If you’ve recently started out on your business journey, the chances are that you have a great product or service to sell and you’ve probably started out as a sole trader. There are a few things you should know about sole trader bookkeeping and accounting laws, and so, we’ve outlined our great bookkeeping tips below just for you!
What does ‘Sole Trader’ mean?
Let’s first get the obvious misconception out of the way. The term ‘sole trader’ itself is often misunderstood. While most people believe a sole trader business can only feature one 'trader,' this isn't the case.
'Sole Trader' is simply a legal term used when registering a business entity. You can certainly employ others in your sole trader business. A sole trader is the sole owner of the business (you and the business are one and the same entity). Think about when you do your tax return, it is still an individual tax return - just you and what you have profited (or lost) throughout the year. This can include your sole trader income as well as work in employment but they still need to be kept separate.
Your Business Name
If you have gone through the legal processes to register for an ABN, don’t forget to register your business name if you are using one. You don’t necessarily need a business name, you can certainly trade under your own legal name, but if you do trade under a business name, it must be legally registered with the Australian Securities and Investments Commission (ASIC).
Sole Trader GST Basics
If your business turnover is under 75K, then you can choose to voluntarily register for GST. It is important you understand turnover is your gross income before expenses - don’t confuse turnover with profits. Voluntarily registering for GST might be worthwhile if you have a lot of expenses that include GST on them because it will mean you can claim back GST credits for those expenses.
Also, consider business-related fuel expenses. If you use fuel for your business's equipment like mowers and tractors, or heavy vehicles (over 4.5 tonnes) you may be able to claim fuel tax credits. However, you can only apply to claim fuel tax credits if you are GST registered first.
Keep in mind though, if you are GST registered you will need to charge GST on your goods and services and keep it aside to pay at BAS time.
If your business is turning over more than 75K annually (or you expect it to), it is compulsory to register for GST. Once registered, it becomes extremely important to record your business transactions accurately for the GST components. Make sure your invoices are labelled ‘tax invoice’ and the GST amount is clearly shown. Similarly, when recording expenses, make sure the receipt or bill shows GST before you record it and claim it as a credit.
The Chart of Accounts (COA)
It makes for easy bookkeeping if your profit and loss accounts and your balance sheet accounts are set up correctly from the onset of your business operations. If you’re letting this get away from you - get it done now!
You should have at least one income account set up for your sales or services income. It is up to you how many accounts you need to record your income for reporting and compliance purposes. Some businesses that have more than one type of income may want to track that income separately to help manage their business better.
An example may be where a retail store sells products in store as well as online, so they might want to know which brings in more revenue. To do this they may allocate store income to the ‘Sales In-store’ income account and the online income to the ‘Sales Online’ income account.
Depending on your business and the type of expenses it has, you will need several expense accounts set up to allocate those transactions. Common examples are office, electricity, motor vehicle, contractor invoices, insurance and repairs & maintenance expense accounts. Try to keep your expense accounts as simple as possible for ease of bookkeeping - too many accounts becomes time-consuming and pointless unless there’s a good reason you need to break down to specifics.
When your income and expense accounts are set up and used correctly, you will automatically have all the data required to generate your profit and loss report.
Balance Sheet Accounts
This finally brings us to the balance sheet accounts. As a sole trader, the main account you will use here is the owner's equity account. This is the account where your personal transactions will be allocated such as money you may have invested in the business for start-up or top-up costs. It will also be used for any money you take from the business for personal living expenses (in lieu of wages).
As a sole trader, you won’t pay yourself wages, it is simply drawings from the business (remember you are the business). The balance sheet may also include liabilities such as loans or credit cards and any assets such as bank accounts or equipment it owns.
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