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Business Finance 101 – The Accumulated Depreciation Asset account on Balance Sheet

Business Finance 101 – The Accumulated Depreciation Asset account on Balance Sheet

The Accumulated Depreciation Asset account on Balance Sheet

The Accumulated Depreciation account is found in the assets on the company’s balance sheet and reports the amount of an asset’s cost that has been depreciated (written off) up to the date of the balance sheet. The asset’s original cost is recorded in another asset account eg Motor Vehicle at Cost, Office Equipment at Cost, Plant and Equipment at Cost.

They are shown together with the Assets at Cost account debited when assets are posted there and the Accumulated Depreciation is credited each time that Depreciation Expense is debited (usually for small business depreciation is calculated at year end by the accountant). Since Accumulated Depreciation will have a continually increasing credit balance it is referred to as a contra asset account.

As an example let’s say that at the beginning of the current year a company’s asset account Plant & Equipment has a balance of $50,000 which will be the at-cost amount (net GST) from the previous year. From the time of purchase until the beginning of the current year the related Accumulated Depreciation account has accumulated a credit balance of $25,000 over the past 3 years. The Balance Sheet will also report the net of $50,000 less $25,000 leaving a Plant & Equip balance of $25,000 which will be used to calculate the next depreciation allowable.  So at the end of the current year the company debits Depreciation Expense for $7,500 (if that is the calculation at 30%) and credits Accumulated Depreciation Asset for $7,500. At the end of the current year the credit balance in Accumulated Depreciation will be $32,500.

Start of Year     

Plant & Equip                 $50,000 is constant unless more equip purchased

Accum Deprec              -$25,000

Total Plant & Equip        $25,000

End of Year

Plant & Equip                  $50,000

Accum Deprec               -$32,500      has $25,000 plus $7,500 (if that is is                                                             the depreciation calculated)

Total Plant & Equip        $17,500

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Cashflow Tips – Ways to raise cash for business – Some business cashflow tips

Cashflow Tips - Ways to raise cash for business – Some business cashflow tips

Cashflow Tips – Ways to raise cash for business – Some business cashflow tips

Handy ways to raise cash for business – some cashflow tips from an Australian Entrepreneur, Brad Sugars

1.  Know your expenses when discounting
Although discounting — through coupon sites like Groupon and BuyWithMe or even on your own — can help you attract new customers, selling anything at a loss won’t help you generate a positive cash flow.
My view? Never discount. But if you do, know the costs and impact of what you’re offering and be prepared for the fallout. Among other things, you’ll need to know your overall cost basis — that is, what you paid for something. You should also know your how much you should ideally charge, the cost of your offer and the profit margins on your product or service. How else will you know if your discount has you breaking even or operating at a loss?

2.  Bundle products and services
Even though discounting isn’t always recommended, adding value is. By creating bundles of products or services, for instance, businesses can inject tremendous amounts of perceived — and tangible — value into their offerings for very little cost.
A good example is the maintenance agreements some car manufacturers are now providing with the purchase of a new car. Not only does that type of offer help allay a major concern or frustration customers have – paying for a breakdown or time lost at the dealership – it also offers real value in terms of limiting out-of-pocket maintenance costs.
Put more simply, you can increase your price point initially since you’ve helped lower a perceived risk by offering something as basic as a guarantee.

3.  Create a back-end product or service
If you know your initial offer to reel in new customers won’t be profitable (loss leader), find ways to create higher price points on back-end products or services. Perhaps the first hour of catering is free, but subsequent hours shoot up in price. Or maybe an attorney will agree to draft your will for less if she thinks you’re a likely candidate for estate-planning consultations in the future.

4.  Encourage repeat business
If you’re in a volume-driven business like retail, landing repeat shoppers is your holy grail for cash flow, profit and growth. In most cases, you won’t start to profit on a customer until the third, fourth or even fifth transaction. For this reason, you need to devote your efforts toward getting customers coming back — and more often.
Consider loyalty programs, VIP offers and other frequent-shopper programs, which can be ideal vehicles for systematizing repeat business. Also keep in mind that the word “free” is a popular incentive among shoppers, and the costs of funding a freebie may easily be covered as long as you’re dealing with excess inventory or low-cost, but valuable add-ons.

5.  Pre-sell products or services
For owners who want to encourage sales sooner, pre-sell your products or services. You might couch the pre-sale as a way for consumers to plan for their future or get a jump on shopping. You can also offer to take old, out-dated products back at a pre-arranged price.

Taken from Entrepreneur article HERE

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Business Tax Tips – Starting a business – The tax and super responsibilities

Business Tax Tips – Starting a business – The tax and super responsibilities

Starting a business – The tax and super responsibilities

Starting a business? Do you know your tax and super responsibilities? The ATO (Australian Tax Office) have many things to support you with the running (and start-up) of your business.

Here is what is available with some explanation –

From ATO site

When you start a business, there are tax and super responsibilities you need to be aware of, including:

  • the tax implications of your business structure
  • whether you’re entitled to an ABN
  • registering your business
  • records you need to keep
  • deductions you can claim.

We provide information about the key things you need to know and do when starting your own business.

Find out about:

For your tax and super basics, this video is a good starting point:

AKP link 22-11-18

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Business Finance 101 – How can a company have profit but no cash!

Business Finance 101 – How can a company have profit but no cash!

How can a company have profit but no cash!

How can a company have a profit but no cash to pay its bills? And what does it mean when accountant’s say “Profit is not Cash”?

If you have cash sales (cash accounting)  profit will usually correlate closely to the actual cash you have.

But if you invoice (accrual accounting) clients for goods and services, the timing of when customers pay has an effect on the cash the business actually has.

Not everyone pays on time, but if they did you would have regular cash flow, and only be delayed by the initial terms at the beginning, eg 7 days, 30 days. Regular payments will mean regular flow of money to cover your expenses.

What if clients are late paying? Then the debtors on your balance sheet will grow (that is where the invoice “waits” for payment) until the client pays.

As an example, in our previous post explaining Profit and Loss, see HERE we gave an example of Profit and Loss resulting in $15,000 profit.

Business - Profit & Loss

But what if you were only paid half of the sales at the end of the period (which is more close to reality – eg most pay the next month or two…)

Sales (invoices)                                   $100,000

But only paid (actual cash)                  $50,000

Which goes to bank (in assets)

Net Left                                                $50,000

Which sits in debtors/receivables (in assets)

NotePROFIT would be same in accounting terms,

Note but CASH Profit would be -$35,000 (negative!)

That is, if you still had paid all your bills, you would still have to find $35,000 to pay them – see here –

Business Cash Profit

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Cashflow Tips – 5 ways to improve cashflow business success

Cashflow Tips - 5 ways to improve cashflow business success

Cashflow Tips – 5 ways to improve cashflow business success

Here are 5 ways to help improve cashflow business for success and get it under control – remember it is an on-going monitoring that keeps you on top – measure and tweak, measure and tweak…!

One of the things many business find a burden is that cashflow can easily get out of hand and several studies suggest that financial miss-management is one major contributor to business failure.

Take action on these –

1.       Look at who owes you – WEEKLY.

Check your debtors/accounts receivable report every week – get onto those tardy payers – send Statements a minimum every Fortnight! A month is too big a gap and easy to slip the mind…

2.       Plan for highs and lows.
Be aware of possible lean cashflow patches coming up and plan for them!. Avoid major purchases from your business’ working capital unless you are sure you have cash to cover it. A cashflow budget will help you see this – eg when revenue is down on forecast you expected (eg the average monthly required, or based on same time last year, or certain % growth if that is the current trend).

3.     Have finance products working to your benefit.
Overdrafts, premium funding, lease facilities and cashflow funding products can all be excellent tools to help boost a business’ cash. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in, which is the best way to handle credit cards!

4.     Avoid penalties.
Keep on top of credit cards, taxes and compliance to save the cost of fines… and the stress!

5.     Keep your hands out of the till.
Make cash drawings for personal purposes as minimal and follow conservative cashflow forecasts. Take a weekly wage for yourself so it’s easier for the bookkeeper/accountant, and gives stability to regular expenses and drawings so you can PLAN better!

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Bookkeeping –Top 7 ways to organise your accounting

Bookkeeping –Top 7 ways to organise your accounting

Bookkeeping –Top 7 ways to organise your accounting

When it comes to running your own business, keeping your accounting in-order must be an achievable goal. That said, there are times where a little lack of discipline can cause some headaches down the track.  Rather than getting yourself in a bind later, let’s have a look at some simple steps you can take to help keep your accounting organised.

1. Bank Accounts – Separate and Secure

Mixing up business and private transactions in your bank accounts is a recipe for disaster. Always use separate business bank accounts for your business transactions; your private bank accounts should be kept wholly for private transactions. The cost of business bank accounts these days is very low, and there is no excuse for not having a business bank account or accounts. Get in the habit of making regular transfers of drawings from your business to your private bank account.

2. Cash payments – Avoid cash, where possible

It’s best not to use cash for your business transactions, as losing the receipts is common (and extra work) but if you use it in an emergency, then reimburse yourself using a suitable expense claim (to document the transaction, which analyses the expenses between expense categories) so that again, all business transactions are recorded and the GST is safely captured.

3. Credit Card accounts – Stay on top monthly

If you use a credit card for your business that is absolutely fine, but you should always pay your business credit card bills from your business bank account — that way no business transactions are omitted and all GST is captured. Similarly, if you use the wrong Eftpos card by mistake (such as the one for your private bank account) reimburse yourself documenting using a suitable expense claim document or simply transferring the correct amount to your personal bank. Then there is a clear record in your accounts.

4. Bartercard – Managing transactions

If you must use Bartercard, then it’s so much easier if you use live bank feeds to record all the transactions on the Bartercard statements because there are a lot of them (especially the fees and charges). Otherwise, it’s a total pain from the bookkeeping point of view. (Where not available with your software version, here is how to enter the transactions).

5. Accounts Receivable – Implement process to report and remind methodically

Always ensure you have a system for recording (good accounting software) whether your customers, clients or patients have paid your accounts receivable. Of equal importance, it’s important to track how old the debts are if unpaid so you can chase them up promptly. Your system should also record any special arrangements to pay over time or the excuses given for non-payment. It doesn’t have to be sophisticated, and if you are not using your accounting software to issue invoices, just write on the face of the invoice whether or not they have been paid, filing separately those paid from those awaiting payment. It’s surprising how many business people do not know who owes them money, which is just plain crazy considering how hard it is to earn the money in the first place!

6. Accounts Payable – Don’t forget about!

Similarly, always have a system for your accounts payable. I’ve had two clients pay me twice this month for the same invoices, which is not only a hassle for me because I have to repay the money, but it is risky for them as not all suppliers are as honest as I am! It’s best to be totally organised with your accounts payable and pay them on the 20th of the month so that your suppliers know when they’re going to be paid and you know when you’re going to pay them. Research shows that the most successful businesses pay their bills on time!

7. Paperwork – Organise and digitise where possible

Keep all your business paperwork in an orderly fashion. Nowadays you can scan on the paperwork and keep this electronically, either on your accounting software or in a simple electronic filing system using the US date system (eg 2 May 2018 written as 180502) so that everything is filed in chronological order. Keep a separate e-folder for each month and year. If you’re old-fashioned you can keep the paperwork in physical form, but now so much arrives electronically it’s pretty daft printing it out and wasting all that ink and paper!

Conclusion

Keeping your accounting organised will save you time and money, and also help you make your business more successful. Perhaps even more important, it should result in a whole lot less stress!

Based on the MYOB software blog at http://myob.com.au/blog/7-tips-for-keeping-your-accounting-organised/

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Business Tax Tips – GST on Hire Purchase – How it works and how GST applies

Business Tax Tips – GST on Hire Purchase – How it works and how GST applies

GST on Hire Purchase – How it works and how GST applies

Instead of paying the full price upfront for a high purchase asset such as equipment or vehicle, a business can acquire assets by entering into hire purchase to pay for and use goods over a period of time – then they need to account correctly for the GST on hire purchase. Next they need to know how GST applies. Here is some information from the ATO website to assist, including links for further information –

From the ATO website at this current date

Under a hire purchase agreement, you:

  • purchase goods through instalment payments;
  • use the goods while paying for them;
  • do not own the goods until you have paid the final instalment.

Where the supply of goods to you under a hire purchase agreement is a taxable supply, the price you pay for the goods includes GST. If you use the goods in your business, you can generally claim a GST credit.

You treat a hire purchase agreement as a stand-alone sale or purchase in a tax period – that is, the same rules apply as they would for any sale and purchase of goods under an ordinary sale agreement. A hire purchase agreement is not treated as a sale or purchase made on a progressive or periodic basis.

Paying GST on hire purchases

If you enter into a hire purchase agreement on or after 1 July 2012, all components of the supply made under the agreement are taxable, whether or not the credit component is separately disclosed. Any associated fees and charges, such as late payment fees incurred under the terms of the hire purchase arrangement, are also subject to GST.

If you enter a hire purchase agreement before 1 July 2012, and the supplier:

  • separately identifies and discloses the interest charge to you, you don’t have to pay GST on the interest as it is a financial supply;
  • doesn’t separately identify and disclose the interest charge to you, you must pay GST on the total amount payable under the contract.

The interest charge is ‘disclosed’ to you if the supplier tells you any of the following in the hire purchase agreement:

  • the dollar amount of the credit charge;
  • the interest rate;
  • the formula or formulas used to work out the credit charge amount;
  • any other information sufficient to work out the credit charge amount.

A hire purchase agreement entered into before 1 July 2012 continues to be treated in this way even if there’s a subsequent change to the agreement, provided the change doesn’t result in a new agreement. That is, the supply of a separately disclosed credit component will continue to be an input taxed financial supply.

Claiming GST credits on hire purchases

If you account for GST on a cash basis.

As all components of a hire purchase agreement entered into on or after 1 July 2012 are subject to GST, you can claim one-eleventh of all components, including the credit component and any associated fees and charges that have been subject to GST under the agreement.

For hire purchase agreements entered into on or after 1 July 2012, you can claim input tax credits up front instead of waiting until each instalment is paid, in the same way as you would if you accounted for GST on a non-cash basis.

For hire purchase agreements entered into before 1 July 2012 you can claim one-eleventh of the principal component of each instalment in the period you pay it. If the supplier provides regular accounts or statements that show the principal and interest components for each instalment, you must use that information to work out GST credits in the relevant tax period. If you don’t know the principal component for each instalment, you need to take reasonable steps to find out from the supplier.

If you account for GST on a non-cash (accruals) basis.

You can claim the full GST credit on your hire purchase agreement in the tax period when either:

  • you make your first payment;
  • a tax invoice is issued to you, provided you haven’t already made your first payment.

For agreements entered into before 1 July 2012, you claim a GST credit only for the principal component of the agreement, not the credit component. 

Example: Hire purchase agreement entered into on or after 1 July 2012

Albert’s Abattoir (Albert) is registered for GST and reports GST quarterly.

Continuing the example above, Albert decides to buy a second freezer on hire purchase from Friendly, …on 20 July 2012.

Albert buys a freezer from the Friendly Freezer Store (Friendly) for $33,000 through a hire purchase agreement. Under the terms of the agreement, which separately discloses the interest charge, Albert will repay $670 per month for five years. The total payment will be $40,200 ($33,000 plus $7,200 interest).

Because the agreement is entered into after 1 July 2012, both the principal and interest component of the supply are subject to GST.

The freezer is delivered on 7 August 2012 and Friendly notifies Albert that the principal component of the first instalment is $550. This means the credit component of the first instalment is $120 (670-550).

Albert can claim a GST credit for the GST included in both the price of the freezer and the interest charged. As the agreement was after 1 July 2012, the interest is not a financial supply (even though it is separately disclosed).

Whether Albert accounts for GST on a cash or non-cash basis, he can claim a GST credit of $3,654.54 (one-eleventh of $40,200) for the tax period ending 30 September 2012, as this is the period in which he pays the first instalment.

(To see a pre-1 July 2012 Example: hire purchase agreement entered into before 1 July 2012, see the webpage)

See also:

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