Accounting Equation Part 2

THE ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY

This equation can be expanded even further to:

ASSETS + EXPENSES = LIABILITY + EQUITY + INCOME
which are:

DEBITS                               =                                    CREDITS

Debits are recorded on the left hand side of the equation (ledger) and Credits are recorded on the right hand side.

Some typical examples:

INCOME  TRANSACTIONS

Cash @ Bank

A +              E              =              L             +              EQ               +              I

15/7/09	Sales	$110

Cash Sales

A              +              E              =              L              +              EQ               +              I

			15/7/09	Bank	$100

GST Collected

A              +             E               =              L +              EQ               +              I

			15/7/09	Bank	$10

EXPENSE  TRANSACTIONS

Wages

A              +              E =              L             +              EQ               +              I

15/7/09	Bank	$900

Cash @ Bank

A +              E              =              L              +              EQ               +              I

			15/7/09	Bank	$900

This is called a double entry system.  These equations apply when ever we are INCREASING the amount in these type of accounts.

You will notice that in the Income transaction  examples, there are three transactions.  One on the left hand side and two on the right hand side which when added up EQUALS the one on the left hand side.

The money is going into the Bank (therefore increasing our asset) so$110 is recorded on the left.  Where this money is allocated to, goes on the right side, $100 was sales (Income) and $10 was GST (Liability). These accounts have all now been increased by these amounts.

The same applies to the Expenses examples.  In this case, we have paid wages.

Wages is an expense and is recorded on the left side.  Cash at Bank is an asset (which is also on the left side, but this time our asset isn’t being increased, money is going out of the account decreasing it, so it has to be recorded on the right hand side.

Accounting Software

I have a question for anyone who would like to respond.

I am in a position to start a new client on a software package that is hosted off site and has features that allows multiple users.  I have heard of two that I am interested in exploring and would like feedback from anyone who knows them.

The software programs are XERO and SAASU.

Your comments would be greatly appreciated.

Terminology Answers & Cost of Sales

Here are the answers to the terminology quizz from the previous blog post.

Accounting                                              H

Asset                                                           L

Balance Sheet                                         P

Cash Flow                                                 K

Cost of Sale                                              N

Creditor                                                    B

Debtor                                                        I

Drawings                                                  E

Entity                                                        M

Equity                                                        D

Expenses                                                  A

Income                                                      F

Liability                                                 G

Profit & Loss                                          C

Trading Account                                J

Trial Balance                                       O

A little added information about Cost of Sales to help explain:

Cost of Sales is an accounting method to measure the relationship of the Sales Margin.

This means that if the Cost Price is marked up by 3 times the G Profit is double the cost (300-100), or the margin (on Sales) is 66%.

Accountants measure the margin on Sales, and this, in theory, should always be constant. By separating from expenses the analysis is not confused by other issues. This measure has many advantages, one of the major advantages is that the Sales Breakeven level can be easily worked out, (to determine whether Expenses need cutting back, or sales need to be boosted)

Another way to put this:

If you mark-up an expense and sell it – it should be a cost of goods sold (COGS).

So take labour for example – If your labour is sold this should be COGS. Administration staff to run the general business is not sold so it’s an expense.

The same applies to freight so if you mark it up and sell it along with the goods then COGS or if this is just a treated as a fixed cost of doing business it’s an expense

The most important thing is to be consistent between the accounting periods so you can see if your gross profit (the profit made from trading) is trending up or down as a percentage. If down your margins are being squeezed or you have been inefficient servicing clients and if up the opposite you have been operating efficiently.

The Accounting Equation

Many small business owners do have a basic understanding of accounting concepts.  Many may have heard some of the jargon used and think they understand what it means, but when put to the tes, do not.  This post is intended to help with some of this.  To prove the point, today we will start looking at some definitions.  THESE ARE NOT CORRECT match ups.. See if you can match up the terms with the correct definitions and the answers will be provided in a future blog..

Accounting	A	Decreases in economic benefits during the accounting period in the form of outflows or depletion of assets; or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
Asset	B	A person to whom we owe money.  They (collectively) are also known as accounts payable.
Balance Sheet	C	Used to complete the calculation process to determine the amount of money left after deducting the expenses from the income. It includes figures not related to inventory & results in a Net figure.
Cash Flow	D	Is the residual (remaining) interest in the assets of the entity after deducting all its liabilities.
Cost of Sale	E	Is the withdrawal of cash or other assets from the business by the owner of the business.
Creditor	F	Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets; or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
Debtor	G	Is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources containing economic benefits.
Drawings	H	A system that is used to record the actions of a business from which reports can be prepared on the performance of the business.
Entity	I	A person who owes us money. An alternative name for them (collectively) is accounts receivable.
Equity	J	Is used to complete the calculation process to determine the amount of money left after deducting expenses and income only related to inventory and results in a Gross figure.
Expenses	K	The movement of money into and out of an entity over a given period of time; or the difference between cash receipts & cash disbursements over a given period of time.
Income	L	A resource controlled by the entity as a result of past events and from which economic benefits are expected to flow to the entity.
Liability	M	An organisation, such as a business, Government Department or club.
Profit & Loss	N	An expense that will be marked up and sold.
Trading Account	O	A list of the names and balances of each ledger account on a particular day.  It has a debit & a credit column.  When totalled, the two columns should be equal.
Trial Balance	P	A report showing assets, liabilities and equity of a business on any one day.

The ATO’s new BAS Agent Newsletter

If you are interested in registering for this newsletter go online to http://www.ato.gov.au/businesses/content.asp?doc=/content/00234801.htm&page=1&H1
and there is a heading in the Table of Contents on the right hand side that allows you to do that.

You can also receive email updates directly from the Tax Practitioners Board by emailing
tpbwebsite@ato.gov.au and providing your contact information, including your email address and phone number.

Key points in the newsletter were:

You must now register to provide BAS services

On 1 March the Tax Agent Services Act 2009 came into effect. This new law stipulates that you must be a registered tax agent or BAS agent to continue to provide business activity statement (BAS) services for a fee or other reward. Transitional arrangements are in place to ensure that people and entities with a range of circumstances can enter the new regime.

BAS agent products and services

The products and services offered to BAS agents by the Australian Taxation Office (ATO) will initially include the same access to the portal and electronic commercial interface (ECI), along with a premium level telephony service.

Over the coming months we will be:

• improving current available products and services, and
• expanding on tailored products and services for BAS agents.

We will keep you informed through this newsletter and www.ato.gov.au as changes occur.

Registered BAS agents and safe-harbour provisions

One of the changes brought about by the tax agent services legislation is the introduction of safe-harbour provisions. The ATO is responsible for the administration of these provisions.

Taxpayers who engage a registered agent (BAS agent or tax agent) may not be liable to certain administrative penalties in some circumstances.

Safe-harbour provisions can only apply to:

• a false or misleading statements penalty, where the statement is lodged on or after 1 March 2010, and
• a failure to lodge on time penalty, where the document has a due date for lodgment of 1 March 2010 or later.

Activity statement and income tax addresses can be different

Your clients can have different addresses for activity statements and income tax. When your clients lodge an income tax return, we automatically update their income tax address. However, we don’t update the address for activity statements and instalment notices.

To update an address for activity statement purposes, your clients will need to update it separately through the Business Portal, the Australian Business Register at www.abr.gov.au or by phoning us on 13 28 66.

Information about tax debt now available

A series of products designed to help your clients manage their tax payment obligations are now available, including:

• a comprehensive tax debt topic guide
• a brochure titled Finding it difficult to pay your tax? and
• an overview of our approach to collecting debt.

Bookkeeping essentials

Our bookkeeping essentials web page covers topics identified in our consultations with you and contains information that will be helpful to you, your clients and your business.

You can save the Bookkeeping essentials web page to ‘Favourites’ in your web browser for easy access to this information.

Key Dates

Different lodgment dates may apply if your client uses a tax agent or if you lodge online.

Links for information regarding this are as follows:

For key lodgements dates for business

http://www.ato.gov.au/businesses/content.asp?doc=/content/34949.htm&page=11&H11

Where a due date falls on a day that is not a business day (that is, a Saturday, Sunday or public holiday), lodgment or payment may be made on the first business day after the due date without incurring a failure to lodge on time (FTL) penalty or general interest charge (GIC). A public holiday is a day that is a public holiday for the whole of any state or territory in Australia.

If clients use a tax agent

http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/00218883.htm&page=4&H4=&pc=001/005/041/015/010&mnu=42768&mfp=001/005&st=&cy=1

Reasons for Outsourcing your Bookkeeping

Reasons for Outsourcing your Bookkeeping.
Many small businesses owners and sole traders:

• Simply do not have the time to undertake all the regular data entry, invoicing, following up on debtors, payroll, inventory management, bank reconciliation, reporting and other paperwork that is necessary.
• Don’t understand all the necessary tax laws and company reporting requirements.
• Struggle with the computing software required to process the data.
• Aren’t interested in those types of activities.
• Didn’t like or had difficulty with mathematics at school.
• Don’t want to learn to do these things.

Benefits of Outsourcing your Bookkeeping.
Many small business owners and sole traders can benefit from outsourcing by:

• Be free to concentrate on income-generating activities
• Relax, knowing that your bookkeeping is in good hands
• Save time & money by not having to hire, train, and monitor the performance of the bookkeeping personnel.
• Only paying for the hours actually dedicated to bookkeeping – doesn’t include any down time.
• Reduces the equipment and/or overhead costs that are required to maintain additional staff.  Including PAYG, Superannuation, Annual & Sick Leave.
• The Bookkeeper works co-operatively with your Accountant to customize your Chart of Accounts and preferred reporting formats.
• Improving your cash flow with efficient billing and debt collection
• Knowing the financial position of the business on a daily basis
• Having the financial management information necessary to make informed decisions
• Having the information your accountant needs to accurately advise you
• Your banker will have accurate information from which they can examine your performance

Compare the costs !!

If it takes an outsourced bookkeeper 4 hours per week to complete the business’s bookkeeping tasks, the investment would be around $200 per week (most outsourced bookkeepers charge between $40-$60/hr).  If the business owner completes these tasks, it would most likely cost them around 6 hours in time and (if you charge $80 per hour) a minimum of $480.

That’s a saving of at least $280 per week

How to stay afloat in the current economical conditions.

With the doom and gloom of the world recession on every radio, T.V. and newspaper at the moment it is very easy to look at how to cut costs and to hold on tight to what you have.  That’s not always a bad thing, but you need to be wise and what you cut back on and what you hold tight to..

One example is that because we are wanting to hold onto our hard earned cash, often it is the Marketing Budget that is the first to go..  This is NOT a good idea. If anything, the Marketing Budget should be increased, not decreased.  With customers more difficult to find, you want to be the one to find them, not your competition and if you’re not out there marketing, then you don’t have much chance.

Current Customers become even more important now.  You want to hang onto them and make sure that they don’t cut you out of their budgets. Keep in touch with them, set up a system to contact them on a regular basis just to “check in on them” and as well as keeping in touch, it is a good way for you to get information on what’s happening in the industry.  Look at ways that you can add value, that won’t cost you big financially.

Cost Cutting can’t be ignored, but again this is where you need to be wise.  Don’t go putting off your key personnel just because you pay them the most.  They may be the ones who can come up with the best ideas or keep those important clients.  Consider things like evaluating the costs of your insurance or superannuation schemes; look at refinancing options; are there better deals out there?  If you are paying a full time Accountant, consider taking on a Bookkeeper to free up your Accountant to work on growth plans.  Look at ways that you can save energy and reduce your carbon footprint.  There are a lot of Government subsidies out there at the moment that you might be able to take advantage of.

Consider ways to diversify your income, particularly if you are heavily reliant on one client.  If that client goes under, it leaves you far too vulnerable.  So as well as looking for new clients, consider ways to provide added services to your existing customers or ingenious ways of generating income.

Make sure that you have a budget and that you set aside time at least monthly to look at and monitor the financial status of the Business and consider your Cash Flow and any actions that might need to be taken.  You should know what the current status is of your Business at least at the close of every month.

The Season of Generosity

As it is the “Season of Giving”, I thought I would share with you some of the things that I have recently been reading. A lot of it comes from Robert Kiyosaki’s book ‘Retire Young Retire Rich’. Now, if you don’t want to be Rich, then you can stop reading here.
This isn’t new information to me, I have heard it all before, but if you are like me, and it isn’t something that is already a regular habit, then you need reminding regularly, so here goes.
The reason that most people are not rich is simply because they are not generous enough. We have all heard stories about how generous a lot of rich people are, how many charity organizations are formed by rich people. Some of whom are people like Warren Buffett, Bill & Melinda Gates, Denzel Washington, Oprah, George Lucas, Brad Pitt, our own Australians, like Glen McGrath, Clive Palmer (iron ore billionaire).
A cynical person might suggest that they are probably doing it for the tax cuts, but I personally don’t think they need the tax cuts and would venture to state that they are most likely rich because they were first ‘generous’ people.
Many became rich because of the nature of the business they were interested in starting up. Henry Ford became a billionaire by providing affordable cars for the masses at a time when only the rich could afford cars. Motors companies for the rich went out of business, while the Ford Co. continued to grow.
If you want to be rich you must build Networks and link your Network to other Networks. It is easy to become rich through networks because it is easy to be generous through Networks.
Networks are people, businesses or organizations that you are generous with because you support them and they support you. Networks are powerful forms of leverage and this can include Network Marketing Companies.
Working together in Networks makes each member stronger and more viable. There is a give and take, a sharing of strengths and minimizing weaknesses. By being co-operative and ensuring that those you do business with do well financially, you grow exponentially.
Individuals and businesses who focus only on making themselves richer, or who take more than they give, don’t make good network partners. They also often have to work a lot harder and earn less in the long run.
The key point in Networking, is to be sincere and make sure that everyone in the Network/Organization is also doing well.

What about me? You might well ask.
In order to become rich, we need to learn to delay gratification. A business owner must pay themselves last. They must continually re-invest into the asset they are building to ensure that it will become strong and grow. Too many business owners put themselves first before their asset, employees and others and ultimately that is why they will fail.
The reason the business owner pays themselves last is because they want to build an asset in order to be paid the most. Delay gratification and work to build assets that grow in value. Work to build assets, don’t work for money. The people who get paid first, ultimately get paid the least.
Ask yourself “Are you in business to acquire and build assets?” or “Are you in business for the pay cheque?” Business owners can become rich exponentially, people working for pay may become rich incrementally.
Generosity falls under the age old ‘Law of Reciprocity” ie “Give and you shall receive”. It has survived the test of time and will survive the test of the future.
It is very understandable that you want to look out for your loved ones and yourself, but if you want to become rich, you must serve as many others as you can FIRST! That’s the Law!
If you smile at someone, they will smile back; if you punch someone, they will punch back. The same applies to everything, including money, if you want more money, give more away. If money is short, you can’t be generous with your time and expect to get money in return. If you’re generous with your time, you will have plenty of time. If you’re generous with your money, you will have plenty of money.
People will often hang onto their money because they are afraid they won’t have enough. So what happens? Their fear become a reality, partly because of the Law of Reciprocity and partly because of the Law of Attraction, but that’s another newsletter.
If you have difficulty giving money away, start by giving a little at a time, on a regular basis and gradually build it up.
Another reason poor people are poor, is because they treat themselves poorly. They don’t do things that financially enrich themselves. So, you also need to be generous to yourself. Each day/week you should put aside money in three areas. Rich Dad suggests 3 piggy banks, one for savings, one for investing and one for giving. It can be as little as .10c, .50c or if $1 a day, by the end of the month, you will have $30 in each of the piggy banks.
To ensure that you do have money to divide between the three areas, you should consider the 80:20 rule. Here, you divide your income, living off the 80% and dividing the 20% into your piggy banks. If you are a Christian, the tithe should come out first.
So with the Christmas season here, there is even more reason and opportunity to be generous. If you are short of ideas, I have put a list of suggestions that you might like to consider on the front page.
Have a Blessed and Generous Christmas and I’ll talk with you all again in the New Year.