Accounts receivable and accounts payable are the two main factors that affect your business cash flows. Managing both is an important skill that needs to be mastered for an effective financial stability. It also helps boost the overall performance of the company and avoid cash problems. Properly tracking accounts receivable and payable involve the creation of invoice on time, delivering the receipts, tracking the shipping orders and maintaining financial transactions. Here are a few tips that will help you in managing accounts payable and receivable in an effective and efficient manner.
1. Organize Your Transactions
Be organized and send out invoices immediately after the transaction has been completed. For a regular delivery of goods or when goods are taken on credit, send the invoices when they are due. It may be difficult to remember all the transactions for which payments are expected in future. Hence, make sure you keep a proper record system and organize all your transactions. See to it that your accountant effectively organizes all your transactions as your books contain valuable information and prevent you from forgetting or making incorrect invoices. For businesses that have multiple transactions daily or weekly, it is difficult to track different transaction details from different vendors. In such cases, it is strongly recommended that you prepare books of account. In case you need help in creating your books of account, then consult a professional bookkeeping firm to assist you in this matter.
2. Establish Timelines
When you send out invoices, be clear about the payment deadlines and penalties like an interest charge for overdue accounts. It will not only ensure that your debtors pay on time but also prevent bad debts. When establishing timelines, keep it for a short time. The aim should be to close out a transaction as early as possible.
At the same, establishing timelines can also ensure that you are paying your debts on time. You do not attract any interest rates and plus, establishing timeless will help you have sufficient funds readily available as and when the payment dates are due.
3. Initiate a Credit Policy
This should be a planned company process and not just decided by your accountant. When you consider establishing a credit policy for your company, keep these following factors in mind:
4. Use Automation for Tracking Transaction
Tracking can be a painstaking process especially when you do it manually. For a systematic process of tracking your daily transactions, use accounts payable and receivable software to automate transactions. Your transactions will be recorded in real-time and plus, it will allow you to avoid delinquency or interruptions in workflow. Tracking and managing accounts receivable and payable is important not only for assessing effectiveness but also to help the owners to make smarter financial decisions. Therefore, use automation as it will save you time and errors will be avoided.
Managing accounts payable and receivable can indeed be a challenging task especially when your business is growing. If you are facing any difficulty to manage both, then contact a professional to help you manage your accounts in a manner that will improve your working capital and finances.
A report of all the costs associated with the production, administrative, financing, selling and distribution of a product is called as cost sheet. Preparation of a cost sheet is done to calculate the margin or profit of a product. Also, it is used as a basis while setting the price of similar products in the future. Cost sheet should be prepared by every business before it starts with the operations. The importance of cost sheet is explained as follows.
Determining Selling Price
Cost sheet helps in fixing the selling price of a product or service. It is essential to prepare a cost sheet for determining the individual costs which lead to determining the cost of the product or service. Once you know your total cost, add the margin or the profit percentage to the total cost in order to arrive at the selling price.
Facilitates the Managerial Decisions
Fixing of selling price is aided by the cost sheet and so cost sheet help managers in making management decisions such as whether to produce or buy a component, what prices of goods can be quoted in the tender, whether to retain or replace an existing machine, how to reduce costs, etc.
Disclosure of Profitable and Unprofitable Activities
Since cost accounting calculates individually the cost, selling price, and profitability of the product, the separation of profitable and unprofitable activities or items becomes easy. So if the cost of any product is exceeding than the revenue, then it helps the decision-making to identify and make decisions whether they need to continue with the product or not.
Find Out Exact Cause of Change in Profit
Cost sheet keeps a track of all your cost. As a result, you are able to identify the cause behind a change in profit. If the wages of labor is increased, then your profits will decrease. Similarly, if the price of raw materials is reduced, your profits will increase. Therefore, you can determine which cost element has led to change in profits and keep a check on all your business expense. Moreover, cost sheet can be used to determine the profitability of each department within your organization. This helps you to know which department is performing better and what needs to be done to improve the profitability of other departments.
Preparation of Budget
Companies can prepare a budget with the help of cost sheet. You can prepare the budget by using the current or previous year’s data. Based on your existing cost sheet, you can make estimates of your cost for the next financial year. It helps you to be prepared and make the necessary arrangement of funds for costs of the next financial year. For example, if you expect factory overheads to increase by 10%, then accordingly you can make the arrangement of funds to cater to the increase in the cost of factory overheads.
Cost sheet can prove to be extremely beneficial in taking future business decisions. Now that you know the importance of cost sheet, it is advisable that you contact a professional accountant who will help you understand the implications of different cost on your business and prepare a cost sheet in order to enable you to make right business decisions.
Do you find it difficult to formulate your balance sheet? Do you get confused between what are assets and liabilities? Is it that you always tend to classify your assets and liabilities in the wrong manner? Although assets and liabilities seem easy to classify, they can be quite confusing once you actually start recording them in your books of account. This article will help you in classifying your assets and liabilities and so, you will be able to manage your balance sheet in a much more efficient way. Listed below are the differences between assets and liabilities.
Assets are those items which are the property of the company. They can tangible as well as intangible. Tangible assets include those items which can be seen such as plant and machinery, building, land, etc. Intangible assets include goodwill, investments, patents, etc. Assets are what you own and are you receive benefits from these assets at present as well as in the future. For example, when you purchase a building, its benefits are enjoyed in the current financial year as well as in the coming years.
Liabilities are those items for which you are liable to make payments. These liabilities have to be paid to the people you have borrowed money from or taken loans or credit. Usually, a company obtains capital from the general public in the form of shares and from financial institutions in the form of loans. These liabilities are called termed as capital. Other types of liabilities include salary and wages, interest on loans, payments to creditors where goods are taken on a credit basis for a specific period.
Current Assets and Liabilities
Assets which can be converted into cash quickly (usually within one year) are called current assets. They include cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other liquid assets that can be readily converted to cash. Current assets are important to the business as they can be readily converted into cash for paying ongoing business expenses or day-to-day operations.
Current liabilities are bills which are due and have to be paid within the current financial year. Short- term debts, accounts payable, accrued liabilities, and other debts are examples of current liabilities. The working capital which is the capital required for the day-to-day expense is calculated by deducting current liabilities from current assets (Working Capital = Current Assets – Current Liabilities). A positive working capital indicates that the company is highly efficient and has a good short-term financial health.
Non-Current Assets and Liabilities
An asset whose complete value or benefits will be enjoyed over a period of years is called a non-current asset or fixed asset. Thus, the value of such assets is higher than current assets. Examples of non-current assets include investments, property, plant and equipment, and intangible assets such as goodwill, brand recognition, intellectual property, etc.
Liabilities which are not due within the current accounting year are called long-term liabilities or non-current liabilities. They include long-term borrowing, bonds payable, and long-term lease obligations. Non-current liabilities are important for investors as they want to check whether the company has more capital in the form of debt or borrowing than its owned capital. If the majority of the capital is in the form of debt, then the cost of capital increases as they need to be regularly serviced by interest rates.
You need to classify current assets and liabilities, and non-current assets and liabilities in the right manner in order to get a true and fair view of your financial statements. You may tend to make errors in your financial statements if you do not know what are assets and liabilities and how to classify them. However, if you want to avoid errors in classifying assets and liabilities, it is advisable you consult a professional accountant who will prepare and maintain books of account for your business without any errors.
Inventory management is important for a business in order to maintain a good cash flow. The practice of looking after and controlling the orders, storing and delivering the goods is known as inventory management. If you do not have an inventory management system, it may lead to overstocking or understocking. Also, you may end up having a low cash flow. The importance of inventory control system cannot be ignored and so, here are a few reasons why inventory control system is beneficial for your business.
Improves the Accuracy of Inventory Orders
Maintaining a proper inventory system will help you know how much stock is available in your warehouse. You will have an accurate knowledge of the items in your inventory. Once you know how much inventory is stored in the warehouse, you can send the required number of inventory to the retail store as and when you receive the order. This will help you have a stable count for the stocks in the retail store and your warehouse will have sufficient stocks to cater to the orders.
Lost Sales can be Avoided
Lost sales can be avoided if you maintain an accurate inventory management system. For instance, if there’s no count of the level of inventory in your warehouse, then you may end up understocking. When there’s a demand for your product from the retail store, you may not be able to fulfill the order. As a result, the retailers or customers may approach your competitors and you lose out on sales. However, this can be avoided if you have a record of the level of inventories at your warehouse.
Deliver Before Time
Late deliveries on a regular basis indicate you have a poor customer service. Making a customer wait for the shipment which has been sent by the vendor is also a sign of poor customer service. An inventory management system helps you track where your order has reached and in case, there’s a delay, you can make the necessary arrangements by contacting other warehouses to deliver the products.
Increases Efficiency and Productivity
Having inventory management devices such as barcodes will help you record the inventory on a system instead of manual counting. This will prove beneficial as tracking your inventory transactions will become easier. Hence, the efficiency and productivity will increase because of having a much smoother inventory system and plus, errors in counting or registering the products can be avoided.
Helps Save Time and Money
Managing your inventory efficiently will help you save time and money. You will know exactly how much is required to meet customer demands and make necessary arrangements for the production process. Moreover, certain inventories are perishable and you can ensure that there is no overproduction. This helps you prevent any damages and you save time and money.
Maintaining your inventory efficiently will help you cater better to customers. A business is dependent on their customers for its profitability. In case you have difficulty in managing your inventory, you should consider hiring an accountant.
QuickBooks are for small and medium-sized accounting businesses which help them to maintain basic accounting transactions. It offers on-premises as well as cloud-based accounting application system which records business payments, pay bills, and payroll systems. If you are a beginner, here are a few tips on how to use QuickBooks.
1. Backup your Files Regularly
QuickBooks deals with your financial files, reports, and customer information. It is of utmost importance that you always save your work like you would do for any other application such as Word Documents. Backing up your files regularly will help you retain crucial data in case you delete or lose your files due to some reason.
2. Customize Navigational Panel
One of the most difficult tasks of learning a new software is to get used to some regular functions. QuickBooks includes a navigational panel which can be customized as per your liking. Ensure that you set this up early so that you do not have to keep looking for certain function repeatedly.
3. Use QuickBooks Memorized Transactions
QuickBooks’ memorized transactions is a great tool. Entering any bill, cheque payment, invoice or a journal entry that is occurring regularly can be a time-consuming task. Your transactions can be auto-recorded by QuickBooks’ memorized transactions. Memorized transactions help you to handle your cash flow better as it will record the transaction details which are going to occur in the future. Also, this feature prevents you from missing out on any payment or collection.
4. Print Checks and Pay Bills
Printing checks from QuickBooks will increase efficiency by reducing unnecessary data entry. It also helps make your monthly reconciliations smoother.
Efficient management of entering and paying bills is made possible with QuickBooks. When making a payment, either use online bill payment linked to QuickBooks or print your checks.
5. Set Up Invoices For Online Payment
Online payment options can be set up to allow your clients to pay online via ACH bank transfer or PayPal. You will be charged a small fee but it’s worth considering the amount of time you will save in making the payments.
6. Use QuickBooks Find Feature
This feature can come in very handy when you need to find a transaction that you need to check again or need more information. With the help of the find feature, you can search inside QuickBooks itself and quickly get your desired information.
QuickBooks is a great way to help your business in recording accounting transactions. It makes your life easier. However, if you want to know how to use QuickBooks extensively, it is recommended that you consult a professional firm that will provide training for QuickBooks.
Financial and cost accounting are a part of the company’s operations. Both help the company control its finances and formulate strategic organization policies. An overall picture of profit and loss is provided by financial accounting, while cost accounting provides a detailed analysis of a product’s cost.
Financial accounting keeps track of a company’s financial transactions for a given period of time which is usually for a year. Financial transactions are recorded using a standardized format and following certain guidelines and is presented in the form of income statement or balance sheet.
Cost accounting is a system of recording all the costs incurred in a business. It includes the cost of used to calculate each overhead product-wise, such as materials, labor, direct and indirect expenses, etc.
Financial accounting is done for a set of audiences who need to analyse the profitability of the company and make business decisions. The various stakeholders who are interested in financial accounting include company’s management, investors, creditors, credit rating agencies, and other regulatory agencies.
Cost accounting is required by stakeholders within the company. This includes board of directors, business owners, departmental heads, etc. Cost accounting helps the management make better business decisions.
Financial accounting uses the information of cost accounting for multiple products and the figures are represented in the balance sheet.
Cost accounting includes the cost of raw materials, work in progress, and finished goods to determine the cost of a product. The information is provided in a detailed manner.
Valuation of Inventory
Financial accounting values inventory at cost or net realizable value (market price) whichever is less. Net realizable value is the value of the asset which is realized only when the asset is sold.
In cost accounting, only the cost price of the inventory is considered.
The transactions are recorded in the books of account as and when they occur. However, the final report is often presented at the end of the financial year.
Cost accounting is reported as and when the management requires it for making decisions such as increasing the production or change in the price of labor, etc.
Initially, the transaction are entered into journal entries and then ledger accounts are made. Once the ledger accounts are prepared, they are converted into trial balance and finally the financial statements are prepared.
For cost accounting, you need to first determine the cost of sales. This includes expenses such as prime cost, administrative costs, financial costs, selling and distribution, etc. Once the cost of sales are determined, you need to add margin/profit in order to get the selling price for a product.
Apart from the above mentioned points, there are other differences such as fixation of selling price which is not an objective of financial accounting but cost accounting helps in determining selling price, possibility of forecasting, etc. If you need more information or any help relating to difference between financial accounting and cost accounting, then do not hesitate in consulting a professional accountant.
A balance sheet is a financial statement which represents your company’s assets and liabilities. The assets and liabilities of your company should be equal to each other for your balance sheet to tally. A mistake in the balance sheet will rendered it unbalanced. As a result, it will make decision making of your company difficult which may affect your profitability as well. So, how do you fix an unbalanced balance sheet? Before you figure out the answer to this question, it is important to know why you have an unbalanced balance sheet. Here are a few reasons why you may have an unbalanced balanced sheet.
1. Data Damage or Misplaced Data
If you use Quickbooks, data damage is a possibility. Files being damaged can be caused by sudden discrepancies in reports. For example, if you pulled up a balance sheet for “all dates” while everything is balanced, “this fiscal year” will have an out of balance report which is most likely to be a transaction damage. Re-sorting the list and rebuilding the data is a way to fix this problem.
Also, data can being misplaced on account of human error. To avoid this, you need to double-check by conducting the audit for an accurate balance sheet. Conducting audit will help you identify any manipulations in the financial records as well.
2. Incorrectly Entered Transactions
This is a common human error and every owner should know that such mistakes can occur. Transactions can either be entered wrongly such as the incorrect numbers, ignoring the entry, only entering either the debit or the credit side of the entry, and more . To fix such issues, you need to cross-check your financial records and train your employees to avoid such errors.
3. Dealing in Different Currencies
If you export to other countries, you will be dealing in different currencies. In this case, it will be difficult for you to maintain one single book for all the transactions. Fluctuations in exchange rates may lead to difficulty in determining which rates should be entered in the books. Hence, if you enter the incorrect rates, you may end up with an incorrect balance sheet.
4. Change in Inventory
Change in inventory affects cash flow statement as last month’s inventory needs to be subtracted with the inventory of the current month. This amount then needs to be reduced from the cash balance. Calculating this amount can be tricky which can affect your balance sheet. Thus, taking help of a professional will help you prevent any mistakes relating to inventory accounting.
5. Equity Calculations
The total worth of owner’s equity should be checked. An increase in assets leads to increase in equity and vice versa. The balance sheet will not be balanced if the equity does not show the difference between assets and liabilities. Therefore, errors in calculating equity can be another reason why your balance sheet has not tallied.
Now that you are aware of why your balance sheet has not tallied, make sure you keep in mind these points the next time you enter the transaction details. So, if you want to fix an unbalanced balance sheet or want more information on this topic, then it is recommended that you consult a professional who will guide you.
Every business can determine its profitability and efficiency based on the financial statements. Although profitability can be easily identified on financial statements, the efficiency of the organization can be understood with the help of accounting ratios.Therefore, businesses cannot neglect the importance of ratio analysis. The comparison or relationship between one accounting data-point and another helps in determining the financial condition of the company. Ratio analysis is done to compare how the company is performing with others in the industry and also to determine a company’s current performance with respect to previous years. Here are a few more reasons why accounting ratios are important.
Analyzing Financial Statements
Financial statements are very important because they are used for internal as well as external purposes. Ratio analysis plays an important part in assessing the financial position of a company. The company managers, investors, and creditors look at these ratios for decision making purpose. For example, if a company has a high debt-to-equity ratio, then banks will be reluctant to provide further financial assistance. This is because a high debt-to-equity ratio indicates that a company may not be able to generate sufficient cash to fulfil its debt obligations.
Optimum utilization of assets and the ability to earn profits by the company is judged by accounting ratios. Judging the efficiency will assist in the decision making process of the company and its capacity to expand in the future. Ratio analysis also helps to know at what pace the company is moving as compared to its previous years as well as its current competitors.
The overall performance of the company’s operations may be quite impressive. It may be difficult to identify any weakness when going through the financial statements. Accounting ratios can help locate these weakness even though the company is in a stable financial condition. It is extremely important for business owners to know where their business is not performing and to ensure suitable action is taken.
Accounting ratios are utilized to identify past financial performance as well as to establish future trends. Comparison of past ratios to the present can help in formulating a plan for the future. Formulating plans helps in decision making. Hence, business owners need to have accurate ratios in order to make a plan for the future.
Ratio analysis helps in comparing i the overall performance of a firm Internal performance is compared between different divisions, how efficiently they are working as a unit as well as together as an organization. Ratios are used by investors, bankers, and creditors to compare the past performance of the company and whether to currently invest in the company. Thus, by comparing the performance, you get a clear picture about the financial position of a firm and helps to identify areas of improvement for the future.The importance of ratio analysis cannot be neglected as they are equally important as financial statements of a company. Now that you are aware of the importance of ratio analysis, make sure you use them to enhance your firm’s performance and take right business decisions.
Need any help regarding your financial books of accounts? Consult a professional who will give you all the required guidance and help regarding your accounting worries.
The estimation to determine whether a particular of expenditure or investment is worth funding for a significant amount is called capital budgeting. The large amount of money spent for these investments are called capital expenditures. These investments are mainly for acquiring fixed assets such as machinery, land and building, etc. For getting accurate results to determine whether the investment is worthwhile, the process of capital budgeting needs to be carried out effectively and efficiently. Here are a few objectives of capital budgeting.
The correct investment decision can yield spectacular returns. The effects of capital budgeting decision will have a long-term impact on your business. For example, a machinery may be bought initially for a huge expenditure which can affect the correct spending of the company. However, the returns from the investment will be obtained in the coming years. Thus, you need capital budgeting to help you take decisions which have a long-term implications on the firm. Hence, the future of the firm is determined by capital budgeting.
Large Amount of Funds
Making capital investment decisions require large amounts of funds. Companies cannot afford to make any wrong decisions especially, when huge sums of money are involved. Thoughtful, wise and correct investment decisions should be made, otherwise the company will incur losses.
Capital budgeting decisions cannot be reversed once they are taken. The reason for this can be that either these capital assets cannot be converted into usable assets or second hand capital goods have no value in the market. Hence, the only remedy is to dispose off such assets which will sustain heavy losses to the firm.
Most Difficult Decisions
Capital investments are the most important decisions that are to be made by the company. These decisions make or break a path for a profitable future. It is extremely difficult to estimate the costs which will be incurred in the future due to political, technological, and economical factors which affect the estimated benefits and costs.
Budgets are used by companies to determine their future growth and expansions. The capital budgeting decisions that are taken help you to plan for future business developments. Therefore, before you go ahead with executing your plans, you need to plan whether the project you undertake has a good return on your investment or not. The same is the case when you purchase an asset to enhance your output and scale your business operations. You need to determine the cost of machinery, the payback period, the net revenue you generate in subsequent years, etc. This is possible only when you use capital budgeting to plan for your company’s future activities.
Now that you know the objectives of capital budgeting for your business, you should use it for making any of your business decisions. For the growth of your company and increasing profits, you need to have capital budgeting. If you find it difficult to take any financial decisions, then get in touch with professionals who will help you out. Also, if you need help in managing your asset.
Having a record of your daily transactions is essential for your business. However, maintaining your financial records is not an easy task. You can do it yourself but there are chances of making certain mistakes which may cost your business. We have listed some common errors that entrepreneurs make while maintaining their financial accounts. The effects of errors on financial statement can be costly and hence, every businessman should be aware of the common errors that are made on financial statements.
1) Errors in Classification of Assets and Liabilities
Your balance sheet is the most important statement as it tells you the financial condition of your company. Although you might have studied the balance sheet over and over again, classification of assets and liabilities can be quite confusing. You need to know how much amount you are liable to pay and how much amount you should receive from your clients. Hence, classifying your assets and liabilities in the right way is of utmost priority.
2) Errors in Income & Expenditure Statement
Income and expenditure statement basically is made to calculate the cost of goods sold. A miscalculation or misleading figure may massively affect the cost of goods sold, net income, and gross profit. Furthermore, it is important to maintain the income and expenditure statement up-to-date. Any error in this sheet may directly affect your profit and loss statements, leading to understating or overstating of profit or loss.
3) Errors in Cash Flow Statement
Some common errors in cash flow are overstating operating cash flow, grossing up non-cash settlements, netting off transactions, errors with foreign currency, and errors in determining what is “cash” or “cash equivalent”. Financial consultants emphasize that the cash flow statement information is 100% accurate because the investors place emphasis on it before making any business decisions.
4) Data Entry Errors and Errors of Omission
Data entry errors occur when the data is incorrectly entered in the financial database from the financial documents. These errors occur when there are mathematical human errors in the books of accounts. For example, numbers may be reversed by mistake such as 27 may be written as 72. This is a basic human error and hence, you need to cross check to avoid such mistakes.
The error of omission refers to the entry not being recorded by the accountant, this may happen when there are a lot of transactions and the accountant may forget to feed in one or two of them. These are two basic human errors and double checking has to be done to avoid them.
5) Errors in Inventory
It is important to have an estimate of the inventory in your warehouse as well as the inventory which is in transit. In some cases, you may be dealing with different types of inventory and may have to decide how much inventory you require in the future. One of the common errors is to re-record any sales return, that is the inventory has been returned and is now back in your warehouse again. In fact, if you have many different inventories, then it becomes difficult for you to keep a track of them. It is strongly recommended to hire an accountant who will do a much better job instead.
The effects of errors on financial statements can affect your books of accounts severely. You can end up taking wrong decisions. Hence, take time and make sure your books are balanced so that the future of your company is safe and secure.
An accountant is important for your business as you need to maintain the book of accounts to get a true and fair view of the status of your business. A professional accountant requires a high degree of precision and level-headedness. Also, if any figure is misplaced or wrongly entered, it can affect your decision making. Therefore, hiring a wrong accountant will have a negative impact on your business. So, if you want to hire an accountant, then here are a few qualities of a good accountant you should look for.
1) Knowledge about Latest Tax Laws
It is important for an accountant to stay updated with any change in the tax laws as well as any industry’s generally accepted accounting policies. An accountant should have specialized knowledge about tax returns and policies.
2) Accurate and Detail Oriented
Accountants need to be extremely accurate and detail oriented. This means they have to make sure that they double check their work. Errors should be avoided and they should provide accurate information in the books of account.
3) Client Oriented
An accountant should not only be good with numbers but also be able to understand his clients and establish good communication with them. When an accountant has an understanding of his client’s business, he will be able to work better as per the client’s business goals and requirements. The accountant will help you with analysis of your financial statements and assist you in making proper business decisions.
4) Communication Skills
An accountant should be able to communicate accounting terms to a person in an easier way. Having the ability to explain complex accounting terms in an easier manner is a major skill that you should look for in your accountant.
An accountant is expected to meet the needs of his clients. Also, he should be able to meet his client deadlines. Moreover, an accountant has to keep his cool while dealing with his clients as all of them will not be the same. Therefore, flexibility is an important quality that an accountant should possess. He has to embrace every challenge and effectively respond to changes in work environment.
An accountant deals with confidential information and thus, they need to develop client’s trust. Being able to manage client’s information increases his trustworthiness and helps him gain more clients in the future.
It is essential for an accountant to have the correct ethics and morals in his professional as well as personal life. By being a law abiding person you know that your accountant will do the right job for you and it will definitely show in your books of accounts.
These are a few qualities of a good accountant. When you hire an accountant you would want him to have these qualities. If you are not sure whether you will hire the right accountant, it is recommended that you consult a professional accounting firm.
Classifying capital and revenue expenditures can be a difficult task. These expenditures directly affect in creating an accurate balance sheet and thus, you need to know how to classify them in the correct manner.
Examples of capital expenditure include the purchase of an asset or any repairs done to the asset in order to increase its life and productivity.
Examples of revenue expenditure include wages and salary, printing and stationery, electricity, repairs and maintenance, inventory, postage, insurance, taxes, etc.
To help you understand capital and revenue expenditure, here are a few points that distinguish the two expenses.
Capital expenditure is any amount spent by a company on an asset which provides long-term benefits (usually for more than 12 months). Capital expenditures are generally listed as assets in the balance sheet.
Revenue Expenditure is an expense which is incurred in the current accounting year and the benefits of that expense are also enjoyed during the same time period. Therefore, revenue expenditure is applicable only for the current accounting period. Revenue expenditures are listed as expenses on the debit side of profit and loss account.
Capital expenditure is non-recurring (expenses incurred once in a few years) in nature. This means the benefits to your organization is for a longer period of time.
Revenue expenditure is recurring in nature which means you need to spend on a periodic basis to derive any benefits from it. The company is not benefitted by revenue expenditures beyond the current accounting period. For maintaining the existing productivity, a company has to incur revenue expenditures. For example, electricity bill paid for the current year cannot be benefited from in the next year. Revenue expenditure seeks to maintain the current earning capacity of the company.
Capital expenditure includes purchasing of fixed assets such as land and building, plant and machinery, etc. The benefits of these are enjoyed by a period of years. Buying a new motor vehicle is a capital expenditure because the vehicle will be used over a period of years depending on its usage. Capital expenditure seeks to improve earning capacity of the company in the future.
The benefits of revenue expenditure are enjoyed for a short time (less than 12 months).
Capital expenditure involves huge costs as the value of assets and investments are large amounts. Revenue expenditure is rent paid, wages and salaries etc. Hence, there is less money spent as compared to capital expenditures. A transaction is only classified as capital expenditure if it crosses a certain limit. It differs from organization to organization to classify what expense will be capital or revenue.
However, certain expenses are termed as deferred revenue expenditures. A deferred revenue expenditure is a kind of expenditure which is revenue in nature but its benefits last for a number of accounting periods. Examples of deferred revenue expenses are the discount on issue of shares, research and development expenses, heavy advertising expenses for promotion of a new product, etc.
You can charge depreciation amount based on capital expenditures as per your company policies. Depreciation for capital expenditures is charged over a long period of time. There is no depreciation charged to revenue expenditure since these expenses are charged in the current period or shortly thereafter. Hence, it is important to know what to classify as capital and revenue expenditure to get a true and fair view of your expenses.
These are just a few differences between capital and revenue expenditure. If you have any difficulty in classifying capital and revenue expenditure or need any help with respect to maintaining your accounts, it is recommended to consult a professional accounting firm.
There are multiple transactions that take place during the year therefore, it is important to have a record of those transactions. Financial accounting helps internal and external stakeholders make better business decisions. Without financial accounting, decision-making can have a negative impact on the company’s performance. Here’s why the importance of financial accounting cannot be neglected.
Maintaining Financial Transactions
Every business needs to keep a record of the transactions it makes irrespective of its volume. Accounting uses a double entry system which means there are always two accounting entries for a transaction. A double entry system records both sides of a transaction which have two equal and opposite effects in at least two different accounts.
For example, if you purchase a machine in cash (for $10000), you debit machinery account and credit the cash account.
Get More Funding
When a bank issues a loan, it requires the financial statement to know whether the company is in a condition to repay the loan. Banks make sure that the company has repaid previous loans on time, their assets to liabilities ratio, and other important elements are considered before providing loans. Investors, on the other hand, look for what business the company is in, the profitability of the company, company’s competitors, company’s past earnings, what is the status of the company’s stock in the market, etc. Hence, financial accounting eases the process of getting loans and investments for your business.
Comparing Statements Between Two Financial Years
Financial statement of the current year can be compared with previous years. Small business owners can take a look at their figures for the year and identify the differences between the two. This helps to take better decisions for the future.
For example, you can compare the costs between the two financial years. If the costs of the current year are more, you need to determine ways to reduce the costs.
Fulfilling Tax Obligations
Maintaining books of accounts makes it easier to pay tax. The reason being, all bills, and other transactions are recorded and kept in one place. You do not need to make corrections at the last moment. Thus, an organized Balance Sheet, Cash Flow Statement and Profit and Loss Statement can benefit in planning tax returns.
Planning for the Future
Financial statements help to know where the company stands currently in terms of profitability. For example, reserves and surplus account tell you how much funds are available with the company. This helps you to know whether the company has sufficient funds to expand or diversify. Hence, financial accounting helps in making decisions for the future.
There are many more reasons why financial accounting is important, these are just a few. It is advisable to consider taking professional help if you have any doubts regarding your financial accounts or need any accounting tips to help you maintain your books. Financial accounting is a must for the smooth functioning of your business. You need to maintain the right books and make sure that the accounting is up to date.
Accounting for business financial statements is a common function of all businesses. But ever wondered why your business needs financial statements? Whatever the type of your business, you need to be aware of its financial status on a regular basis. Apart from this, as a business owner, you need to comply with certain regulations and provide financial information as required by statutory and taxation authorities. These vital tasks can be obliged to by maintaining business financial statements. Financial statements allow you to analyze company status, make vital decisions, and oblige to requirements by taxing authorities. Hence, there are several reasons to maintain business financial statements. Here are a few.
Measuring Business Growth
As a business owner, it is your responsibility to keep a track of the business’ financial status. You must know where your company stands financially on a regular basis. Financial statements provide answers to questions like are you making profits, are there enough resources to fund your goals, are you meeting deadlines, are you achieving set targets, etc. It also helps you manage your income and expense efficiently. Without financial statements, you will have no control over the efficiency of business operations and financial management. Moreover, you may miss out on regulatory compliance and taxation benefits without proper maintenance of financial statements. Having regularly updated financial statements allows you to evaluate your financial condition, make strategic decisions and track growth and performance.
For Obtaining Funds
Another reason why up-to-date financial statements are necessary is funding and credibility. Businesses need funding from time to time. Lending institutions and banks refrain from funding companies who do not have updated financial statements. Moreover, statements full of debts and losses are not considered by funding institutions. Investors and shareholders also assess the management’s potential through financial statements. Having good credibility is especially important for small businesses seeking expansion. Good credibility equals market reputation and ease in securing funds. Well-maintained financial statements help you with effective finance management. This will help you increase credibility and secure funding.
Taxation and Compliance
Taxation is another vital function of every business. You need to oblige to tax requirements set by provincial and federal authorities. Financial statements are an essential part of your preparations for the tax season. The tax season includes calculating taxable income, identifying payable taxes, and potential deductions and credits. Tax calculations and deducting potential expenses become easier with updated financial statements. Moreover, you need to oblige to requirements set by statutory authorities like Canadian Revenue Agency (CRA). The CRA has specifically set out a requirement for corporations to produce financial statements. Hence, for an efficient tax season, reduce the tax burden, and regulatory compliance maintaining financial statements is necessary.
These reasons sum up the need for business financial statements. As a business owner, accounting for day to day transactions and maintaining financial statements on a daily basis is a task. It is best to outsource your accounting and bookkeeping to experts for efficient financial management.
Operating a business comes at a cost. These costs include manufacturing, marketing, salary payment, administrative costs, and more. All such costs that organizations incur on a routine basis are termed as a business expense. Although every organization has its own set of expenses, there are some common business expenses that most firms pay. Efficient management of these business expenses helps in increasing profits and reducing your tax burden. Here is a list of some common business expense that must be anticipated and managed.
Every business operates from a tangible space. It may be a part of your home or space at a different location. Hence, costs related to the office space are a common business expense. You may have leased or rented the location, or it may be a mortgaged property. Hence, rent or lease and interest on the mortgage would count as some common expenses.
Utility and Administrative Expense
Apart from location costs, there are other general expenses that businesses incur in their day to day operations. These include utility costs like electricity and water, and administrative costs such as expenses for telephone and the internet, office supplies like pen, paper, and pins, and general property maintenance. If you are operating from home, these costs may vary in terms of the part of your home being used for business. However, these remain a part of common expenses irrespective of the type and size of business.
Payroll and Benefits
Employee salary and benefits make a huge portion of business expenses. Employees are paid as per the payroll system of the company. Additionally, there are certain taxes that you incur plus benefits that you pay to your employees which qualify as common business expenses.
Advertising and Marketing Expense
Advertising and marketing are vital for growth and success of your business. To increase sales and expand growth, businesses use various advertising mediums like television, newspapers, billboards, banners, and digital media. Additionally, having a website has become a necessity today. Website maintenance, advertising, and marketing costs are an important business expense.
Although taxes depend on the type and size of the business, they make a vital part of your expenses. Income tax, self-employment taxes, workers compensation tax, and other business taxes are all vital expenses to be taken note of. However, the tax burden can be reduced by identifying deductions and credits. Consulting a tax professional will help in efficient tax management.
Businesses aim to earn profits. Giving a substantial amount of consideration to managing business expense will assist you in increasing profits. Moreover, most of these expenses are eligible for deductions to reduce your tax liability. Consult an accounting and taxation expert for the best ways to handle these expenses.
Accounting is a key function for any business. It is a critical concern of small business owners. It is imperative to keep a tab on all expenses, bills and receivables as the resources in hand are limited and need to be used sparingly. For a small business, saving resources wherever possible is crucial. Whether it be gaining a tax advantage or curbing costs; small businesses have to keep a tab on all of it. It is only then that they increase their profit margin and growth percentage.
Here are a few tips that can help you go through the rocky road of accounting.
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Bookkeeping and accounting may not be daunting but are an essential part of business and financial management. A balance sheet is one of the financial statements that help entrepreneurs evaluate their business’s financial health. However, many business owners, especially those with a traditional accounting system in place, face difficulties in balancing their books. Balanced books are vital to gain a clear picture of your business and financial status. It also acts as a strong foundation for vital strategic decisions. While it can be tiresome, there are ways to ensure your books are always balanced. Here are some tips to help you balance your books.
Keep Your Business and Personal Accounts Separate
Mixing business and personal accounts is a common mistake that hinders balancing books. The mixture makes accounting difficult as you have to weed out business related invoices, bills, receipts and payments before recording and balancing. This leads to errors disallowing statements to tally. Having separate accounts is a sign of better organization, making it easier for accounting and balancing your books.
Make Sure You Record Every Single Transaction
Most small business owners are forced to manage everything on their own. With so many things on their plate, accounting mistakes are bound to occur. Missing out on recording daily entries and reconciliation can make balancing books difficult. While big transactions are efficiently managed, petty transactions are often forgotten. Hence, it is vital to record every single big and small transaction to make sure your statements tally.
Invest in an Accounting Software
Accounting software and cloud programs are designed to assist you in better financial management. There is a chance that you may lose or misplace paper receipts or invoices, making it difficult to recognize and find errors in the books. This can hinder balancing your books. Software allows you to store and backup data electronically, reducing the risk of missing out on entries. Moreover, many banks allow you to download data directly into the program, saving time and effort. Hence, it makes it easier to record and manage entries assisting in balancing your books.
Schedule an Accounting Period
When you don’t have an organized schedule for recording and reviewing financial statements, it can lead to errors, overlooked payments and overspending. It is best to input your income and expenditures weekly if not daily and have a monthly schedule to review your financial statements. While you can review them quarterly, reviewing them monthly helps understand and manage accounts easily. It also makes it easier to troubleshoot errors in case your statement does not tally. Rectifying bookkeeping errors is easier when reviewing is done monthly, rather than quarterly. Once this becomes a regular part of your schedule you start spotting trends that help you make better business decisions.
Implementing these tips will ensure an organized bookkeeping system and balanced books. If you still feel that bookkeeping does not fit in your schedule, you can outsource it to professional bookkeepers. Their knowledge and expertise in the field ensure you have an efficient bookkeeping system in place.
Accounting and bookkeeping are critical elements of any business. Effective accounting allows you to make informed decisions, reduce costs, generate more profits, and track your business growth as well as financial status. Many business owners hire accountants solely on the basis of their taxation experience. A skilled and competent accountant can do much more than just save taxes or make payments. Not considering an accountant’s knowledge levels and competencies while hiring, can hamper your business. Here are a few signs of a bad accountant that you must bear in mind while hiring one.
All of these points indicate the signs of a bad accountant. Having a bad accountant can turn into a business disaster with wrong tax filing and non-compliance of bookkeeping rules. Outsourcing accounting to a trusted professional accounting firm can take this load off, leaving you with space to focus on vital business functions.
Time and money are the two main constraints that business owners face. Most small and large business owners tend to micromanage everything, and as a result, fail to focus on key tasks vital for business growth. Technological advancement has changed the way businesses operate. Today, you can outsource several business functions in order to reduce costs and focus on generating more profits. One such function that has benefited from the change is accounting and bookkeeping. While they are essential business elements, accounting and bookkeeping are highly time-consuming. Outsourcing your accounting can be beneficial in many ways. Here are a few reasons why you should outsource your accounting.
Let’s you Focus on Vital Business Functions
Accounting and bookkeeping are not a one-time task, but a day to day function. If you fail to work on it daily, it can lead to a massive buildup of tasks. As a business owner, pouring over books to record daily transactions, monitoring records, and also tracking payrolls can eat up your valuable time. With your plate already full of vital tasks, you cannot afford to lose precious time on things that can easily be outsourced. Hence, outsourcing accounting operations to experts provides you with more free time to focus on business growth and establishment.
Eliminates Risks of Turnover and Missed Deadlines
By delegating your accounting functions to a professional accounting firm, you eliminate the risk of absenteeism, turnover, re-hiring and training. Moreover, missing vital deadlines such as filing tax returns, payment to suppliers, etc. can take a toll on your business growth and reputation. A professional team of experts takes the responsibility of all your accounting woes and ensures your work is done on time. This leaves you with ample of time to focus on business growth, without having to worry about payments and employee issues.
Offers Diverse Expertise
The task of accounting is not limited to recording transactions and tracking profits. It goes beyond that and requires expertise in a variety of subjects like tax, financial planning, financial and business laws, and more. This is why having an entire accounting team works better than having a single employee. However, hiring a team of qualified individuals demands an investment of time. This is especially true for small business owners. While you may consider hiring a bookkeeper, you may not yet be ready to have an entire accounting team. Moreover, a single bad hire can demand additional time in re-hiring and training. By outsourcing it to a professional accounting firm, you are hiring a team of experts. These professionals have expertise in areas essential for effective accounting, offering you the best solutions at an affordable cost.
All these points highlight the importance of outsourcing your accounting. While outsourcing seems the best choice, many business owners show reluctance as they feel they might lose control over accounting operations. However, by outsourcing your accounting, you are able to take the additional load off and also stay in control at the same time.
Finance is the center of any business. Businesses revolve around earning and managing its finances. Therefore, a sound accounting system and practice are vital for the success of your business. As a business owner, your biggest constraint is time. With several things on your plate, overseeing accounting functions becomes difficult. While you may have a software in place to make things easier, accounting mistakes might still occur. Accounting mistakes can have a great impact on your growth and reputation, as well as, other business operations. To avoid this, here are 5 common accounting mistakes that every business owner must be aware of.
Overlooking these common accounting mistakes can cost you heavily in the future. Furthermore, most business owners make the mistake of tackling every business operation on their own and not getting professional help. Outsourcing financial management to accounting experts will enhance business efficiency and save you from accounting mistakes.
When investing in securities issued by corporations, you may have come across a term called a holding company. While you might wonder what it is, you would be surprised to know that most successful companies in the world are holding companies. A holding company is a parent corporation that holds various businesses under it. Such a company does not do anything by itself, but instead, it is designed to hold investments in the form of stocks, bonds, mutual funds, gold, silver, real estate, trademark, patents, licenses, copyrights, or anything of value. A holding company holds enough investment in other entities to manage and control them.
How does a Holding Company Function?
A holding company does not operate like a regular business. It is a parent company, which does not trade in goods and services itself, but owns and controls powers in other companies that do. To understand it better, let us say that you and your friend decide to invest together. You incorporate a new firm as a holding company and issue a million shares for $10 each, raising $10 million fresh cash. As stockholders, you elect a board of directors, who in turn elects one of you as a CEO.
As a holding company, you then invest the money raised from shares in a business, or in assets like bonds, shares, gold, silver or money market funds. The balance sheet of this company would only show assets in the form of different investments made. As the owner of the holding firm, you show up at the office each day, but do not actually have a day to day role of revenue generation and cost management. Each of your subsidiaries is looked after by its own management team, who runs the business. Your job is overseeing, financial support, setting risk management practices, and putting right people in the right places. You will watch over the other companies, support them to achieve the set targets and increase profits while reducing risks.
Why Choose a Holding Company?
A holding company is perfect for entrepreneurs looking to branch out to new business prospects that don’t fit in within their existing companies. It is also great for business owners who want to compartmentalize different departments, services or products. Actually, anyone looking to lower their financial risk by investing in several ventures can opt for a holding company. One of the major benefits of a holding company is that the holding company itself is protected from losses. Even when one of the companies they hold, goes bankrupt, the holding company only experiences capital loss, i.e., the investment they made in the firm. They will not have to incur any debts held by the bankrupt firm. For example, Berkshire Hathaway holds Burlington Northern Santa Fe railroad, but none of their debts are guaranteed by Berkshire Hathaway.
You can find several real world examples of a holding company like Johnson & Johnson, Berkshire Hathaway, General Electric, and Procter & Gamble. Efficient financial and risk management is vital for successfully running a holding company. Consulting a financial and bookkeeping agency would prove beneficial if you are heading a holding company or wanting to start one.
Inventory management is a crucial part of accounting, especially for those businesses dealing in physical goods. Companies sometimes need to estimate the value of their inventory during a financial year. It may be for maintaining periodic financial records or to estimate damage or theft of inventory. While it may not be difficult for those dealing in a few products, but for large companies where the physical count is impossible, you need techniques to estimate the value of your inventory. There are two procedures to calculate, namely inventory- gross profit method and retail method.
Gross Profit MethodThis technique is used to estimate your ending inventory. However, it is no substitute for an annual physical inventory calculation. This method could be used for periodic or monthly financial statements to estimate the amount of missing inventory caused by theft, fire or any disaster. Gross profit method estimates the value of inventory by applying the company’s current gross profit percentage to the net sales and the cost of goods available. Follow the below mentioned steps to arrive at the ending inventory cost.
Gross Profit= $4,000,000-$2,600,000
Gross Profit= $1,400,000
Now, Gross Profit Margin= Gross Profit/Net Sales
Gross Profit Margin= $1,400,000/$4,000,000
Therefore, Gross Profit Margin= 35%
If the gross profit margin is 35%, the COGS is 65% of net sales. (Note: If the previous year’s gross profit margin is reasonable for the current period then you may use them for calculations)
$500,000 x 35%= $175,000
Retail MethodThis method of ending inventory calculation is used by retail businesses who track both the cost and retail sales price of the inventory. Follow the below mentioned steps to calculate the inventory through this method.
$258,000/$430,000 x 100= 60%
$30,000 x 60%= $18,000
While both of these methods help you calculate your inventory, it also depends on the type of business you operate in. Bookkeeping and accounting are a vital part of any business to estimate the financial status and also the value of tangible and intangible business aspects. Guidance of an accounting consultant can be helpful in finding the best solution for your business.
Inventories or stock are goods that a business holds for selling. They are not necessarily only finished products but also raw materials that are used to manufacture goods. Accounting for inventory transactions is vital for matching appropriate costs and revenues and also to gain an accurate representation of inventories on hand. While in the computerized inventory tracking system the transactions get automatically generated, it is better to have the knowledge of inventory transactions, especially when there arises a need to manually enter the records.
Raw Materials Inventory
Raw Materials Purchased
When raw materials are purchased, the stock of your current inventories increases. Once you count and match the quantity of the materials with the purchase order, you have to record the transaction by debiting the raw materials account and crediting the accounts payable account. If it is a cash transaction, you need to mention credit ‘by cash’.
Debit: Raw Materials Inventory - xxx
Credit: Accounts payable - xxx
Raw Materials in Work in Process
Once you start manufacturing the goods, the raw materials will be shifted from the warehouse to the production site. This calls for another journal entry to record the shifting of the materials to work in process account. This can be done as shown below:
Debit: WIP- Work in Process - xxx
Credit: Raw Materials Inventory – xxx
Damaged, Obsolete Raw Materials
There is likely to be some amount of damaged or obsolete inventory that becomes unusable in the manufacturing process. Such risks must be recorded by making a reserve account for them. Reserving means that you are charging the cost in advance. It can be recorded as follows:
Debit: Cost of Goods Sold – xxx
Credit: Obsolete Raw Material/Raw Material Reserve – xxx
However, when an actual damage or obsolescence occurs, you must make an adjustment entry as follows:
Debit: Raw Material Reserve – xxx
Credit: Raw Material Inventory – xxx
The same could be a case with the WIP inventory. In that case, the same steps must be followed, except that you must replace ‘raw material’ with ‘WIP’. Moreover, the manufacturing process may have a certain amount of spoilage and waste. You may record this loss in the following manner:
Debit: Cost of Goods Sold – xxx
Credit: WIP Inventory - xxx
Finished Goods Inventory
Finished Goods Purchased
Finished goods inventory stock may either be purchased from outside or through companies manufacturing process (when manufactured within the company). In both the cases, the stock is increased, which calls for the need to be reflected in the books.
Finished Goods from Production
Debit: Finished Goods Inventory – xxx
Credit: WIP Inventory – xxx
Finished Goods Purchased
Debit: Finished Goods Inventory – xxx
Credit: Accounts Payable/Cash – xxx (depending on the type of transaction – cash or credit).
Finished Goods Sold/Shipped Out
Whether you sell the finished goods or move them to a warehouse location, the stock is decreased. You can record this transaction as follows:
Debit: Accounts Receivable/Cash – xxx
Credit: Sales – xxx
Decrease in Inventory
Debit: Cost of Goods Sold – xxx
Credit: Finished Goods Inventory – xxx
Finished Goods Inventory Adjustment
Just like the raw material inventory, an amount of finished goods might also be damaged or obsolete. Hence, the risk must be reserved. Additionally, the occurrence of the situation must also be recorded.
Debit: Cost of Goods Sold – xxx
Credit: Finished Goods Reserve – xxx
Adjusting Entry in the event of Occurrence
Debit: Finished Goods Reserve – xxx
Credit: Finished Goods Inventory – xxx
Valuation of the Inventory
The market is unpredictable; prices keep going up and down. Sometimes, the value of the inventory recorded might be higher compared to the market price. To have an accurate on-hand inventory balance on the balance sheet, you need to make some adjustment entries. In this case, you need to do the following.
Debit: Loss of Inventory Valuation – xxx
Credit: Raw Materials Inventory – xxx
Credit: WIP Inventory –xxx
Credit: Finished Goods Inventory –xxx
Accounting for inventory transactions is vital to estimate the worth of your inventory. Apart from the above-mentioned entries, there may be additional entries needed depending on the type of business. While managing and tracking these records is easier with cloud systems and accounting tools, consulting a bookkeeping expert may prove beneficial.
As you near the close of the financial year, you start anticipating taxes. When filing taxes most of us are looking to pay no more than we owe or rather boost our tax refunds. Tax refund is a boon, which helps you secure yours as well as your family’s future by saving more. While you are obliged to pay taxes, there are ways that will help you reduce your tax liability. Here are 6 tips through which you can get more tax refund.
Making charitable contributions to tax-exempt organization allows you to claim a substantial amount of non-refundable tax credit. Such tax-exempt organizations include religious organizations, charitable organizations, community groups, colleges, non-profit hospitals and more. When you make donations to the listed organizations, you are generally able to claim all or part of the amount, up to the limit of 75% of your net income.
If you get a T4 slip and are required to pay out of pocket expenses as a part of your employment, you may be able to claim a deduction. Expenses paid out of your personal finances, which are not reimbursed by your employer are eligible for deductions. Examples include cell phone and laptop used for work. If you have to incur phone expenses related to work, which is not reimbursed you can claim such a deduction. However, make sure you have proper records to prove this.
Certain medical expenses, which are not covered by your health benefit plan, may be eligible for claiming non-refundable tax credit. These include fees paid to medical practitioners, ambulance services, attendant care fees, certain chronic disease treatments, and more. All of these can be claimed while filing tax returns. Hence, make sure you keep a record of receipts and prescriptions for any medical expenses you incur.
Retirement benefit contributions like Registered Retirement Savings Plan (RRSP) may help you boost your tax refunds. As you start investing in RRSP, you will be able to get a tax refund equal to your marginal rate. You can contribute this later to your Tax-free Savings Account (TFSA). Moreover, you can even elect to transfer a percentage of your pension benefit to your spouse to take advantage of income splitting to boost your tax refund.
If you are a small business operating from home, you can avail of several deductions. Most of the expenses you incur to obtain the income are eligible for deductions. This includes internet expenses, stationery, portion of rent, and other maintenance costs you pay for your work space. As per CRA work space in home expenses you can deduct cost of electricity, heating, and more.
You can deduct a number of expenses related to your immediate extended family. Child care and elderly care expenses can be claimed via deductions. If your child goes to a day care or you take care of your child and elderly family member, you can claim a deduction and boost tax refund. Moreover, filing as a family will also help you claim certain non-refundable tax credits.
Implementing these tips before the filing date can help you get more tax refund. While it is not difficult to file your returns, taxation is a complex subject which requires guidance. It is preferable to consult a taxation expert to help you manage income and get more tax refund.
How you would pay yourself as a small business owner is a question that requires contemplation. You can pay yourself a salary, or can receive dividends, or a combination of both. However, the decision on salary vs dividend is influenced by a variety of factors such as personal and corporate tax structure. Considering this, each way of paying yourself comes with pros and cons. Moreover, in almost all cases there is a discrepancy of a percentage or two that can work in your favor or against you, and this potentially influences your decision on how to compensate yourself. To provide you with clarity on the subject here is a comparison of paying yourself in salary vs dividend.
Compensating yourself in Salary
As mentioned above you can compensate yourself with a salary as well as with a dividend. If you choose to pay yourself salary, you can reap certain benefits but will also have to bear the disadvantages that come with it.
By compensating yourself in salary, you ensure a personal income. With a personal income, you will be able to contribute toward the Registered Retirement Savings Plan (RRSP) and Canada Pension Plan (CPP). As your CPP is based on how much and how long you contribute, paying yourself in salary will help you consider this important retirement plan. Regarding tax benefits, the salary or bonus you pay yourself will be a tax deduction for your small corporation. Additionally, you can implement income splitting by paying salary to related employees such as a spouse or children and avail of income tax benefits.
Having a personal income may also turn out to be a drawback. Unlike dividends, which are taxed at a lower rate, salary is a hundred percent taxable. This might increase your tax load. If your business profits vary every year, paying yourself with a salary can result in taxation issues, as you will not be able to carry forward business loss. With regards to CPP you will have to contribute toward it as an employer as well as an employee. Furthermore, it will also require you to set up a payroll account with the Canada Revenue Agency.
Compensating yourself in Dividends
Many business owners choose to compensate themselves via dividends. Paying yourself in dividend comes with the following advantages and disadvantages.
Dividends are taxed at a lower rate than salary hence you save yourself from the load of personal tax. Additionally, when paying yourself in dividend, you will not have to pay toward CPP, which will save you money. Unlike salary, paying yourself in dividend is much simpler. You write a check to yourself from the company, update your minutes books, and prepare a director’s resolution for dividends paid.
Apart from the benefits you reap, there are certain disadvantages. Compensating yourself in dividend does not allow you to contribute toward retirement benefits like RRSP and CPP. Dividends can also disallow you from enjoying the benefits of personal income tax deductions.
Whether you pay yourself in salary or dividend is completely dependent on the type of business, and your personal financial circumstances. A detailed understanding of types of corporations and related tax structure, as well as your personal financial management, will help you make the best decision. Guidance of a financial and tax consultant is recommended to help you choose the best from salary vs dividend.