What is Business Accounting?
Business accounting covers the financial management of a business. It involves recording, analysing, interpreting and presenting financial information in a way which allows business owners to make better decisions.
Accounting allows businesses to keep track of cash flow and ensures businesses meet compliance obligations for tax purposes.
What does basic accounting involve?
The topic of accounting is often quite complex, but for small businesses, it’s helpful to simplify the process into three key areas:
- Bookkeeping
Bookkeeping is essentially how you keep track of your business transactions.
- Accounting reports
Accounting reports are how you will assess the financial performance of your business.
- Tax returns
Every business is legally required to pay tax to the Australian government and there are various types of business tax to think about.
What is bookkeeping and how is it different from accounting?
Bookkeeping is essentially a form of record-keeping and is extremely useful for business owners when it comes to budgeting. When running a business, you’ll need to record all of your income and expenses. This can involve tracking invoice payments and business purchases, as well as keeping a record of all your receipts.
This is different to accounting, which is the process of collecting, interpreting and analysing this financial information and presenting it in a way which allows you to easily see the financial situation of your business.
Although bookkeeping can be done manually by writing down all transactions, there are easier ways to go about it with accounting software. Read about the different types of accounting software.
What is the difference between the cash method and the accrual method of accounting?
- Cash accounting method
The cash method involves recognising your business revenue and expenses at the time it is actually paid or received.
- Accrual accounting method
The accrual method involves tracking transactions when they occur (rather than when they have left or come into the bank) and requires you to track payables and receivables i.e. money that is owed to you and money that you are owing. The accrual method of accounting is generally thought to provide a more accurate snapshot of your business finances.
Which accounting method is more commonly used?
Accrual accounting is more commonly used than the cash method as accruals give businesses a more realistic idea of the income and expenses during a given time period. Accruals paint a more accurate picture of long-term business.
What are accounting reports?
After you have a bookkeeping system set up, the next step in the accounting process is to determine the state of your business finances. As a business owner, you will want to know whether you are spending or earning more or less than you think, and how much money your business is owed or is owing.
This is where accounting reports come in. Accounting reports are statements that clearly show the financial status of a business over a specific time period, detailing all financial transactions and operations. Hiring an accountant to assist you along the way with accounting reports will ensure that all of your accounting records are correct.
What are some common types of accounting reports?
There are various types of accounting reports, such as:
- Profit and Loss (P&L) statement
A profit and loss statement, also known as an income statement, compares your income and expenses and will tell you whether or not your business is actually making any money.
- Balance sheet
A balance sheet tells you what your business owns compared to what it owes.
- Cash flow statement
A Cash flow statement assesses how well your business is doing in terms of generating cash and can indicate whether your cash inflows are enough to cover outstanding debts and operating expenses.
- Business activity statements (BAS)
BAS is used to notify the ATO how much GST you have received and paid.
What is the purpose of BAS in accounting?
The business activity statement (BAS) is a legal document required by the Australian Taxation Office (ATO) for registered businesses. The purpose of BAS is to report on BAS tax obligations including Goods and Services Tax (GST), pay as you go withholding (PAYGW), pay as you go instalments (PAYGI), wine equalisation tax, Fringe Benefits Tax and Luxury Car Tax.
After you’ve considered the various accounting reports, don’t forget to consider the taxes that your business will need to pay.
What are some common types of business tax in accounting?
Another important step of the accounting process is meeting your compliance obligations and filing the appropriate tax returns to the Australian Taxation Office (ATO). Some of the most common types of tax for businesses are:
- Income Tax
The full company tax rate is 30 per cent, but note that the small business tax rate is 27.5 per cent for the 2019/20 financial year. You may also be applicable for certain concessions if you are a small business with an annual turnover of less than $10 million.
- Goods & Services Tax (GST)
If your business is registered for GST, you will need to add a 10 per cent tax to your sales price which is then paid to the government.
- Payroll Tax
If you are an employer, you may be required to pay payroll tax. This is a state tax which is assessed on the wages paid/payable to employees by an employer.
If all of this is sounding complicated, you’re not alone. This is why many businesses consider engaging an accountant.
Do I need an accountant for my small business?
Accountants are an asset for small businesses because they help start, turn around and grow a business financially while keeping businesses on the right side of the law. They do the fundamental jobs of balancing your accounts, tax returns, financial statements, funding, loans and payroll.
However, beyond that, an accountant can also help steer your business in the right direction by showing you which numbers really matter.
Learn about business accountants and the services they offer.
