Bizstartup.ie - NewsGetting to grips with accounting

Starting a new business is a daunting experience for anyone as they tackle new areas of the corporate arena for the first time.

For many, one such area is maintaining accounts, which even the thought of is enough to bring them out in a cold sweat. By preparing some basic systems and files, however, the process of maintaining accurate books and records for a new business can be done regularly and simply. It’s important to note that a director is obliged by law to maintain accurate books and records for their company.

There are some fundamental matters that need to be put in place at the very start of commencing your new business:

Accounting system

Depending on the nature and volume of transactions you envisage for your business the accounting system you select can range from a number of simple excel spreadsheets to an off-the-shelf software package, which are often cheap and easy to use.

The core records that need to be maintained are:

• sales ledger recording all sales invoices
• receipts book for cash received
• purchase ledger for maintaining purchases invoices
• payments book for EFT (electronic funds transfer), cheque and cash payment
• cash/bank control account.

These five core data sheets will enable you to prepare the basic statements of your business performance – a profit and loss account and a balance sheet.

More detailed statements of particular areas of the business that need to be prepared regularly from the information above are the debtors’ ledger, detailing what money is outstanding from creditors; the creditors' ledger, including the amounts owed to suppliers; and finally a bank reconciliation that adjusts the bank balance for uncleared lodgments and cheques at a period end.

Filing system

There is an obligation to maintain the source data of the business accounts for a six-year period. You should develop a filing system suitable for your business to store original sales and purchases invoices and statements, bank statements, cheque stubs and correspondence, for example, in chronological or alphabetical order. This will assist in any disputes with suppliers or customers and also in the preparation of year-end accounts so your accountant can verify the information recorded on your core records above easily and quickly – essential to keep the accounting fee low!

Accounts preparation

While there is only an obligation to prepare accounts annually, either to calculate your taxable income as a sole trader or to comply with taxation and Company Registration Office filing requirements as a company, annual accounts are not much help in running and managing a business because:

• they are too infrequent – a year is a long time not to know what is happening to the finances of your business
• they are prepared to a different format that often is not helpful for decision-making.

It is advisable to routinely prepare and analyse management accounts for the business. Ideally this should be done on a monthly basis, so you have a clear idea of the turnover being generated, the cumulative costs, outstanding debtors and creditors and the ultimate profitability of the business – fundamental in the early stages when cash is tight and the business is becoming established. These accounts should be benchmarked against the budget included in the business plan.

Tax registration and returns

Every business will have a requirement to register for tax, quite probably under a number of different tax heads. The Irish tax system works on the self-assessment basis, so it is the business owner’s responsibility to maintain accurate records and submit this to Revenue in accordance with the prescribed filing deadlines.

Income tax/corporation tax

Depending on whether your business is a sole trader, partnership or limited liability company, it will need to be registered with Revenue for either income tax or corporation tax. The profits generated by the business will be taxable at income tax rates (20pc up to 41pc plus income levies, etc) in a sole trade or partnership while company profits are chargeable to corporation tax at 12.5pc. An annual return is made for both of these taxes.

Value Added Tax

In most businesses, registration for VAT will be required. With certain exceptions, VAT paid on purchases is recoverable, while you must account to the Revenue Commissioners for VAT you charge on sales.

This means that, if the amount you pay for purchases includes VAT, you can reduce the cost to your business by the VAT amount. Similarly, you must deduct VAT from your sales before accounting for them in your business. A bi-monthly VAT return and payment needs to be completed and submitted to Revenue.

PAYE/PRSI

If your business is employing staff, it will need to be registered for PAYE/PRSI. As an employer, it is your obligation to calculate and deduct the appropriate amount of income tax, levies and employees’ PRSI from your staff’s wages and forward this to Revenue on a monthly P30 return. There are specific payroll software packages available to assist with this process, which is recommended for a business with numerous employees.

Conclusion

Essentially, establishing and maintaining your accounting system comes down to understanding what you need to record, developing a system that works for your business and ensuring you dedicate the time necessary to keep it up to date. Ultimately, it is an exercise that you will get more out of than you put into it as, if your information is current and correct, you will be well informed on your business performance and will be in a position to make financial decisions based on accurate information.  

Chris Ball is corporate finance director with Russell Brennan Keane, a business advisory and accountancy firm with over 50 years’ experience from offices in Dublin, Athlone and Roscommon