Most small businesses and sole traders, when
looking at their accounts, will concentrate solely on their Income/Profit and
Loss statement. However, as bigger businesses are more likely to understand,
the Balance Sheet of a business can be just important.
While an Income or Profit & Loss Statement
can give an immediate snap shot of whether a business is making money for that current year a Balance Sheet
can give an indication of the overall status of a business – it’s total value.
The Balance Sheet can also give an indication of what monies are owing or are
owed, indicate how much money an owner or owners have put into the business,
and, when reconciled properly, can highlight errors, missed payments etc.
I will therefore be doing a short series of
posts about the Balance Sheet and how it can be understood and used.
Before delving into Control Accounts,
Reconciliations etc. it is important to know and understand the different
categories of accounts that make up a Balance Sheet.
Broadly speaking there are three main
categories of accounts that make up a Balance Sheet, but each of these
categories can then be further broken down:
Assets are accounts that reflect value to a
business. They give an indication of what the business owns, what value is held
by the business, and what monies are owed to the business. The Assets category
can be broken down into several other categories as follows:
Term Assets > 1 Year
We will look at each of these categories in
The word “Intangible” means “unable to be
touched” or “not having physical presence” and this definition holds true with
regard to Intangible Assets.
- Intangible assets are long term resources that
give value to a business but which have no physical existence. There are
arguably three main “types” of Intangible Assets:
– Branding includes the brand name of a company’s products, or the company name
itself – the more recognised the brand name the greater its value. Branding
would also include logos etc.
– This would cover any Trademarks or Patents that the company owns. This type
of Intangible Asset is more definite as most Trademarks and Patents last for a
defined time period, and these can therefore be depreciated. Intellectual would
also cover licences, i.e. Franchise License etc.
– Goodwill is generally the “value added” to a business when it is sold. It can
be defined as the difference between the “actual book value” of a business and
the price paid for that business. It is a recognition of the reputation,
customer base etc. that a business holds, and will generally include the perceived
value of brands, logos etc.
Fixed Assets are much easier to define as they
are any items purchased for the business that cost $100 or more.
There are generally several categories of Fixed
Assets, most of which are self-explanatory. The more common categories are as
Improvements – Any alterations to existing premises that adds value to those
& Equipment – Any heavy duty machinery etc. used for construction, manufacturing
All fixed assets will have a useful life and a
depreciation rate as defined by the tax office, and can be written down as per
the defined rate.
Most Balance Sheets will show two accounts for
each type of Fixed Asset, one account for the original cost, and one account
for the depreciation to date. The net of these two accounts will be the current
“book value” of the Fixed Assets.
Current assets are those assets that are used
on a regular basis and often the account balances of these assets can change on
a daily basis. These assets cover money, stock, monies owed etc. The primary
categories for current assets are as follows:
in Bank and On Hand – Includes all bank accounts (except loans), petty cash
– Any stock that a business may hold be it Raw Materials or Finished Goods.
– This includes not only monies owing from clients, but also any other short
term loans that may have been made to staff etc.
– These reflect any monies that have been paid up front for a service, license
etc. that covers up to a period of a year – e.g. Insurance paid at the
beginning of a year that last for a year. (Prepayments are more likely to be
used by companies and businesses who produce accounts on a monthly or quarterly
basis, rather than smaller businesses who only produce accounts on an annual
Long Term Assets
> 1 Year
This reflects any assets, other than Intangible
or Fixed, that are not likely to change in the current year. In general this
category of asset will cover any deposits made, e.g. a rental deposit for a
lease that has more than a year to run, or any loans made by the business that
have more than a year left to run.
In the case of a longer term loan made by the
business, there will generally be two accounts, one in current assets to
reflect the loan payments that will be made in the current year, and one in
longer term assets for the repayments that will be made in more than a year’s
Next Week – Liabilities.
It is not
being in debt that is an issue. Most people are probably in debt at some point
in their lives, not least due to having mortgages. No, the issue is when you fall
into financial difficulty and can’t manage your debt repayments.
some people may have caused their own financial difficulties, by taking on more
debt that they can afford to manage (often because they have been enticed by
easy access to credit cards, or interest free purchase) a lot of people fall
into problems through no fault of their own. There may well have been a change
of circumstance that has caused the problem, e.g. loss of employment, or a
the reason that someone has fallen into trouble with regard to their debt
repayments, the absolute worst thing that someone can do is to ignore the
situation. This is one time when burying your head in the sand is a really bad
idea. Ignoring problems with debt will only make matters worse.
ignore debt problems, things tend to spiral out of control:
will continue to be charged on top of the debt
possessions secured against the debt may be repossessed and sold
credit rating will be effected
may even be sued.
therefore important to act as soon as you realise you may not be able to meet
your creditors as soon as possible and try to negotiate new payment terms with
them in line with what you can afford. They will be much more amenable to you
if you contact them before a payment that you can’t afford is due rather than
wait for them to chase you up on overdue payments.
applying for a Hardship Provision with your creditors.
to see if you have any insurance to help cover you in your situation, e.g.
credit insurance, income protection insurance.
to see whether you are entitled to assistance from Work and Income.
applying for a Debt Consolidation Loan.
a Budget Advisor.
debt is related to a credit contract, you can apply to the lender for hardship
provision. It is a legal requirement for lenders under the Credit Contracts and
Consumer Finance Act (CCCFA) to consider applications for hardship provisions.
If you can come to such an arrangement with your lender, this may mean that you
can pay off the debt in smaller amounts, or take a 'repayment holiday' until
you are able to afford the full payments again.
In order to
apply for the hardship provision, you will have to:
the lender as soon as you realise you will not be able to pay,
been making your payments on time, and
reasons, which could not be foreseen, that you have found yourself in this
apply if your hardship has been caused by illness, injury, loss of employment,
or the end of a relationship.
consolidation loan is one new loan that covers all your debts. This would mean
that all your individual creditors were paid off and instead you owed money, with
just one lot of interest charges, to one financial provider. Debt consolidation
loans are offered by most banks and other financial lenders.
If you are
considering consolidating your debts, you should:
- try to keep your repayment
period short. Otherwise, you may end up paying a lot more money in
interest charges even if you have smaller repayment amounts
- get advice on the
consolidation loan contract from someone other than the lender before you
- check you can afford the
- check the interest rate is not
higher than what your bank would charge you
- check for any other fees
that may be charged by the provider
Budget / Debt Advisor
there are several different organisations and agencies who will help you to
manage getting your debt under control. They will generally work with you to
draw up a suitable repayment plan and will usually negotiate with your
creditors on your behalf, not only to plan a repayment schedule but also often
to get further interest charges either reduced or suspended.
these organisations will even put together a system whereby you make one
payment to them per month and they then pay your individual creditors on your
behalf, making it much easier for you to stay on top of your repayment
are generally very open towards working with these organisations as they know
it means that they have a good chance of getting their money back, the
organisations having already achieved a good track record with them.
of the organisations who specialise in helping people with debt are as follows:
clients’ books for their year end accounting there are certain mistakes that I
am finding that clients have made with their book-keeping that could easily be
that I have quite commonly found, not only in my small client’s books, but also
previously, when working for much larger organisations, is duplication. This is
particularly so for purchase invoices / receipts.
One of the
reasons that this occurs is that there may be two copies of an invoice or
receipt. An invoice may have been faxed or emailed initially but then a final
invoice sent through the post (maybe with goods ordered), or an initial receipt
may have been issued and then followed up with a valid tax invoice. Of course,
sometimes the duplication problem occurs even when there is only one copy (as I
have seen with a couple of my clients).
There are two
effective ways to ensure that duplicate entries do not happen:
- When using an accounting system
ensure that the correct invoice number is entered against the correct supplier.
Good accounting systems will either not allow you to enter two identical
invoice numbers against the same supplier, or at the very least they will flag
the fact that you have done so.
- Be organised when entering your
paperwork into whatever system you are using. Arrange your paperwork by date
order before you even start entering it (this should enable you to instantly
see if you have any duplicate paperwork), and then immediately file any
paperwork dealt with. This ensures that you will not enter the same lot of
mistake that I have come across is to miss an entry completely. Of course this
could work either for or against the client depending on whether it is a sales
or purchase entry that was missed.
way to avoid this error is to reconcile all your entries back to your bank
account. In general, if you use an accounting program such as Xero or Banklink,
then the automatic bank feeds should ensure that omissions do not happen.
However, if you don’t use a program with automatic bank feeds then you will
need to manually reconcile all your entries.
omission to make that would not necessarily be picked up by bank
reconciliations is that of cash receipts. I know from having a market stall for
my jewellery that any sale paid for in cash could easily be overlooked and not
included in your accounts.
There are two main ways to ensure that these sales
are properly accounted for:
- Bank ALL money received for cash
sales – don’t be tempted to use any of it for every day spending money.
Keep an up to date written record of
all cash received for sales and then transfer these details to your accounting
records at the earliest opportunity. (At the markets I write down everything
that is sold so that I can adjust both my sales and inventory records when I
get back home).
Cost of Sales
Another common error is to cost all purchases of goods
for resale, or materials for making goods, directly to cost of sales. In fact,
all these types of purchases should instead be costed to “stock” or “inventory”.
The cost of purchasing goods for resale cannot be treated as a Cost of Sale
until the goods have actually been sold. Likewise, the cost of materials, cannot
be treated as a Cost of Sale until the materials have been used to make a product
and that product has been sold. (I won’t go into further detail here as I have
a previously post specifically about Cost of Sales).
One common misconception appears to be that meal or
refreshment costs can be treated as taxable business costs as long as the meal
or refreshments are taken whilst out and about on business matters. In fact, I
know of one Franchise Organisation who actually told their franchisees that
this was the case. IT IS NOT!
While as an employee, it may well have been possible
to claim the cost of a meal or refreshment from an employer while out on
company business, that employer would NOT have been able to claim this cost in
their accounts as a taxable expense.
If you particularly want to you can treat these costs
as business expenses, however, they cannot be treated as TAXABLE business
expenses. In other words the costs would have to be added to your accounts
after tax and not before.
If the meal is taken with a genuine client, then 50%
of the cost can be treated as a taxable business expense but you still can’t
claim the whole cost against tax.
etc. Costing $100 or More
Another common error is to write off items that should
in fact have been capitalised.
If a piece of equipment, or a tool etc. that you have
purchased for your business costs $100 or more then it has to be capitalised
and you can’t claim the whole cost in the year of purchase. It doesn’t matter
what it is, whether it is a mobile phone, a piece of furniture, or a tool, if
it cost $100 or more than it has to be treated as a capital purchase.
The thing to really watch out for here is when several
items are purchased together, that may individually cost less than $100, but
that in total cost $100 or more. If they are all purchased for the same type of
thing, i.e. refurnishing an office, or building a computer etc. then it is the
total, not the individual cost that is relevant.
If in doubt about any of the items mentioned above
then please check them with your accountant!
How organised is your paperwork?
Do you organise your financial documentation before taking it to
We’ve all heard about the ‘shoeboxes’ of papers that are handed
in to accountants at this time of the year. Whether this is still true or
the stuff of legend (and it’s something I can remember receiving in the past),
I’m sure you can understand that accountants much prefer to do what they are
good at rather than sifting through piles of loose, disordered papers.
I’m equally sure that you as a client want to concentrate on what
you are good at. You don’t want to mess around with your paperwork at any time let alone trying to sort out your financial
information at the end of the year.
Well, right at the moment, Terrace Consulting have a great offer
are offering you the opportunity to purchase
a solution that will save you time and money and provide you with a faster,
more efficient system for your documents – not only at EOY but throughout the
year. It will help you to meet your obligations to Inland Revenue and also to
comply with other legislation such as the Companies Act.
There are two options available:
- A generic filing structure that you can use to organise
and file paper or electronic financial information. Now’s a good
time to set up a system for the new financial year so you can keep it all
under control during the year and be sorted for next EOY.
$4.95 ex GST
- An e-workbook that gives step-by-step
instructions on how to create a business filing structure for paper or
electronic information PLUS a more detailed structure for filing financial
information that is tailored to the business type – eg retail,
engineering, trades, health and beauty, agriculture – that is relevant to you.
Only $ 19.95
This offer is available for a limited time only. Offer
closes on 20 May 2014.
instructions and further information contact me
big mistake that can be made by small businesses is in thinking that the total cost
of the purchases of materials etc. that they have made through the year becomes
their “cost of sales” figure for the year. This is wrong!
Cost of Purchasing
Materials for the year DOES NOT EQUAL Cost of Sales for the year!
purchase of materials that you make is actually a cost against your inventory
Any handmade business,
or indeed any small business that makes its own product, will have two
different inventories, one will be for raw materials, and one will be for
you purchase some raw materials you are increasing the size of your raw
material inventory. Then, as you use some of those materials to make a product,
so the raw material inventory will decrease and the finished goods inventory
will increase. Equally, when you sell a product, so the finished goods
inventory will decrease.
So, to give
RAW MATERIAL STOCK
FINISHED PRODUCT STOCK
Purchase of Materials
Make a Product
Sell a Product
course is just a very simple example of the movements between inventory values
when buying materials, making products and selling products.
to the Finished Product stock, this can be costed as either cost price or
selling price. Personally I recommend that for accounting purposes that your
product inventory is costed at materials cost (plus labour costs if required). For my own jewellery inventory I have two
columns, one for materials cost and one for sales value. I therefore have the
materials costing of the inventory for my accounts but still know what the
sales value of the inventory is.
It is very
important to understand inventories because inventory balances and movements
are used to calculate the cost of sales for the year.
Cost of Sales
Cost of sales
can be determined in two ways:
The best (and
probably easiest way) to do this is via the inventory balances. The simple
calculations is as follows:
- Opening Inventory Balances
- Plus – Purchases of Materials
- Less – Closing Inventory Balances
- Equals Cost of Sales
to use the figures from the inventory example above:
Plus: Purchases of Materials
Less: Closing Balances
Equals: Cost of Sales
simple examples you will see quite easily what the second way of determining
the Cost of Sales is – quite simply it is the cost of the product that has been
sold (as shown in red).
Now this may
seem the easier option when presented with such a simple example, but when
there is a lot of product that has been sold during the year, using the
balances as shown above becomes the easier option to use.
Of course in
reality inventories will be much more detailed than the examples shown above as
each material should be listed with descriptions of materials, cost per item, quantities,
total cost for items etc., as should each completed product.
So to summarise:
Cost of Sales for the Year =
Cost of making the Products Sold in the Year.
Do you need
to complete a tax return as an individual if you are working as a paid
Here in New
Zealand, for the majority of employees the answer will be “no”. However, in
Australia and the UK, (and probably many other countries) the chances are that
the answer will be “yes”.
concentrating on New Zealand, although much of what will follow will equally
apply to Australia and the UK, what qualifies an employee as being someone who
does need to complete a tax return?
answer is “if you receive other sources of income”.
that, if your only other sources of income are interests or dividends that you
have received from NZ banks or NZ listed companies then you still may not need
to complete a tax return as resident withholding tax will have been applied.
However it is probably in your best interests to complete a tax return anyway
as the tax may not have been withheld at the correct rate.
else qualifies as “other income”?
Well to be
honest pretty much any income you have received other than gifts from family
and friends. So let us look at the main potential other sources of income that
there are and which need to be reported via a Tax Return:
If you have
an investment property that you let out, either as a standard rental property
or as a holiday let then the income that you receive from this needs to be
declared. However, there are certain costs in relation to the investment
property than can be used to offset the income such as mortgage interest, rates
and insurance, repairs and maintenance etc.
Investments and Shares
mentioned, Resident Withholding Tax (RWT) will already have been deducted from
dividends received from NZ companies but it may not have been withheld at the
correct rate. Likewise, returns on investments in Portfolio Investment Entities
(PIEs) will need to be declared if your returns have been taxed at a lower rate
than they should have been.
Trusts and Estates
If you are
a beneficiary of any trust or estate then any income that you receive from that
trust or estate needs to be declared.
the whole range of potential income that you could receive including interest
from foreign banks/companies, dividends from foreign companies, superannuation
paid overseas, income from foreign employers etc. However, if you have already
paid tax to another country based on any of this income, then as long as you
provide the IRD with proof of this tax payment, it will be used to offset any potential
tax payment to NZ.
exception to this rule if for new migrants to NZ. New migrants, who have not
lived in NZ for at least the 10 previous years, are granted a four year
exemption to most foreign sources of income, the exceptions being employment
income that was earned while living in NZ.
Partnership or Look Through Company (LTC)
that you have received from a partnership that you are a part of, or from a
Look Through Company that you are a shareholder of, excluding of course, any
income that was paid to you as a salary with tax deducted.
needs to be declared if it was paid to you tax free. If tax was deducted then
it is counted as normal paid employment.
Self Employment Income
Although an employee you may still have your own
small business on the side. Any income you receive from this business, less any
allowable deductible costs, will need to be declared. This category will be
looked at more closely in a future post.
Any Other Income
basically a cover-all to cover any other type of income that you may have
received including tips or gratuities, “cash in hand” jobs etc.
the above is just intended to convey the types of income that should be
declared on an Individual Tax Return and to give an idea to individuals of what
they should be looking out for. If you receive any of these types of income, particularly
when it is income against which costs can be offset, then it is best to seek
professional advice for help with your tax return.
When it comes to registering for GST there may
or may not be an option. Once your business turnover reaches a certain value,
or is anticipated to reach a certain value within the next twelve months, there
is no longer an option, registering becomes compulsory.
In New Zealand the
mandatory threshold is $60,000 and in Australia it is $75,000.
If your turnover (total sales) is less than
these mandatory figures then registering for GST becomes optional.
So are there any benefits to registering for
GST before you have to?
Well, to answer that first we should look at
what you have to do if you are registered for GST.
have to charge GST on all your sales (15% in NZ, 10% in Australia)
have to complete regular GST Returns.
The timing of how often you need to complete
GST Returns can vary. In New Zealand, if you only have a small turnover then
you have three options, either monthly, bi-monthly (which is the most common),
or six monthly. In Australia the reporting options are monthly, quarterly (the
most common), or annually.
Once you get used to completing GST Returns,
and so long as you are keeping good records, completing the returns can be done
easily and relatively quickly.
So is there a benefit to registering for GST
before you need to?
There is one very big benefit to being
registered for GST. Once you are registered for GST you can claim back all the
GST that you have been charged on your purchases, and this includes GST on
The big con to registering is of course the
fact that you have to charge GST on all your sales thus increasing your sales
price. This of course is not necessarily a con if all your sales are generally
to businesses, since, if they are in turn registered, then they can claim back
the GST you have charged them. It can however be a big con if your sales are to
end users, the general public. How much of a con this would be would of course
depend on how your final sales price comperes to those of your competitors
selling the same or similar items.
Of course, the other thing that should be taken
into consideration here is whether or not the majority of your sales are to
overseas buyers. You don’t need to charge GST if you have goods that you are
selling to overseas buyers.
So really at the end of the day you need to
weigh up the pro (of being able to claim back GST charged) against the con (of
having to increase your sales price by the GST) in order to determine whether
it is beneficial to register for GST before you need to.
If the majority of your sales are to overseas
buyers then there is a good chance that it would be beneficial to register for
GST. If the majority of your sales are domestic then maybe not.
You may have noticed that there are a few different
types of accountant out there and wondered what on earth the difference is
between them. The types of accountant that you are likely to see are chartered
accountant, certified accountant, management accountant and even public
accountant. Or of course you may have just assumed that it is only a “Chartered
Accountant” who is actually a qualified accountant which isn’t the case.
In fact, the different descriptions, or designations,
are usually an indication of the professional accountancy body that the
accountant qualified with. In England, where I originally qualified as an
accountant, there are several different professional bodies to choose from, all
of which give you a professional accountancy qualification, and the majority of
which also offer their qualifications on a global level:
- CIMA – Chartered Institute of
Qualified members are given a
designation of CGMA or Chartered Global Management Accountant
- ICAEW – Institute of Chartered
Accountants in England and Wales
Qualified members are given a designation
of ACA or Chartered Accountant
- ACCA – Association of Chartered
Qualified members are given a designation
of ACCA or Chartered Certified Accountant
- CIPFA – Chartered Institute of Public
Finance and Accountancy
Qualified members are given a designation
of CPFA or Chartered Public Finance Accountant
Each of these professional bodies has a system of
examinations and required professional experience before membership is granted
and each body also requires its members to undertake a minimum number of hours “continued
professional development” each year.
In Australia there are three professional accountancy
- CPA Australia – Certified Practising
- ICA Australia – Institute of
- IPA Australia – Institute of Public
And in New Zealand there is just the one:
- NZICA – New Zealand Institute of Chartered
Other countries will have all also have their equivalent
So what is the difference?
Well, in simple terms, the difference tends to come
through in specialisation.
All qualified accountants, regardless of which accountancy
body they qualified with will cover certain subjects such as Accounting
Standards, Financial Statements, Tax, Business Law etc.
However, some accountancy bodies, such as CIMA for example,
will have a higher proportion of concentration (exam wise) on management
accounting, costing, business finance etc. while others such as ICAEW will have
a larger concentration (exam wise) on auditing, taxation and law.
Public accountants have, as their name implies, much
more learning toward accounting for public finance and are more likely to work
in publicly funded environments such as government departments or district
The professional experience required to gain full
membership of an accountancy body (once exams have been completed) will also
generally have different requirements between the accountancy bodies in terms
of the disciplines for which minimum requirements are needed.
As a general rule of thumb most chartered accountants
will have started out working in an accountancy practise whereas most
management or certified accountants will have started out in the accounts
department of a commercial company. However, career directions can change and
over time the different “types” of accountants can become much more
intermingled with chartered accountants in commerce and management or certified
accountants in practise.
when interviewing a candidate for a position once (in England) I asked her why
she had chosen to study with the ACCA. Her answer, I felt, was quite insightful
and gave some distinction between the different designations. She answered that
CIMA was very industry based, ICAEW was very practise based whereas ACCA was
more middle of the road, somewhere between the other two.
So is one type of accountant better than another?
While many of my colleagues are likely to argue with me, arguing in favour of
their particular institution, the simple answer is no. We are all qualified
accountants, regardless of which designation we may hold, and through continued
professional development, we are all qualified and capable of doing the work
that we do.
Most trades and
professions have their own ‘language’ and accountants are no exception. How
many times have you heard certain account ting terms or phases and wondered
what on earth the person using them is talking about?
Well in order to help you out, here are some of
the more commonly used terms used by accountants in alphabetical order:
Accounts PayableAlso known as “Bought Ledger” or
Amounts companies owe suppliers for goods and
services. Listed in the current liabilities section on the statement of
Accounts ReceivableAlso known as “Sales
Amounts customers owe a company from sales of
goods or services that the company expects to collect within one year. Listed
in the current assets section on the statement of financial position.
A list of
expenses that have been incurred and expensed, but not paid or a list of sales
that have been completed, but not yet billed
Assets are resources controlled by the entity
as a result of past events (usually transactions), from which future economic
benefits are expected to flow to the entity.
Summary of a
company's financial status, including assets, liabilities, and equity
detailed plan, over a defined period (usually one year) with dollar amounts
Chart of Accounts
A listing of a company's
accounts and their corresponding numbers
A summary of cash
received and disbursed, within a specified period of time, showing the
beginning and ending amounts
At least one
component of every accounting transaction is a credit. Credits increase
liabilities and equity and decrease assets.
one component of every accounting transaction is a debit. Debits increase
assets and decrease liabilities and equity.
decrease in the value of an asset due to age and use
Amounts paid to
shareholders out of current or retained earnings
accounting in which every transaction has a corresponding positive and negative
entry (debits and credits)
money that you take out of a business to either live on and/or pay any personal
expenses. Drawings are part of the net profit and not a business expense.
to the owner or owners of a company
The preparation and presentation of
financial reports showing business cash flow, profit/financial performance and
financial position. The analysis and interpretation of financial statements to
help business owners and managers make informed decisions about their business.
company's usual 12 month reporting period.
A record containing the
balance sheet and the income/profit and loss statement
tangible property; building, land, computers, etc.
record of all financial transactions within an entity
difference between a business’s total sales and its cost of sales. Listed as a
category on the statement of earnings. Also called gross income.
billing from the seller to the buyer, outlining what was purchased and the
terms of sale, payment, etc.
record for recording transactions
is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources
embodying economic benefits.
information about particular activities within a business, including budgets,
costing and evaluating business activities.
Net Profit Also known as “Net Income”
remaining after all expenses and taxes have been paid
of entering then permanently saving or “archiving” accounting data
known as "Income Statement"
A summary of income and
The process of
matching one set of data to another; i.e. the bank statement to the check
register, the accounts payable journal to the general ledger, etc.
The amount of net profit
retained and not paid out to shareholders over the life of the business
income before expenses.
Statement of Account
summary of amounts owed to a vendor, lender, etc.
Stock Also known as “Inventory”
Merchandise purchased or
manufactured for resale at a profit
list of the general ledger accounts and their total balances
Turnover Also known as “Operating
from regular business operations
Do you sell goods or services online?
In most cases when you’re selling goods or services over the internet,
you have the same tax obligations as any other business.
Trading online is no different from doing business from a shop, or from
your home. Any income you earn from a business (and this includes online
auction or sales sites such as TradeMe or Ebay, or online market places such as
Felt or Etsy) needs to be included in an income tax return.
of course, not everyone who sells something online is considered to be
conducting an online business.
If, for example, you have a second hand fridge
to sell because you’ve bought a new one, or some clothes to sell because you no
longer want them, then of course the money received from online sales such as this
isn’t considered to be business income.
tax office lists some questions you can ask yourself when you trade online in
order to determine if you are conducting an online business. If you answer “yes”
to some or all of these questions then it’s likely that you will need to
declare the income earned:
you buy goods with the intention of reselling them? (It doesn’t matter if the goods were
purchases new or second hand what matters is whether the intent was to resell
you intend to make a profit from the sale?
(Are you selling something at a higher
prices than you paid for it or that it cost you to make? You may not have had
enough sales yet to cover your overheads but you are still selling with an
intent to make a profit.)
you providing services in return for payment?
(The payment doesn’t have to be cash,
any type of return that you have received for your services is considered to be
a payment for those services.)
you regularly sell goods or services online?
(This lets of those shown in the
examples given above but captures those who, for example, sell handmade goods
online and consider that they are conducting a hobby rather than a business)
you sell online as part of an already established business?
(This obviously speaks for itself and
covers business, such as brick and mortar shops who also sell online).
one thing the tax office does state, in addition to posing these questions, is
that “There is no minimum income level to be in business”. This is an important
point to note if you are debating as to whether you are conducting a hobby or a
Another important point to note is the following statement that the Inland Revenue
Department has made in relation to conducting an online business:
routinely monitor online transactions”
if you conducting an online trading business than make sure that you report it
accordingly as you don’t want to be caught understating your income.