Introduction to Bookkeeping Beginner Basics: The Chart of Accounts

We created a free educational guide, called Introduction to Bookkeeping Beginner Basics, which is available to download from the EzyLearn website, and to complement that guide, we’ve been publishing a series of blog posts, also titled Bookkeeping Basics. We’re now three posts in, and we’re going to be look at the chart of accounts, which is the foundational element of every business’s accounting system. The Bookkeeping Basics guide will take you through how to set up a chart of accounts in your accounting software, whether you’re using Xero, MYOB or QuickBooks, while this blog post is going to explain why it’s important.

What is a chart of accounts?

The chart of accounts (COA) is an organisational tool that lists every account in a business’s account system. In the context of bookkeeping, ‘account’ is used to refer to a unique record for each type of asset, liability, equity, revenue and expense. So a chart of accounts, then, is just a system that organises your finances so that your reports make more sense and you can easily see the financial health of your business.

A well-designed COA helps the business to comply with financial reporting standards, and should be flexible enough so that a business can tailor its chart of accounts to best suit its needs. Within the categories of operating revenues and operating expenses, for instance, the accounts might be further organised by business function or by company divisions. As such, a COA can be as large and as complex as the business itself.

Understanding your ‘accounts’

When you set up your chart of accounts, it will be organised the same way every other company does – your banks accounts come first, then all assets, liabilities, equity, income, and expenses in that order. Here’s what each of those accounts mean:

Assets:

You accounts receivables are considered an asset, as is your income, but the two are completely different things. Accounts receivables are business claims against the property of a customer that’s occurred following the sale of goods and/or services, and income is what you have collected from the sale of those goods or services. In other words, if you invoice a customer and give them time to pay, then that’s ‘accounts receivable’. When you collect the money and deposit it into your account, it’s ‘income’.

Liabilities:

Liabilities are notes owed by the business. If you lease anything or you’re buying anything on credit – this includes suppliers who extend a line of credit to you – then it’s considered a liability.

Equity:

An equity account would be any equipment the company has paid for, or would receive money for if it is sold. Cars, machinery, and certain office equipment are all considered equity. If you had a loan on a business vehicle, the payments you make would be considered a liability, but the vehicle itself would be equity. Each time you make a payment, the liability goes down, while the amount of the equity account would increase. To keep your balance sheet accurate, you need to track both.

Expenses:

Finally, expenses are just that: the money paid by the business for the operation and production of goods and services that are paid for immediately. This includes things like stationery or fuel for a business vehicle, which are paid for at the point of sale, is an expense, where a telephone bill that allows you 14 days to pay, on the other hand, is a liability.

Why a chart of accounts is important

Whether you’re using an old fashioned pencil and paper, an excel spreadsheet, or more sophisticated accounting software, such as MYOB or Xero, it’s important to know where your money is coming from and where it’s going to. A chart of accounts is the organisational tool that allows you to do that. And it’s important to keep it up-to-date, so that, if for any reason, you want a picture of how your business is performing financially, your reports will be accurate.

This blog post is part of our Bookkeeping Basics series, which are being published to complement our new educational guide, also titled Bookkeeping Basics, which you can download for free from the EzyLearn website.

Accounting Tutors getting ready

Don’t you just love something new? Some entrepreneurs I know call it the “shiny object” syndrome because it means you’re always focusing your time and energy on something new, rather than doing the daily drudge work. But this is exciting.

I haven’t had a chance to speak with every registrant but this image shows the EzyLearn students who’ve completed our accounting & bookkeeping courses and would love to be tutors to help other students understand how the software is used in the real world.

Continue reading Accounting Tutors getting ready

Bookkeeping Basics: Payroll and Paying People

EOFY is nearly here — can you manage payroll?

woman studying myob payroll xero payroll quickbooks payroll online training courseIN OUR FREE, EDUCATIONAL GUIDE, Bookkeeping Basics, we feature a section that briefly discusses payroll, which we thought was worthy of being expanded upon on here. You might also like to go back and revisit our other blog post that complements the guide, Bookkeeping Basics: Cash vs. Accrual Systems, if you haven’t already.

Paying your employees

Before you employ staff, you need to determine how they will be employed. Are you going to use casual or permanent employees? If you’re employing the latter, will they be employed on a full-time or part-time basis? As the business owner and employer, you must also ensure that you’re paying your staff the correct rate of pay, as well as any entitlements — such as, sick leave, annual leave, overtime, etc — that may be owed to them.

This blog post isn’t going to go into the intricacies of how to work out what you should pay your employees, nor will the Bookkeeping Basics guide, as it generally falls outside the scope of the role of a bookkeeper, however, you can use the Fair Work Ombudsman’s (FWO) Pay Calculator to work out the following:

  • Base pay rates
  • Allowances
  • Overtime and penalty rates
  • Pay rates per hour
  • Pay rates per shift
  • An employee’s employment status (i.e., full time, part time, casual).

Record keeping

If you employ staff under a modern award or agreement (virtually all Australian businesses do), you have a legal requirement to keep accurate and correct time and wage records, in addition to issuing payslips to all of your staff — failure to issue pay slips incurs harsh penalties if it comes to the attention of the Fair Work Ombudsman. You must also keep your each staff member’s time and wage records for, at least, seven years and make sure they’re stored somewhere that’s always accessible, should they ever need to be inspected.

Although you don’t have to keep all employee records, it’s best practice to keep the following records for seven years, even after the employee has left the business, in case they ever file a complaint with the Ombudsman or the Tax Office ever does an audit:

  • Employee resume and application details
  • Employee workplace performance records
  • Employee trade certificates or registration certificates.

For tax purposes, all employee and contractor records must be kept for five years, but most businesses keep them for seven years, in case an enquiry is made by the FWO.

Deducting tax from an employee’s pay

Under the Pay As You Go (PAYG) withholding rules, you are legally obliged to collect tax from employee payments so they can meet their end-of-year tax liabilities. In order to do so, you must first register with the ATO for PAYG withholding, which you can do online, over the phone or through your BAS or tax agent.

You must also provide your employees with a tax file declaration form, which you can also obtain from the ATO, and must be completed by an employee if they want to:

  • Claim an entitlement to tax offsets by having a reduced amount withheld from payments made to them
  • Advise you of changes to their:
    • tax-free threshold
    • residency status
    • HELP, Trade Support Loan or Financial Supplement debt.

You must then determine how much to withhold your employee’s pay, which you can do by referring to the ATO’s Tax Tables or the Tax Withheld Calculator.

If you have staff that are under 18 years of age

You do not have to withhold amounts from payments to employees under 18 years of age if those amounts are not more than:

  • $350 per week
  • $700 per fortnight
  • $1,517 per month.

Employees with HELP, TSL or Financial Supplement debts

If an employee has indicated they have a HELP, TSL or Financial Supplement debt, you should use the HELP/TSL or Student Financial Supplement Scheme tax table on the ATO website to work out how much extra to withhold for these debts. Add this to the amount withheld shown in the relevant tax table.

Your superannuation obligations

As an employer, you also have an obligation to make super contributions for each of your employees. You must also ensure that you:

  • Offer eligible employees a choice of super fund (temporary residents are eligible to choose)
  • Pay the minimum amount, called the super guarantee (SG), which is currently 9.5 per cent of ordinary time earnings
  • Make your super contributions on the required dates as set by the ATO.

If you don’t pay the super guarantee for your employees, you will have to pay the super guarantee charge, which is not tax deductible.

Which employees are eligible for the SG?

Generally speaking, all employees are eligible if they are paid $450 or more (before tax) in any calendar month. You must pay super for all employees who:

  • Are full-time, part-time or casual
  • Receive a super pension or annuity while still working — including those who qualify for the transition-to-retirement measure
  • Are a temporary resident — when they leave Australia, they can claim the payments you made through a ‘departing Australia superannuation payment’
  • Are a company director
  • Are a family member working in your business — provided they are eligible for SG
  • Are over 70 years of age
  • Some contractors, even if they quote an ABN — visit the FWO website for more information.

Final things to consider

Not all bookkeepers offer payroll services, because it can be time consuming and it’s always in flux (new software enters the fray, employees come and go, and each time that occurs, it results in more work). Additionally, the minimum wage is regularly reviewed and increased, which is something that needs to be monitored to ensure your employees continue to be paid correctly. If you decide to hire a bookkeeper to manage your accounting, and you’d also like them to handle your payroll, be sure to clarify how they’ll bill for payroll services and what your obligations are to ensure you’re not paying too much.

We provide online training courses in Payroll for MYOB, Xero Payroll and Quickbooks. Find out more about our industry-endorsed online training courses and videos.

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Need help managing your bookkeeping system?

the perfect administrative executive assistant office manager learn online courses trainingIf you’re looking for a reliable bookkeeper to manage your bookkeeping system, who also specialises in payroll services, is highly qualified, or even a registered BAS agent?

See our bookkeeping directory, National Bookkeeping, for more information on the hundreds of bookkeepers listed who are available to work all around Australia. 


Remember, you can download our educational guide, Bookkeeping Basics, for free from the EzyLearn website.


Online bookkeeping accounting training courses for CPD points

Find out more about Continuing Professional Development with EzyLearn


 

 

 

 

FREE Xero Training Video: How Often Should You Check Your Inventory in Xero?

The key to cutting down discrepancies is consistency

IF YOU RUN A SHOP or business that holds stock, you should be in the habit of checking your inventory regularly. A lot of retail stores only check their inventory every quarter; others every year. This is usually because a stocktake is a big job.

Stock and inventory stocktake and count - inventory in Xero & MYOB Advanced Certificate Training CoursesThe case for a monthly stocktake

The inventory feature in Xero was a functionality that was missing for many years — but then Xero caught up.

Running an inventory report in Xero is pretty easy. The hard work sets in when you have to count your inventory to account for any discrepancies. There are usually always differences between what Xero says you should have in stock, and what you actually have on hand. The more frequently you run them, the fewer discrepancies you’ll find.

Like anything in the bookkeeping process, the more frequently you do something — be it reconciling your account or chasing up late payers — the easier and quicker it is. Where a quarterly or yearly stocktake could take half a day or more, a monthly one may only take you a couple of hours.

Understand trends in your business

A monthly stocktake is a good way to get to know your business, and understand its certain trends and idiosyncrasies. In particular, it helps you with ordering and making related business decisions.

A shop selling food, for example, needs to be wary of ordering stock that doesn’t sell quickly and ultimately goes out of date. A monthly stocktake will help you keep track of this, and monitor which items sell quickly and which don’t. Likewise, a monthly stocktake of a furniture shop lets you determine which pieces spend long periods in storage, and manage your ordering accordingly.

Run inventory reports in Xero

Free Xero Training Course video about inventory reporting
Click Image to see FREE Xero Training Course video

Do a monthly stocktake by running your inventory reports in Xero. You’ll be able to work out whether your stock:

  • is ageing (for technology retailers)
  • is going off (food)
  • costs more money to store (furniture); and, subsequently, how long it can take to sell before it’s costing you money. 

If you are new to bookkeeping it’s probably a good idea to learn more about some of the basic Xero reports you can produce for a business.

MYOB or Xero online accounting course training videos***

If you only have a very basic knowledge of Xero, cloud accounting or bookkeeping, and you’re looking to gain a better understanding of basic bookkeeping terminology, get our free Basic Bookkeeping Guide

You’ll learn how to run reports in Xero, in particular inventory reports, in our Xero training courses. Visit our website for more information or to enrol and see course prices.


online bookkeeping courses to earn cpd points

EzyLearn Excel, MYOB and Xero online training courses count towards Continuing Professional Development (CPD) for bookkeepers and accountants. We’ve been an accredited training provider of the Institute of Certified Bookkeepers ever since the organisation started in Australia. Find out how CPD points can be of benefit to you.


 

Bookkeeping Basics: Cash vs. Accrual Systems

Bookkeeping Basics apply to every cloud accounting platform: MYOB, Xero or Quickbooks (QBO)

lifelong learning platform woman online learning for life

BOOKKEEPING IS THE PROCESS of keeping accurate records of the financial affairs of a business, and every business operating in Australia, whether it employs staff or whether it’s owned and operated by a single sole trader, must keep their bookkeeping up to date.

Bookkeeping plays a key role in the lodgement of your tax returns and business activity statements. It can also provide valuable information on the financial health and performance of your business.

The bookkeeping process for a business starts the very moment you begin trading, so it’s extremely important that you set up a system for managing your bookkeeping early in the life of your business — ideally, at the same time that you’re setting up your other operational systems (email accounts, websites, invoicing, etc). We’ve included bookkeeping basics videos in our MYOB training course for several years already but now these basics are part of a separate guide!

ezylearn-bookkeeping-basics-training-course-workbook-logo

If you’ve never been self-employed before, just the idea of setting up a bookkeeping system is probably enough to strike fear in your heart, which is why we put together a free guide to setting up your own bookkeeping system, called Bookkeeping Basics, which you can download, for free, from the EzyLearn website.

The Bookkeeping Basics guide is an instruction manual on basic features and terminology used in every bookkeeping system, and will provide you with some good foundation knowledge of how your accounting software works, which you can use before you enrol in one of our cloud accounting training courses or find a good bookkeeper to take care of your bookkeeping for you.

Bookkeeping Basics Topic: Understanding cash vs. accrual accounting

The main difference between cash and accrual accounting is the timing of when when revenue and expenses are recognised. Although, the two methods are distinctly different from each other, there are many businesses that use a combination of both.

Cash-based accounting

A cash-based accounting system records transactions at the time the cash was paid or received, regardless of when the transaction occurred. With this method, if you get an invoice from a supplier, for instance, you won’t record the cost in your books until you’ve paid the invoice. By the same token, you won’t record a sale in your books until you receive the money from your customer.

Cash accounting is common among small businesses, especially contractors who work on small projects or are on weekly retainers with their clients, as it’s the simplest way to manage cash flow.

Accrual-based accounting

An accrual accounting system, on the other hand, recognises both income and expenses when the sale takes place, rather than when cash changes hands. When a web designer, for example, raises an invoice for a website they’ve completed, the sale would be recorded in their books, even though they haven’t received payment yet.

With accrual accounting, debtors and creditors are created in your accounting software, which shows what is owing to you and when, as well as what you owe others and when. This helps to give you a truer picture of your financial situation, in particular it helps you keep track of money you do and don’t have in real-time, rather than after the fact as is the case with cash-based accounting.

Which system should you use?

Before cloud accounting software, like MYOB, Xero and QuickBooks came along, a lot of small businesses used a cash-based accounting system simply because the alternative required a lot of grunt work, a lot of the time. Cloud accounting has made it significantly easier to set up and maintain an accrual-based accounting system — in fact, many small businesses that use a cloud accounting system often use this method by default, without even realising.

That being said, there are some things to consider when selecting a system for your business, such as:

  • The size of your business — i.e., will you be employing staff or using lots of contractors?
  • How complicated your business transactions will be
  • Whether you will have the resources to manage an accrual system.

Accrual accounting and GST

There is one last thing to consider, and it relates to GST. For small businesses whose annual turnover is less than $2 million, but greater than $75,000 per annum, they must register for GST and they may choose whether or not to register on a cash or accrual basis. (Businesses with an annual turnover of less than $75,000 are not required to register for GST, but may do so if they wish to.)

How you choose to register for GST will greatly affect your business’s cash flow. If you choose to register for GST on an accrual basis, GST will be payable on sales for which payment hasn’t been received yet, and could leave you out of pocket until your client pays you. That being said, GST can be claimed on unpaid expenses if you hold a tax invoice. If your business has a lot of expenses, this may balance out in the wash. If you run a leaner operation, however, it most probably will not, so this is something you should give careful consideration to.

This blog post is part of our Bookkeeping Basics series, which are being published to complement our new educational guide, also titled Bookkeeping Basics, which you can download for free from the EzyLearn website.

[box type=”info”] This blog post is part of our Bookkeeping Basics series, which are being published to complement our new educational guide, also titled Bookkeeping Basics, which you can download for free from the EzyLearn website.[/box]

Featured Mandurah (WA) Bookkeeper

deb-crompton-bookkeeper-from-mandurah-wa-local-myob-and-xero-portrait-smlIf you’re looking for a reliable bookkeeper to manage your daily or weekly bookkeeping and accounts, either remotely or in-person, Deb from Mandurah WA is a qualified bookkeeper with tertiary qualifications and the practical experience of having operated her own business in the past. Deb has a lot of experience in the day-to-day accounting functions of a small business and you can contact her directly as a fully licensed member from her profile page.

Our National Bookkeeping website has recently gone through a significant upgrade so watch out for more stories about featured bookkeepers in forthcoming blogs! Join and we can feature YOU in our articles too.

Start a bookkeeping business in your local area

Start a bookkeeping business not a franchiseMany bookkeepers starting a bookkeeping business for the first time also find it quite daunting; after all, they have moved from the corporate world where various and multifaceted aspects of running the business are managed by other people.

We put these bookkeepers through our EzyStartUp Course to help them define their goals, pricing strategies, marketing message and professional profile. They also get support from a business mentor and brand building from our digital marketing team.