“I am told you can create financial statements for my business?” the client asked “No I can’t” was my response.
I said no because he had no records for the period for which he wanted the financial statements produced. Accountants are meant to help you organise your existing records in order to produce financial statements and not to conjure up figures. This means that you have to get into the habits of keeping records. If you cannot write them down somewhere then at least keep the source documents (receipts, vouchers, invoices, bills etc.) and someone can help you organise these into a report.
This client wanted the financial statement in order to file income tax returns. What one should know is that whatever you file with the revenue authority should be kept available to them for a period of at least five (5) years. When they come to audit you, they will need documentary evidence of how the financial statements were arrived at.
Someone said that in the unfortunate event that your office caught fire and you have a chance to rescue only one file. Would you choose the file with your financial statements or the file with your source documents? The correct answer is: You should rescue the latter (source documents). The financial statements can be reproduced using the source documents but not vice versa.
The records you keep will be supporting evidence for your financial statements, these are categorised as follows:
I have asked many business people this question.... How much is your turnover? Some have no clue what turnover is or even how to arrive at it. As a business person, you should answer this question as easily as you can answer.... how much sugar do you put in your tea? Do you ever pose to answer the latter?
You sell a service or a product for cash or on credit where do you record these?
If there is an exchange of cash for a service or a product, then that is a cash sale and an income is recognised. When you offer a service or deliver a product on credit, you are supposed to issue an invoice. In this case and income is recognised and debt is tracked for follow up. These two (cash sale receipt and an invoice) form the source documents for your income.
As long as you diligently record any sale that you have made in either of these source documents, you can give these books to an Accountant and they will be able to put these together and tell you the turnover for any given period. This is very important especially for the presumptive tax payers.
The presumptive tax payer is taxed a % of their annual revenue. If you have no records, Revenue Authority will make an assessment based on their own assumptions and you will be liable to pay that unless you provide evidence of actual revenues.
If you do not keep records of your income, it will also not be possible to make revenue projections for your business. This means that there will be no deliberately planned growth, this means that the business if left to chance!
Keep a record of your income and analyse your year on year performance, you will be amazed at the potential your business has.
Yes, he was really shocked when I told him that his car was not an expense! I therefore explained to my client that as much as money moved out of the business, the business did not incur and expense but acquired an asset instead.
An expense is money spent or cost incurred in a business’ efforts to generate revenue, representing the cost of doing business.
Expenses may be in the form of actual cash payments (such as wages and salaries), a computed expired portion (depreciation) of an asset, or an amount taken out of earnings (such as bad debts). Expenses are summarized and charged in the income statement as deductions from the income before assessing income tax. Whereas all expenses are costs, not all costs (such as those incurred in acquisition of income generating assets) are expenses.
That said, for every amount of money that goes out of the business or is paid out for whatever reason, should be documented or recorded in a payment voucher. Attached to the payment voucher should be supporting documents that will help the accountant analyse the transactions for you. At the point of analysis, the Accountant will be able to appropriately categorise the outflows as expenses, assets or drawings.
She thought that she was making losses but in reality she was not. She had put all her stock as expenses and advance rental payments as well. It was just an error in classification.
An asset, simply put, is what you own.
According to the business dictionary, an asset is something that an entity has acquired or purchased, and that has money value (its cost, book value, market value, or residual value). An asset can be:
(1) something physical, such as cash, machinery, inventory, land and building,
(2) an enforceable claim against others, such as accounts receivable,
(3) right, such as copyright, patent, trademark, or
(4) an assumption, such as goodwill.
Assets shown on their owner's balance sheet are usually classified according to the ease with which they can be converted into cash.
Some assets especially those in the fixed assets category like computers and motor vehicles tend to be confused for expenses because both of them take money out of the business. This incorrect classification can easily turn your net profit into a loss.
A client paid me in full for a QuickBooks Training I am yet to deliver. It’s been a month and still counting…whenever I call to schedule the training they have a ‘valid’ excuse for us to reschedule. I have to be careful to the fact that this advance payment is not yet my money. It will become mine once I carry out the training. For now it is deferred income, Income received before it is earned. In accounting this will be categorized as a liability because if the training never happens, I will need to refund what I owe my client.
A liability is that which you owe. The most known liabilities are; accounts payable (Creditors) and wages payable, accrued expenses and taxes, trade debt, and short and long-term loans.
Because of the cash basis of doing business, most SMEs tend not to track their liabilities. Because of lack of cash flow planning, many businesses pay obligations as they come instead of paying as planned. This leads to frequent working capital constrains because inflows are not deliberately matched to outflows and their due dates.
Cash flow planning and management cannot be done without proper record keeping. Are you keeping records?
Every time the business needed money she would just get from her pocket or bag or account, depending on the amount needed (transport, stock, utilities etc) and bail it out. By the time I was sorting and setting up this client's accounts, these small bailouts had amounted to Ugx150Million! She was totally surprised that it was that much! The power of record keeping...at that point I asked, would you want the business to pay this back to you at some point (liability) or you are willing to increase your contribution to the business (Equity)?
We generally understand that capital is the initial money invested in a business to generate income. As the business operates, it either makes a profit or a loss in a given year of operation. The profits made from the business together with the initial capital contributed form the equity of the business. The capital is owner’s equity and the profit is the retained earnings.
Business owners eat up their equity by making drawings instead of paying themselves a salary. Drawings go to reduce the owner’s capital or equity in the business balance sheet (statement of financial position). Whereas salary would be a business expense and would be reflected in the profit and loss or income statement (statement of comprehensive income). The latter will reduce the business profits, which is not only a tax advantage, but is also very useful information on the true cost of running the operations.
On the small business owner’s balance sheet, equity represents funds contributed by the owners plus retained earnings or minus the accumulated losses. Equity is also the net worth of a person or company computed by subtracting total liabilities from the total assets.
As stated in my previous articles, the business owner’s task is to keep records of all the transactions in a business whether big or small. The Accountant will do the classification for you. Here are 4 Record-keeping Tips for Small Business Owners
To your success!
Small Business Survival Strategy #1: Look for False profits due to hidden costs
Check those Inflated Expenses: Small Business Survival Strategy #2