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Frequently asked accounting questions
As you can imagine, we often respond to a lot of accounting questions. Most queries are usually the same, or at least similar. So, I thought I would provide answers to the most popular ones.
How should I structure my business?
There are several options here. The most common are:
- Sole trader – a person who is the exclusive owner of a business.
- Company (including a look through company) – a legal entity representing an association of people. Or,
- Partnership (including a limited partnership) – an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests.
The option you choose will impact your taxes, liability, control, and even how you pay yourself or draw money from the business. Some options are more complicated than others and have different reporting requirements.
For example, as a ‘sole trader’, you can report all income in your tax return, and get away with avoiding financial reports. You will pay tax on this income at your marginal tax rate – an escalating sale – 10.5%, 17.5%, 30.0%, 33.0% to 39.0%. This is great if you are only earning income that is taxed at 17.5%, but things change when you cross the threshold of 30.0%.
By choosing to operate as a ‘company’, you will have a set tax rate of 28.0%, compliance requirements are more complicated, but you have limited liability. On the other hand, a ‘partnership’ where all profit (or loss) is split – perhaps 50/50 or 75/25 – you have unlimited liability and income splits may be less flexible.
It’s obvious that all structures have their pros and cons. So first, lay out your business goals. Then we can discuss the best options that support your business objectives.
Should I operate a separate business account?
This is a no brainer – YES! Operating a separate account allows you to track your business expenses and helps with providing records to your accountant at the end of the financial year. It is easier and more cost effective for you as a client if we can see what income and expenses relate to the business. When you don’t operate a separate account, business and personal can become blurred, creating headaches for both you and your accountant. Trust me, you don’t want to be bombarded with queries about transactions that happened years ago!
How do I record transactions?
There are a few options, but the one recommended is to use an accounting software that records all your information. We suggest using Xero. Why? Because it has so many options and pricing models, it allows your bank statements to come in automatically ready to code immediately and offers affordable cashbook options (must be purchased via your accountant) – this is a great option if you only want bank transactions and to do GST, but don’t want to hold assets or issue invoices.
Alternatively, you can manually record transactions using a spreadsheet, but you need to make sure all transactions are clearly marked with what they relate to – e.g., income, contractors, wages, stationery etc. This will reduce your accountants’ queries and speed up the process, therefore lowering your end of year fee.
How do I prepare for end of financial year?
Remember that if you have an accountant, then you have an extension of time (assuming you have not fallen behind in the past, but if you have, we can help). This means that you have a year to file your return – for example, 31.03.2022 financial year gives you until 31.03.2023, which is more than enough time to organise your year-end information. If you are using an accounting system – make sure all transactions are coded and bank accounts reconciled, all asset invoices are saved, all debtors and creditors are in the system, stock held is correct, and all payments are made. Provide your accountant with asset invoices, all PAYE workings, all GST workings, holiday pay information, stock reconciliations, loan and finance agreements, statements, and any investment reports (term deposits, share portfolio, investments).
I recommend that this is done as early as possible, post the end of the financial year. There are many reasons… to ensure it’s fresh in your mind, the work will be done, and it will be off your plate, to get an idea of your tax obligation early – including any provisional tax obligations for the future year, and to avoid the risk of not getting it filed on time – it’s a super busy time for accountants, so try not to be late to the party!
If you wish, we can provide you with information checklists, and offer advice on the best system for your business.
Should I hire an accountant?
YES! Of course. We can help you with so much. From advisory on tax, IRD audits, financial reporting, and bookkeeping, to valuations, due diligence, and strategy. Find out more about what we do here.
We enable you to do what you do best in business, save money, and be efficient. We’d love to have a chat and see how we can help you.