(DIY accounting – 5 minute read)
The short answer to the question in the title is ‘yes’. Yes you can do your own accounting for your own business. Just like you can do your own plumbing, automobile fixing and your own hair. There isn’t anything stopping you from doing so.
Of course, like any good DIY endeavour, doing your accounting yourself means that you will be making mistakes along the way. Not to mention, you will be dealing with tax authorities without the backing of a tax agent or accountant. This can be anxiety inducing for some individuals.
But if you are dead-set on NOT getting an accountant (because of price, your pride, etc.) here are some tips you should follow:
Use accounting software for DIY accounting
This is a common theme in our blog. We live in the 21st Century. Use the software! Stop living in the stone age and throw out that shoebox full of old receipts! Also, using Excel to keep track of finances does NOT mean you are a computer whiz. It means that you’re stubborn and resistant to change.
There is a whole new generation of cloud based accounting software which syncs up with your business’ bank accounts. Xero, MYOB, Pocketsmith and Quickbooks just to name a few. Some of them are even quite reasonably priced. Ditch that clunky old spreadsheet and embrace the future! Modern accounting software are specialised in financial reporting, tax calculation and accounts management.
Oh, yes, that ONE thing your 10 year old spreadsheet can do that modern accounting software can’t do? Yeah, you don’t actually need it to run your business. Join the cloud. Stop being a dinosaur.
Learn the difference between profit and cash
DIY accountants take note – there is a difference between profit and cash. Let’s quickly review:
Profit is income minus expenses. It is calculated based on a period of time. So if you are calculating your 12 month profit, you take your 12 month income minus your 12 month expense. And you pay taxes based on how much profit you make.
Cash is cash. Easy right? Cash is the actual, physical (well, mostly digital these days..) money that sits in your bank account. Cash is NOT the same as profit. It is true that gaining income and paying for expenses affects your cash balance. However, not ALL cash transactions are income and expense transactions.
If you received a loan, that is not income even though it increases your cash balance.
If you took money out from the business for your personal spending, that is not an expense even though it reduces your cash balance.
Paying back a loan reduces your cash balance, but again, NOT an expense.
This means that you could have $0.00 sitting in your business bank account at the end of the year AND still have to pay taxes. Simply because taxes are calculated based on profit, which is not affected by how much cash you have.
DIY accounting for your assets
Its important to know what your assets are. There are the easy ones like cash and accounts receivable. Then there are the trickier ones. For example, you can buy a car for your business. But that car is an asset, not an expense. You can’t claim it against your income to reduce your profit. You can, however, calculate depreciation on that asset (which is an expense). The same goes for other assets that you buy for the business.
Check with your local tax body for rules on whether or not a purchase is an asset or an expense. Generally speaking, buying a table lamp for your office is an expense. Buying a 100 kg bronze chandelier for your building’s atrium on the other hand, is typically seen as an asset purchase.
Loan repayments are not an expense
Yes, we’ve mentioned this earlier in the article. But it’s worth explaining why. A loan is a liability. When you receive cash from a loan, you increase that liability. When you pay a loan instalment, you’re paying off the interest portion and the principal portion of that loan.
Let’s take the following example:
ABC business takes out a loan for $10,000. They receive $10,000 to their bank account and they code this $10,000 transaction to their loan account.
2 months later they make the first instalment payment against the loan. They pay $1,000 of which $900 is interest and $100 is principal. The $900 is coded to their ‘interest expense’ account and the $100 is coded to their loan account (because it reduces the amount that they actually owe on the loan).
Ok, so maybe part of the loan repayments ARE an expense – the interest portion of it. The principal portion of loan repayments are NOT an expense and should be offset against the loan itself.
Happy DIY accounting!
We hope that these tips help you get a better grasp of your business finances. Just remember that at some stage, your business is going to deal with some really complex stuff. When it feels like it is getting too much, you should get in touch with an accountant who can help sort things out for you.
In the meantime,
Happy DIYing!