Accounting 101: The Essential Guide for Small Businesses

Whether you’re just starting or have been running for some time, understanding finance and accounting is critical for long-term success. This essential guide will break down everything from basic bookkeeping to setting budgets to how to track your financial progress – all tailored with an active conversational tone, specifically for those new to NZ accounting techniques! With the helpful knowledge provided here, you’ll have no trouble navigating through even the most complex international account systems. So let’s get started!

If you are looking to launch a business in New Zealand, it is essential that you first identify with the correct type of entity – whether it be a sole trader, partnership, company, trust or non-profit. This will determine what Inland Revenue Department (IRD) number should be used for your future transactions. Furthermore, opening a business account will make it easier to differentiate between your own personal expenses and those of your business.

Bookkeeping best practices

Bookkeeping is the foundation of good accounting, so getting started on the right foot is important. In basic terms, bookkeeping is the process of recording financial transactions. This can include anything from sales and purchases to payments and receipts. By tracking these transactions, you can create an accurate financial record which can then be used to make informed business decisions.

Things to bookkeep

Keeping books is a crucial step in the accounting process and can be done by transferring information from source documents, such as invoices and receipts, into various categories like cashbooks to record payments out and incoming; petty cash books for minor transactions; wage books to document employee wages.

• A cashbook: records all payments (for example, EFTPOS, credit card and direct credit). It shows different types of sales and income, purchases and expenses under the appropriate headings.
• A petty cash book: records all the small expenses made by a business, making it easier to separate your business and personal expenses (for example, milk, coffee, postage).
• The wage book: records hours worked and wages paid to employees. To ensure accuracy and completeness on your pay stubs, the following items should be included: total gross earnings (amount before PAYE is taken out), amount with PAYE deducted, non-taxable allowance, Kiwisaver deductions & contributions (gross/net employer contribution tax), child support payments and student loan repayments. Any extra loans requested, payroll donations and net wage taxes should also be accounted for.

Develop your system

How do you want to bookkeep? This is the most important step. You need to decide what system you want to use and how it will work for your business’s needs. Options include Excel spreadsheets, invoicing software, cloud-based tools such as Xero or QuickBooks Online, or a manual bookkeeping system (i.e. paper receipts, bank statements, and journals).

There are two main types of bookkeeping: cash basis and accrual basis.

• Cash Basis: Ideal for small ecommerce vendors, maker businesses, products-on-demand outlets and those who use marketplaces like Amazon. Cash-basis bookkeeping records all transactions when money is received or spent.
• Accrual Basis: Bookkeeping records transactions when earned or incurred, regardless of when the cash changes hands. Accrual accounting is often called the traditional bookkeeping system because it’s the standard that most financial institutions and key stakeholders, like lenders, auditors, investors or tax planners, rely on to assess a company’s fiscal health. Utilising this method gives them an up-to-date insight into your revenue cycle and profitability.

Set realistic budgets and track your progress

Creating a budget is one of the best ways to control your finances. It allows you to plan for short-term and long-term expenses and track your progress over time. Several different software packages can help you create and manage your budget, so there’s no excuse not to get started!

Tracking your expenses

Accurately budgeting requires understanding how much money enters and exits your account regularly. Begin by noting your expenses since most will be recurring.

It is important to properly document any expenses you use for personal and business purposes, especially if you’re working from home. For example, if you have one cellphone, simply track the percentage of time it was used for your business ventures and claim a deduction accordingly. The same applies when spending on WiFi or gas mileage costs – keep all relevant records and a logbook detailing where your trips were taken and the purpose behind them; these will be 100% deductible!

Some other examples of recurring expenses might be website hosting fees, advertising, business banking, payment fees, inventory purchases, and so on.

Schedule time to budget

Whether you’re budgeting weekly or bi-monthly, it’s good to take time out to budget. This ensures you can keep on top of your finances and that you live within your income limits. Start by noting down all sources of income, then subtracting any fixed expenses such as rent or inventory, shipping, and advertising. From there, identify areas where spending could be reduced and make sure to allocate a percentage of your income to savings.

All about taxes

Understanding the income tax system will help you get the most out of your money by allowing you to properly report all earnings and deductions.

In your first year of business, if you make a profit, taxes will need to be paid. Although no payments are due until February 7th or April 7th (if utilising an extension) of the following year, income earned during that initial twelve months is subject to taxation and should be reported accordingly. As you enter subsequent years in the business world, it’s important to remember that during the year you may be required to pay income tax – also known as provisional tax.

Apply for early payment discounts

You can apply for a 2% discount on your business tax return if you pay it before the due date and qualify if you’re operating as a self-employed individual or a partner in a partnership. Read more about early payment discount requirements here.

Balance date

As the accounting year draws to a close on the 31st of March, ensure all your accounts are precisely maintained and up-to-date. This date is known as the balance date and is essential for businesses of every size.

Your return form to use for income tax will change depending on what business type you have chosen. To learn more about income tax and provisional tax, read more here.

If you’re planning to sell internationally online, you must know what local taxes apply to each country you’re selling to.

By keeping thorough accounting records, knowing the requirements of your business type, and understanding how income tax works, you can ensure that you can comply with all legal obligations and get the most out of your money when it comes to taxes. It’s always worth getting professional advice if you are uncertain about any of these topics.

Make use of external resources

There is a lot of helpful information about accounting – you just need to know where to find it! External resources such as accountants, bookkeepers and online tutorials can provide invaluable advice and support when managing your finances. So don’t be afraid to ask for help when you need it!

Only 30% of small businesses have an external accountant. Small business owners are often left to do their bookkeeping and accounting – which can be overwhelming!

Utilising the help of an external accountant or bookkeeper can ensure that all your accounts are kept in check and up-to-date. Not only will they take some of the burdens off you, but they will also provide you with the necessary insights regarding tax returns, financial forecasting and budgeting.

During the pandemic, small business owners were tasked with obtaining government relief. Studies found that more than half of them sought help from their accountant, with professional advice being deemed an imperative part of navigating this difficult process.

Accounting software such as Xero, QuickBooks and MYOB are all equipped with the ability to generate and file tax returns for you. If you aren’t already using such software, it is highly recommended you either seek the advice of a Certified Public Accountant (CPA) or find specific accounting partners like a bookkeeper, tax preparer or tax planner.

Of course, regardless of whether you choose to do the accounting yourself or hire a professional, it’s always good to understand more about the finance side of your business. To dive deeper into the intricacies of taxes, doing small business accounting courses like free seminars hosted by the Inland Revenue Department (IRD) will help you better equip yourself.

Stay organised and keep track of growth

It’s important to stay organised and keep track of your business’s financial growth. Make sure you are regularly monitoring your finances and making adjustments where necessary. Keeping a record of all income, expenses, and taxes paid can help you make smart decisions about where to invest in the future and plan for any potential bumps down the line.

If your annual income reaches $60,000 or more, registering for GST is mandatory. On all of your sales and earnings, you must implement a 15% charge straight to IRD. Nonetheless, GST can be claimed back on any eligible purchases and expenditures.

Conclusion

Running a successful business is about more than just having a great idea. Understanding the basics of accounting and taxes is essential to ensuring that your business runs smoothly and efficiently, allowing you to focus on the other aspects of running your business. If you familiarise yourself with the basic requirements of tax returns and understand what resources are available, you can ensure that your business is profitable and compliant.

By following this guide, you can set yourself on the right track towards financial success in your small business. Stay organised, keep track of your growth, use external resources and always get professional advice when necessary! With some time and effort, you’ll be able to keep your financials in order and ensure the success of your small business.