Must Know and Having your Accounts Done Right
Posted on June 21, 2018 by Stephan Yeong
Are you safe in terms of what is being reported for your business
Quite frankly, if you do not have a finance or accounting background, it can be quite difficult to actually understand what is presented on the financial statements. But do you know that as business owner or director in Singapore, you are held responsible for what is being reported. And many times, what we hear from business owners are “we didn’t know” or “we thought that our accountant were doing it correctly”. But do you know what once you sign off on the Annual reports at the end of the year, it basically means that you are holding yourself responsible for what is printed on the report and yes, your accountant may have prepared the reports, but ultimately, you are responsible! In this article, we will share with you a simple accounting check list for entrepreneur and what to look out for and having your accounts done right.
The difference between a successful person and others is not a lack of strength, not a lack of knowledge but rather a lack in will.
As Easy as it can be, Simple
As difficult as it sounds, no it isn’t, if your accounts are done externally or by your accountant, this will be heaps easier as a reviewer. If not, not to worry as well, this article keep things order and point out what to take note off before it brews into something else later on. Let’s break it down into 3 simple portions,
- Profit or Loss Statement
- Balance sheet
- Cash flow Statement
After reading this, you should be on your way on being better prepared on your business financial health.
1. What to look out for in the Profit and Loss
Breaking it down, let’s focus on the usual and routine items then move off to areas that you as a business owner should be careful about.
Regular Repeating Items
Firstly, you would need to start with the easiest, that being said, it would be the regular items like monthly rent and utilities, depending on whether it is a monthly or yearly reporting, the figures should align according to what you are regularly billed.
General Expenses (or commonly known as Other Expenses or Miscellaneous expenses)
Commonly labelled as general expenses or other expenses, it is crucial to know what this amount is made up of, if you see a balance here, do check what it is. This amount will eventually be placed into your tax filing and be mindful that this cost will not be allowed to reduce the tax you are paying, therefore, you might be off paying more tax when you shouldn’t be. This also extends out to items that you are not commonly sure of that pertains to your business.
Also be sure to look out for items like suspense, contra or clearing expenses, this are methods that accountants use to assist in doing the accounts and at the end of the day there should be zero balances in these areas. Do ask your accountant for more information if you see this appearing, it may have been overlooked and may result in issues later on.
Reviewing the trends
It is good practice and will provide you with the understanding if there is any issues or inconsistencies. More often then not, we would advise businesses to have a monthly reporting, this will ensure that records such as invoices and cheques(issued/received) are kept in order. Comparing the monthly trends will also help you better understand the business performance as well as address ways to better improve profitability. If you are doing a yearly reporting, keeping tabs on yearly performances will also serve as a good check on any irregularities and also serves as a good comparative to understand the performance of your business.
2. What to look out for in the Balance sheet
Moving on to the least looked report at by business owners. This is actually an important report that you should have some understanding. The impact it may have is possibly affecting your tax and future compilations with the reporting authorities like ACRA or IRAS.
Items Worth Spotting
This can be a fun exercise, to quickly glance at the accounts reported, anything that is on the assets (top section) and liabilities & equities (bottom half) should have the same signage, if not there might me abnormalities which shouldn’t occur. Do seek further clarifications. It’s always good practice to ask your accountant, “please explain to me what my balance sheet is showing”, you may be surprise at what you can learn from it. In many cases, we have seen issues on handing over of accounts with balances and that could result in unnecessary amendments leading to rework on prior year accounts or worse, result in paying higher tax and potential fines.
Amounts Due to/From Directors (Director’s Pockets)
This is the infamous buckets that accountants like to use to place items that they are unsure of. Be very wary on this balances and always ask what does it pertain to, a common way inexperience bookkeepers or accountants may use this as a way to balance the accounts and this doesn’t go away, it just keeps building up year after year.
Liabilities – Payable (Amount you owe to others)
Liabilities are amounts owed to others by the business and there should always be liabilities regardless if it is monthly or at year end. Key items that should be included are salary or CPF as this amounts are normally paid one month after, therefore, you should see balances here. If not, that may result in means higher tax paid for the current year for not recognizing salary or other costs.
Accrual balances relates less common items owed to others, examples include staff bonuses, tax or GST to local authorities. Having this reflected will keep you aware on the cash you will need to set aside.
For GST registered businesses, GST payable should be reflected at the end of every quarter and reversed out once the payment is made 2 months after.
Current assets – Receivables (Amounts that others owe you)
This are items that others owe you. Usage of through common payment gateways like Paypal, Stripe, Nets, Visa or Matercard, there will definately to be balances withheld and reimbursed at a later period. So there should be balances reflected from using any of this payment platforms. Other common items would include payments pending from your customer on services or products you provided.
Cash in hand
This is another common bucket that is usually misused. Do question yourself, if you see 10,000 here, do you have this amount in your wallet or in the safe? Be comfortable with this amount as this represents that amount that you have collected on behalf of the business and has not been banked in.
Bank Balances (DBS, UOB, OCBC or etc)
Always ensure that the amount here agrees to your bank statement. Differences are usually caused by:
– Cheques that you issued out (but not banked in yet)
– Cheques you received (you have not to be banked in)
It is key to keep a monthly tracking (in accounting terms it is called a Bank Reconciliation) on cheques as they do have an expiry of 6 months. This is to reduce the emotional stress on having to request for a reissue of cheque on payment made or received after half a year later. Take note that amounts that are owing to others are still enforceable legally even though the cheque is expired. This items should be properly reflected under the books of the business.
3. What to look out for in the Cash flow Statement
This is the least understood item among business owners. To sum up simply, this is the cash movements that occurred during the year. But more importantly, it tells
• a story on the cash activity of the business and
• the difference between Cash vs Profit
And if you have the question on how come I have this much of profit but my cash is showing otherwise. This is the report that helps you understand why. Key items you should check first is the ending balances should agree back to the bank balance reflected in the balance sheet to ensure it is accurate to begin with.
Quick key items that to take note of are:
Activities in Inventory or Stock: to monitor the inventory movements, this is usually a result of sales and if it does not follow the moment in sales, there is probably some ongoing inefficiencies.
Activities in Payable: items owing to others whether it is higher or lower relative to the previous year, tells if there is higher or lower obligation that business need to have in terms of cash available to meet the obligations.
Activities in Receivables: tells if the business is slower or faster at sales collection. Do take note that this has to be assessed along with sales to have a more accurate reading of the situation.
Activities in Purchasing of New Assets: a total on all the new assets purchases that you have made for the year
Other Activities would include items like dividends (if declared) or income tax paid for the year.
Do note that this is a non exhaustive list but it will tantalize your knowledge glands in wanting to know more after learning the basics.
4. What are the items you must ask for or should be provided
Things that you should request for should be supporting schedules that the accounts are being made up of. This will provide you a sense of assurance on the items that are being recorded.
Should have items
- Balance sheet
- Profit and Loss
- Cash flow statement
- Statement of Equity
- Notes (indicating the breakdown of the figures in the above statements)
Things you should request for if not provided:
Accounts Payable or Creditor Listing (people you owe to)
Accounts Receivables or Debtors Listing(people that owes you)
Bank Reconciliation (a list of uncleared cheques issued and received)
5. Trust your instincts
Lastly, as a business owner, you will have a better sense of the operating activities of your business. If you sense that there are any issues or things that you are unsure of, do make sure that you have it clarified. Being proactive will not only help you to better safeguard yourself against later troubles but also enable your accountant to better understand your business as well as serve you better.
Do also actively discuss your accountant if there are anything that can help run your business efficiently and effectively. They should be able to offer you a wealth of information obtained from experiences from handling accounts of other or related industries that they have worked with.
At Gauge and Company, we are leading provider of Accounting, Taxation and Corporate Secretary Services in Singapore for SMEs and Startups. We offer high service quality, a commitment that we promise to you and our clients. We are here to answer your Business Tax and Financial questions and welcome you to Contact Us!