After practising for a period of time, the question most frequently asked by clients is how to build a proper company account quickly and easily. Generally, they are SMEs that only have a few number of employees or work as one-man band. They do not have budget or practical needs to employ a specialised accountant. However, they always feel helpless about bookkeeping as they know nothing about accounting.
Therefore, I try to write the following guide from the audit aspect of an accounting firm to help entrepreneurs of SME Startup who do not have much time or accounting knowledge to build a proper, practical and reliable account in the shortest time.
The largest function of accounting books: tax filing
Firstly, I will briefly explain the reason why we suggest doing bookkeeping on your own. As mentioned in the previous article, keeping accounting records is the legal obligation of directors under the Companies Ordinance. The previous article also mentioned that a well-done accounting book is useful for the company to do financial prediction and budget, borrow loans, raise capital and cooperate as well.
As if the above objectives are not ‘practical’ enough for SME Startup, tax filing must be the most ‘practical’ reason for keeping accounting books. After receiving Profits Tax Return each year (the first time is 18 months after the start of business), company has to pass its accounting records to accounting firm to do audit, and then submit the audit report issued by accounting firm together with the Profits Tax Return within the one-month time limit for tax filing (can find tax representative to apply for extension).
Of course I know that people have different understandings towards tax filing this difficult task. Some SME entrepreneurs believe that they are only responsible for keeping receipts and invoices while doing accounting and bookkeeping are accounting firms’ responsibility. Some even cannot distinguish the differences between accounting, auditing and tax filing. I have even encountered a client that he only brought us the Tax Return without any supporting documents and asked us to fill in and submit the Return.
Finish the accounting records - ‘Bitter first sweet later’
We patiently explain to clients and provide solutions to tackle their problems whenever we meet the above situation. Although some accounting firms are willing to one-stop underwrite clients’ accounting and auditing needs, it takes additional monetary and time cost to get back the documents or think of the previous business transaction details if you did not keep the accounting documents properly and finish the records until tax filing. Accounting firms will charge a higher service fee or even reject the job if they notice the accounting records are incomplete and chaotic.
Therefore, we suggest SME entrepreneurs who do not have accountants should better get in the habit of organising and keeping accounting records regularly. It must be beneficial to you if you can keep a quick record when the memory is still fresh and pass these proper accounts to accounting firm during tax filing.
Only 3 main points for SME bookkeeping
Then, move on to the part of how to do bookkeeping in practise. As I expect entrepreneurs who need to read this article should have no knowledge about accounting, the following bookkeeping guide does not involve specialised accounting knowledge like Double Entry, Debit Credit, Profit and loss, Balance sheet etc. The goal of the following guide is to make people without accounting background understand and capable in preparing serial bookkeeping records which can be understood and followed by accountants and auditors. So that they can save efforts in ‘building’ accounting statements for audit usage in order to save additional account and audit fee and facilitate your smooth cooperation with accounting firm.
Regarding simple SME Startup industry, they only need to prepare 3 types of list to build a rather complete and proper accounting serial record. These 3 lists are:
- Bank inflow and outflow record
From the accounting firm aspect, the company bank account is always the most important audit information. Therefore, a list to explain every in and out transaction in bank account is necessary. The list is complete if it can correspond to every transaction in the bank statement).
Points to be noted regarding the list:
– Make separate lists regarding every sub account in the bank account, for example, saving account, current account and foreign exchange account
– Columns of the list include date, types of expense/income, details of expense/income, clients’ company name, inflow amount, outflow amount, reference number
- Non-bank expense record
It is impossible for every income and expense transaction going through bank account. It is common for directors (even employees) to pay for company and ask for reimbursement later on. But please prepare an extra list to record such expense.
Points to be noted regarding the list:
– As long as the expense is related to business with invoice or receipt, better with proof of purchase, it can be put in this list to record. It is not the main point whether the company bank account do the payment or not.
– As long as you can explain the relationship between the expense and company business reasonably, most of these expenses can be used to offset the Profits Tax. Please contact us for details.
– It is common practice for directors to pay for the company in advance and just keep record but not ask for money immediately. This can also be recorded in company expense.
– Columns of the list include date of invoice/receipt, types of expense/income, details of expense/income, payer’s name, client’s company name, expense amount, reference number
- Company income record
Apart from bank account, income is another important thing for a company. It is also an auditing item for accounting firm. Keeping proper income records is important for both others (for accountant to do auditing) and yourself (for you to record your business situation).
Points to be noted regarding the list:
– Make separate lists for each business if the company operates more than one business (e.g. the company not only operates catering service but also rental service)
– Columns of the list includes date of income, name of stock/service sale, number of stock/service sale, client’s name, income amount, reference number, client’s payment method, client’s payment date, receiver’s name
What software to be used for bookkeeping
As the bookkeeping records mentioned above do not involve many specialised accounting skills, it is enough to use Microsoft Excel to make the lists.
Some may ask about the functions of those trendy online accounting softwares like Zero, Wave, QuickBook Online etc. Accounting software is another complicated topic that I will explain in another article in the foreseeable future. However, it can be briefly summarised that the largest function of accounting softwares for small enterprises is to assist people who are not good at accounting to issue invoices and receipts with ‘proper appearance’, and prepare a set of ‘reasonable’ financial statements.
Accounting software is not something that anyone can be immediately familiar with it for the first time. For those who do not have accounting concept, you should first understand the above mentioned 3 bookkeeping main points and simple double entry knowledge, then use some time to understand and try on hand the interface and functions of software in order to use it handily. This topic will be investigated in another article in the foreseeable future.
How to keep accounting records
Apart from bookkeeping, there are some tiny skills to keep the original accounting documents well. Regarding accounting documents, most of you might only think of invoices and receipts. In fact, bank slips, bank statements and registration documents in Companies Registry are also very important. Especially bank statement, if you have chosen paper statement, please keep it properly when the bank sends the bank statement every month. It is better to scan a soft copy. If you have chosen online bank statement, please remember to login the online banking system at the end of each month and download the latest month’s bank statement and save it to avoid failing to download due to expiration.
How should we keep invoices, receipts and bank slips? I know that some clients fold all the receipts in a circular shape so that each month has a circular pack of ‘reference ball’. Some fold the receipts thinly and tie them up with elastic bands and put in a mooncake tin. Some even simply buy ten or more brown envelopes and put all the receipts into them. It is true that there are companies outside to assist bookkeeping and prepare accounting statements. However, it is difficult for you to find someone who are willing to help organising receipts even you pay a high price.
A more formal way is to prepare one to two box file with punch holes, a hole punch and plastic tape. Copy the receipts on A4 paper and then stick the original receipt next to the copied version on the A4 paper. You may copy and stick receipts with same nature (e.g. they are all taxi fees or restaurant fees) in the same month together on one paper. Write down important information including types of expense/income, total amount, payer’s name, payment method in the blank space. Staple all documents from the same business transaction together (e.g. quotation, invoice, delivery note, receipt).
Use the same way to keep all receipts on A4 papers. Arrange them according to dates on receipts from the oldest to the latest and then give them serial number accordingly. For example, the oldest one is 2020V001, then 2020V002, and so on. At last, punch holes on all A4 papers and put them into box file. The serial number has to be the same as the reference number in the above mentioned 3 records to facilitate the easy access when looking into the records. Start a new box file for each year and use a new serial number system (e.g. 2021V001, 2021V002, …).
The above method might look a bit troublesome but it could help entrepreneurs who work in one-man band to build a proper and tidy system to organise and record the receipts. If entrepreneurs do these regularly, it only takes them a little time each week and avoids many problems on accounting one year later. You can also establish a good image in front of accounting and audit firms.