Understanding the accounts of your business is fundamental in order to grow a successful business. It is the backbone of the business and understood and reported correctly, will give you important business information to make sound business decisions. Here are some common bookkeeping and accounting terms that you should know about and understand if you are in business, particularly in business in New Zealand.
General ledger accounts are used for sorting and storing the company’s transactions. Processing transactions involves “coding” or categorising the transactions into the appropriate general ledger (GL) accounts.
Not to be confused with bank accounts. Although a bank account will have a GL account to record how much money is in the bank account, and the transactions coming in and out of it.
Outstanding invoices (bills) the company has received from suppliers but has not yet paid at balance date. Relates to purchases and expenses made.
Outstanding invoices the company has issued out to the client but has not yet received in cash (or into the bank account) at balance date. Relates to sales.
Accrual method vs. cash method
Under the accrual method of accounting, expenses are matched with the related revenues and are reported when the expense occurs, not when the cash is paid.
The result of accrual accounting is a Profit and Loss report that better measures the profitability of a company during a specific time period.
The cash method of accounting, also known as cash-basis accounting or cash accounting records revenue when cash is received, and expenses when they are paid in cash.
GST in NZ is often calculated using Payments basis, which is effectively cash accounting, so it can get a little confusing for some. But business reporting will usually be reported on an accrual basis due to the matching of expenses against the income it was used to create. You get accurate profitability reporting using the accrual method. See more on GST below.
The bank reconciliation is also known as the bank statement reconciliation or bank rec. Its purpose is to determine an organization’s true amount of cash as at a point of time. (Cash includes bank accounts.)
Accounting software with bank feeds, such as Xero, have changed the meaning of this word slightly, so you should periodically check that the bank account balance showing in Xero matches what is showing in the bank by running a reconciliation report each month. This will highlight any out of balance amounts or unreconciled transactions.
It’s a good idea to keep a copy of your reconciliation reports in case anything changes after the fact, you will then have something to compare the current situation to and see where it changed (went out of balance).
Statement of cash flows
Your cashflow is the money coming in and going out of your business — and how much of the money sitting in your bank account is yours to spend.
A healthy cash flow is having enough money to pay what you owe when it’s due. The statement of cash flows (or cash flow statement) summarizes how a company’s cash and cash equivalents (like bank accounts) have changed during the same period of time as the company’s Profit and Loss.
Balance sheet (or Statement of Financial Position)
The balance sheet is officially known as the Statement of Financial Position in NZ. It reports an organization’s assets, liabilities and equity as of an instant, moment, or point in time. The instant is usually the final moment of the accounting period such as midnight of March 31, etc.
Profit and Loss (or Statement of Financial Performance)
The Profit and Loss report, or P & L, is officially known as the Statement of Financial Performance in NZ.
The Profit and Loss reports the revenues and expenses occurring over a period of time, such as the year 2016, the month of January, the six months ended September 30, etc.
Under the accrual method, the revenues reported on the P & L will be different from the amount of cash received, and the expenses will be different from the amount of cash paid.
As a result, a company could report a profit and yet experience a decrease in cash. It is also possible that the P & L will report a loss but the company’s cash actually increased.
This is why a Statement of Cash Flows is often presented whenever a company’s P & L and Balance Sheet are issued.
Budgets and Cashflow Forecasts
Budgets and cashflow forecasts are both essential for the accurate financial management of any organisation but they capture different information and are used for different purposes.
The main difference between a Budget and Cashflow Forecast is based on the type of transaction and the timing when receipts and payments will occur.
For example: a Budget will record the income when you have sent out the invoice whereas your Cashflow Forecast will trace it when you actually receive the amount in your bank account.
A budget is an estimate of your income and spending over a period (on an accrual basis). It helps you think ahead and plan your spending and sales efforts to get to where you want to go.
A periodic budget vs actual report is used to see how accurate the estimations were and may lead to the budget being redrawn. A budget should be reviewed and adjusted on a regular basis.
A budget is not used to monitor the amount of cash in the bank accounts.
A cashflow forecast details when the actual receipts and payments are likely to occur) on a cash basis). It reflects the actual income and expenditure from the bank accounts.
In this case income isn’t just cash from sales but other sources of money as well – including cash injections from bank loans, interest on savings and income from investments.
A cashflow forecast is a living document which should be reviewed regularly. If cashflow is tight some businesses will review and adjust as much as daily. If cashflow is not so tight then monthly is probably more realistic.
GST (goods and services tax) is a tax on most goods and services supplied in New Zealand by registered persons. It also applies to most imported goods, and certain imported services.
GST of 15% is added to the price of taxable goods and services.
If you’re a GST-registered business, you pay GST on your supplies and collect GST on your sales. The difference between these two is what you pay to Inland Revenue.
Who needs to register for GST?
You must register for GST if you carry out a taxable activity (the supply, or sale, of most goods and services in New Zealand and some specified imported services) and:
- Your turnover was $60,000 or more in the last 12 months or will be $60,000 or more in the next 12 months, or
- Your prices include GST.
As soon as any of these things apply to you, you must register for GST within 21 days.
Payments basis or Invoice basis or Hybrid basis
Using the payments basis you account for GST at the end of the taxable period that you make or receive the payment in. The payments basis is a good way to help businesses manage their cash flow. You only pay GST to us after you’ve received payment from your customers and you only claim GST for the purchases and expenses you’ve paid for. Around 78% of NZ businesses choose the payments basis for their GST accounting basis (IRD 2016)
If your turnover is over $2 million you can’t use payments basis, you have to use either invoice basis or hybrid basis.
Using the invoice basis you claim GST when you receive an invoice and you account for GST at the earlier of issuing an invoice or receiving payment. If your turnover is more than
This means if you’ve issued or received an invoice during a taxable period then:
- you pay us the amount of GST shown on the invoices you’ve given to your customers (regardless of whether you’ve received a payment or not), or
- you pay us the GST included in a payment you’ve received (even if you haven’t raised an invoice), and
- you claim a credit for the amount of GST shown on tax invoices you’ve received from your suppliers (regardless of whether you’ve paid your supplier).
Businesses using hybrid basis claim GST on purchases and expenses using the payments basis, and account for GST on sales and income using the invoice basis. In my experience it’s not in common use in small to medium businesses in NZ.
Provisional tax helps you manage your income tax by paying it in instalments during the year. It lets you “spread the load” and avoid having a big amount to pay at the end of the year.
If you had more than $2,500 of tax to pay (called residual income tax) from your last income tax return, you will have to pay provisional tax the following year. This usually happens when you earn income without having tax deducted during the year.
If you are running a business, you will need to fill out a tax return each year and send it to the IRD by the due date. When completing your tax return you will need to include income from all sources, and work out the tax on your total taxable income. Income tax rates are staggered so that the first $14,000 is calculated at the lowest rate, up to the highest tax rate being charged on any income over $70,000.
If you have paid provisional tax during the year you will have a residual tax amount to pay. Your tax liability for the year will be calculated and any provisional payments made throughout the year will be allocated to that. The balance you need to pay, or if you’ve overpaid you’ll get a refund.
Tax rates for Individuals and Sole Traders
|Up to $14,000||10.5%|
|Over $14,000 and up to $48,000||17.5%|
|Over $48,000 and up to $70,000||30%|
|Remaining income over $70,000||33%|
Tax rates for companies
28 cents in the dollar for income years 2012 and later.
Payroll Taxes and Deductions
Employers must deduct PAYE, including tax on schedular payments (formerly withholding payments) from payments made to staff or contractors.
Deductions may also be needed for student loan repayments, child support, KiwiSaver, or any benefits, bonuses or other allowances that you pay.