Category: Accounting

“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.

Accrual concept is an accounting method that requires you to record both expenses and revenues in the when they occur regardless of whether you have received the cash or not. The primary benefit of using the accrual accounting method is that your business financial statements will reflect every expense associated with the recorded revenue for that accounting period (Also see Should You Outsource Accounting Function?).

Generally, accrual accounting approach allows you to recognize economic events and match each revenue you have received to the corresponding expense (matching principle) when the transaction occurs rather than when you receive the payment. With that, you will be able to combine your business’s current cash flow and the expected cash flow to get a clearer picture of your business’s financial condition.

For instance, when you sell a laptop to a client who uses credit card, accrual accounting method and cash accounting approach will have different perspectives regarding this transaction. Cash accounting will require you to recognize the revenue when it’s received even if you will receive payment for the laptop after 6 months. On the other hand, accrual basis of accounting allows you to record the revenue at the point of transaction.

Most businesses, both big and small, consider accrual accounting to the standard accounting method with exception of a few operations. This is because it offers a more accurate image of any business’s current financial position. However, its relative complexity makes it hard for some businesses to implement it. For instance, if you don’t understand account in accrual basis, then, you will need to hire a professional accounting to help with the numbers.

Keep in mind that accrual concept of accounting is the exact opposite of cash accounting. While accrual accounting concept requires you to recognize revenue and expenses as they occur, cash accounting concept requires you to recognize revenues and expenses when you receive the payment.

This accounting concept (Also see Monetary Unit Assumption and Accounting Principle – Business Entity Concept) has become very popular due to the increasing complexity of any business transactions and the fact that most business owners desire accurate financial information. Besides, projects that can’t provide revenue within a short time affect the business’s financial condition at the point of transaction. Thus, it will make sense to have such events reflect on the business’s financial statements during the same accounting period when these events and transactions occurred.

Your choice of the accounting method depends on the requirements set by the Financial Reporting Standards. Therefore, it’s advisable to understand the FRS so that you can make the right choice.

This can be really tricky if you are unsure how to go about so if you need accounting services in Singapore, contact us so we can directly you to a reliable service provider.