“This is my business and I can do what I want with it!”
Have you ever made like this one? Most business owners think that they can just record their business transactions together with their own financial information. But this is wrong. According to business entity concept, you should record all the transactions associated with your business in separate books from your personal fiancé information records.
This requires you, as the business owner, to use separate accounting books for your business and entirely exclude any information regarding your personal assets and liabilities. Failure to adhere to this principle will make it difficult for you to determine your taxable income and that of your business. It will also be difficult for you to determine the exact amount of profit or loss that your business is making.
Here are other benefits of keeping your business books of accounts separate from your own financial information.
Creates a business entity
Note that Financial Reporting Standards seeks to ensure that you don’t make your company a hobby. Note that losses and other expenses related to hobby aren’t tax deductible. However, a business can deduct both.
Therefore, maintaining separate books of accounts for your business offers it more credibility in the presence of Financial Reporting Standards.
Better record keeping
For some people, it’s difficult to keep consistent and up-to-date business records. When these records are intertwined with expenses and income records of the business owner, then, record keeping will become an uphill battle. Besides, intertwining your personal finance information and your business records waste a lot of time especially for accountants trying to figure out what to include in the financial statements and what to exclude.
Enhance your business credit
If you intend to apply for a bank loan, supplier credit, and any other form of credit, you should first establish credit identity for your company. One way of achieving this is by applying for a credit card and then use it for your business expense. This is practical if only you have kept your business books separate from your personal finance books.
Now you understand the necessity of keeping your business and personal financial accounts and records separate. It’s time to set up separate accounts for your business and if you have been recording the business transactions in the books as your personal finance information, set up separate financial records for your business. This will ensure that your business complies with the business entity accounting principle (Also see Accounting Principle – Accrual Concept and Going Concern Principle).
Let’s not hesitate to get an accounting service in Singapore if you need assistance so to ensure you are always on the right track.