liabilities are covered by your assets. It is important to distinguish between current and long-term assets and liabilities. For example, you may be able to cover Accounts Payable (current liability) by Cash and Accounts Receivable (current assets), but you would exclude the Fixed Asset value from your calculations as they are not readily convertible into cash.

What is a Statement of Cash Flow report?

The Statement of Cash Flow report is possibly the least understood (but most critical) of all the Financial Accounting reports. This may due to by the fact that accounting software packages such as MYOB display this report in the less intuitive of the two standard formats.

The Statement of Cash Flow report is particularly important because in business, ‘cash flow is king’. There is no point in having a healthy Accounts Receivable balance if your customers are not paying you. Your business will run out of cash and you will be unable to meet your obligations.

The report shows inflow (+) and outflow (-) of cash under three headings; Operating, Financing and Investing. However, to simplify this concept we will group Financing and Investing together and call it Non-Operating.

The Statement of Cash Flow report is laid out as follows:

(1) Operating

  • Receipts from Customers (+)
  • Payments to Suppliers (-)
  • Payments to/Refunds from ATO (-/+)

(2) Non-Operating

  • Purchase of Assets (-)
  • Loan Payments (-)
  • Borrowings (+)
  • Equity (owner) Injections (+)
  • Equity withdrawals (-)
Beginning Cash Balance – Ending Cash Balance = Net Cash Flow (+/-)

Ideally, the business cash-flow over time will show positive cash-flow overall and positive operating cash flow.

Negative operating cash-flow may be an indication that the business is not collecting debts on time or not taking advantage of supplier terms.

Positive non-operating cash-flow (especially along with negative operating cash-flow) could be an indication that the business is being ‘propped up’ by borrowing or the owner’s capital.

Negative non-operating cash flow could indicate drawings from the business or the paying down of loans.