How To Be A Bookkeeper

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3 Bookkeeping and Accounting Essentials 1st Edition Robert Rodgers Peter Lucas Publishing manager: Alison Green Publishing editor: Gregory Studdert Project editor: Michaela Skelly Developmental editor: Kylie McInnes Cover design: Danielle Maccarone Illustrator: Antonia Pesenti Text designer: Danielle Maccarone Editor: Sylvia Marson Permissions/Photo researcher: Georgina Wober Indexer: Vivienne Scott Typesetting: Cenveo Publisher Services Any URLs contained in this publication were checked for currency during the production process. Note, however, that the publisher cannot vouch for the ongoing currency of URLs Cengage Learning Australia Pty Limited Copyright Notice This Work is copyright. No part of this Work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without prior written permission of the Publisher. Except as permitted under the Copyright Act 1968, for example any fair dealing for the purposes of private study, research, criticism or review, subject to certain limitations. These limitations include: Restricting the copying to a maximum of one chapter or 10% of this book, whichever is greater; providing an appropriate notice and warning with the copies of the Work disseminated; taking all reasonable steps to limit access to these copies to people authorised to receive these copies; ensuring you hold the appropriate Licences issued by the Copyright Agency Limited ( CAL ), supply a remuneration notice to CAL and pay any required fees. For details of CAL licences and remuneration notices please contact CAL at Level 15, 233 Castlereagh Street, Sydney NSW 2000, Tel: (02) , Fax: (02) [email protected] Website: For product information and technology assistance, in Australia call ; in New Zealand call For permission to use material from this text or product, please [email protected] National Library of Australia Cataloguing-in-Publication Data Author: Rodgers, Robert. Title: Bookkeeping and accounting essentials / Robert Rodgers; Peter Lucas. ISBN: (pbk.) Subjects: Accounting. Bookkeeping. Other Authors/Contributors: Lucas, Peter. Dewey Number: 657 Cengage Learning Australia Level 7, 80 Dorcas Street South Melbourne, Victoria Australia 3205 Cengage Learning New Zealand Unit 4B Rosedale Office Park 331 Rosedale Road, Albany, North Shore 0632, NZ For learning solutions, visit cengage.com.au Printed in China by RR Donnelley Asia Printing Solutions Limited

4 CHAPTER 1 BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES What you will learn in this chapter Upon completion of this chapter you should be capable of: 1.1 identifying the duties and responsibilities of a bookkeeper and an accountant 1.2 carrying out research to identify bookkeeping compliance 1.3 setting up and maintaining appropriate systems to meet compliance requirements 1.4 identifying different business activities and forms of business ownership 1.5 explaining the purpose of manual and computerised accounting systems 1.6 explaining the processes in establishing and reviewing an accounting system 1.7 explaining where bookkeepers can obtain support. Are you already competent at these tasks? If you have already accomplished these tasks as a result of your recent workplace or training experiences you may wish to proceed to the comprehensive assessment activity at the end of this chapter to assess your skills in these areas. 2

5 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES 1.1 THE DUTIES AND RESPONSIBILITIES OF A BOOKKEEPER AND AN ACCOUNTANT The primary purpose of maintaining an accounting system is to provide an organisation s financial information to interested parties, such as individuals and organisations that have an interest in the financial affairs of that particular organisation. The required information is provided by bookkeepers and accountants. Bookkeepers and accountants have distinct and individual job descriptions; so there are separate knowledge and skills and different duties and responsibilities associated with recording business transactions, maintaining the accounting system and the reporting and communicating of the financial affairs of an organisation. These separate roles are discussed below. The roles and responsibilities of the bookkeeper A bookkeeper (also known as an accounting clerk or accounting technician) maintains the accounting system and records the organisation s financial transactions in accordance with its policies and procedures. This ensures that accurate and timely financial information is provided from the system. The roles and responsibilities of the bookkeeper include: processing invoices, adjustments, receipts, payments and other financial transactions maintaining the organisation s accounts and preparing management reports monitoring and managing amounts owing by debtors (accounts receivable) and owing to creditors (accounts payable) processing and maintaining the payroll system reconciling the accounts and preparing reconciliation reports preparing statutory reports required by state and federal governments and other regulatory bodies preparing financial statements. The bookkeeper is an integral part of the accounting process, as transactions must be analysed, interpreted and coded to comply with the organisation s reporting requirements and then processed in the accounting system in accordance with the organisation s operating procedures. When a bookkeeper maintains the accounting system as required, the information provided to the users of the system allows them to make accurate decisions relating to the financial affairs of the organisation. When a bookkeeper fails to perform the bookkeeping functions accurately and in a timely manner, the financial information provided may be inaccurate or incomplete. Bookkeepers should be mindful of the GIGO principle, meaning Garbage In, Garbage Out. This principle is based on the premise that if data entered into the system is incorrect or inadequate, then the information provided may also be incorrect or inadequate. Therefore, decisions based on that information may also be incorrect. Bookkeeping functions are required in all organisations including small and large business organisations, not-for-profit organisations and most levels of government. These organisations may employ bookkeepers or they may outsource the bookkeeping functions to a contract bookkeeper. Each organisation will have its own operating policies and procedures relating to its financial affairs. These will range from cash accounting systems to accrual accounting systems, and may involve the sale and purchase of goods and the provision of services, which will most likely involve the Goods and Services Tax (GST) applied by the federal government. An organisation s financial affairs may also involve the payment of wages to employees and either a manual or computerised accounting system. 3

6 BOOKKEEPING & ACCOUNTING ESSENTIALS Given the breadth of different policies and procedures and different accounting systems associated with different organisations, a bookkeeper must possess a sound knowledge of basic bookkeeping fundamentals to be able to: process transactions using both manual and computerised accounting systems maintain up-to-date knowledge of state and federal government legislation relating to an organisation s financial affairs ensure compliance with that legislation communicate effectively with a range of interested people and organisations. Today s bookkeeper should have the ability to work independently, as part of a team and also under the supervision of an accountant and must maintain a high degree of ethical standards. A professional bookkeeper should be capable of undertaking an extensive range of manual and computer-assisted bookkeeping services including: assisting in the establishment and review of an accounting system designing a suitable chart of accounts establishing and maintaining cash and accrual accounting systems recording transactions in the accounting system establishing and maintaining the accounts in the General ledger preparing banking documentation and reconciling bank statements establishing and maintaining an accounts receivable system managing and controlling debtors accounts establishing and maintaining an accounts payable system managing and controlling creditors accounts establishing and maintaining an inventory control system reconciling accounts receivable and accounts payable systems establishing and maintaining an asset management system establishing and maintaining a payroll system reconciling payroll systems calculating GST collected and GST paid amounts calculating PAYG withholding amounts preparing and lodging a Business Activity Statement recording and reporting Superannuation Guarantee amounts preparing and recording end of period adjustments preparing financial statements. ACTIVITY 1A Search the following websites and make a list of the specialist services provided by bookkeepers Bookkeeper.aspx ACTIVITY 1B Search the Internet for five advertised bookkeeping jobs in Australia and record the roles and responsibilities of each position. 4

7 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES The roles and responsibilities of the accountant An accountant s role, in addition to being capable of performing the duties and responsibilities of a bookkeeper, is to oversee the work performed by the bookkeeper and to provide interested parties with analysis and interpretation of an organisation s past and future financial performance. Accountants also provide specific reports as required by any of the interested parties. The services provided by accountants include: business establishment services corporate reporting and compliance services audit services management accounting services financial management advisory services taxation advice and planning services insolvency and reconstruction services systems design services trust account and superannuation fund services. To be able to perform these accounting services, accountants must be qualified, experienced and competent and be up-to-date with accounting issues and changes, taxation legislation and other legislative requirements associated with the financial services industry. Consequently, an accountant, in addition to the compliance issues facing bookkeepers, should keep abreast of the following: Australian and international accounting standards auditing standards taxation law superannuation legislation Corporations Act 2001 Bankruptcy Act 1966 Given the complexities of the finance industry and the nature of specific legislation it is not unusual for accountants to offer services only in specific accounting areas. Accountants usually hold a qualification in accounting and register with an organisation representing a particular qualification, such as the Institute of Public Accountants (IPA). Some accountants undertake additional studies that allow them to be registered as a certified practising accountant (CPA) or as a chartered accountant (CA) with the Institute of Chartered Accountants in Australia (ICAA). In addition to being a member of an accounting organisation, accountants may, with the appropriate qualifications and practice, register with organisations identified with specific accounting services such as the Tax Agents Board as a tax agent or the Australian Securities and Investments Commission (ASIC) as a registered company auditor. ACTIVITY 1C Find and examine four advertised accounting jobs, two from Australia, one from the United Kingdom and one from another country. List the role of each job and the task expectations. ACTIVITY 1D From your Internet searches in the previous activities make a list of the similarities and differences between the roles of an Australian accountant compared to an Australian bookkeeper. 5

8 BOOKKEEPING & ACCOUNTING ESSENTIALS 1.2 BOOKKEEPING CONTRACTORS A bookkeeping contractor is a registered bookkeeper who is charging clients fees for services provided. When a contract bookkeeper charges an organisation for the completion and lodgement of a Business Activity Statement, or services associated with its preparation, the bookkeeper must be registered in accordance with the Tax Agent Services Act 2009 (see Table 1.1 below). TABLE 1.1 Qualifications and conditions outlined in the Tax Agent Services Act 2009 (as of November 2010) Qualification 1 Accounting qualifications 2 Membership of professional association Conditions a. Award of at least a Certificate IV Financial Services (Accounting) or a Certificate IV Financial Services (Bookkeeping) from a registered training organisation or an equivalent institution; and b. successfully completed a course in basic GST/BAS taxation principles that is approved by the Board; and c. have at least 1400 hours of relevant experience in the past three years. a. Award of at least a Certificate IV Financial Services (Accounting) or a Certificate IV Financial Services (Bookkeeping) from a registered training organisation or an equivalent institution; and b. successfully completed a course in basic GST/BAS taxation principles that is approved by the Board; and c. be a voting member of a recognised BAS agent association or a recognised tax agent association; and d. have at least 1000 hours of relevant experience in the past three years. Note: The current registration requirements can be found at the following website: When choosing a contract bookkeeper an organisation will give consideration to the: services that the bookkeeper can provide rates charged by the bookkeeper indemnity insurance provided by the bookkeeper bookkeeper s qualification(s), registration and experience referrals provided by the bookkeeper from past contracts compatibility of the bookkeeper s accounting system with that used by the organisation and the organisation s accountant. The benefits to an organisation of using the services of a bookkeeping contractor include: the ability to negotiate for the specific bookkeeping services and the fees charged a reduction in overhead costs associated with maintaining the accounting system as bookkeeping functions are outsourced reduced operating costs associated with superannuation and leave payments as the organisation does not employ its own bookkeeper the organisation may not need to employ a qualified accountant to perform bookkeeping services. When an organisation hires a contract bookkeeper a letter of engagement is prepared. This details the duties and responsibilities of the bookkeeper and other issues pertaining to the agreement. Examples of letters of engagement can be obtained from the following websites:

9 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES ACTIVITY 1E Access the website and search under BAS agent regulatory information sheets. Make a list of the bookkeeping activities classified as BAS services that require contract bookkeepers to be registered with the Tax Practitioners Board. 1.3 ACTIVITIES BEYOND THE BOOKKEEPER S RESPONSIBILITY When an organisation employs a bookkeeper, or uses a contract bookkeeper, it is essential that the roles and responsibilities are clarified to ensure that the bookkeeper knows what functions have to be met and those that fall outside their responsibility. These would already have been outlined in the letter of engagement discussed above. Organisations should identify non-bookkeeping activities and establish policies and procedures that ensure these activities are undertaken by other people within (or outside) the organisation. Non-bookkeeping activities and the people or organisations that are capable of performing these responsibilities include: Accounting activities: Functions relating to accounting services should be assigned to the organisation s accountant or outsourced to an accounting firm. When an organisation employs both accountants and bookkeepers, it is essential that the accountants are given a coordinating role and that the bookkeepers work under the supervision of the accountants. Debt collection activities: When a debtor has been identified as a bad debt by the bookkeeper, the future of the debt should be resolved by the business owner(s) or managers and legal action placed in the hands of the legal profession. Financing activities: When an organisation raises finance from a bank or other source the owner(s) or persons employed to manage the business on behalf of the owners should take the responsibility for that debt on behalf of the organisation. Asset management activities: The day-to-day management of the organisation s assets should be under the control of the owner(s) or the management team. Legal activities: Issues of a legal nature should rest with the owner(s) or managers and should be outsourced to the legal profession. Operational activities: The day-to-day management of the organisation must be assigned to the owner(s) or the management team. In addition to obtaining the services of professionals to undertake specific management, legal and financial services, an organisation and its owner(s) may consider networking. A business network consists of like-minded people who provide assistance and support, new ideas and solutions to problems, gain access to markets, share suppliers and resources and lobby governments. Governments at the local, state and federal level can also assist businesses and other organisations by providing advice, and in some cases, financial support. The Australian Government website at is a useful one to gain access to assistance and support. ACTIVITY 1F Access and list six areas where the Australian Government provides support to businesses. 7

10 BOOKKEEPING & ACCOUNTING ESSENTIALS ACTIVITY 1G In the Workbook you will find a list of bookkeeping and accounting services. You are required to complete the table by identifying the duties and responsibilities that a bookkeeper could undertake and those that an accountant could undertake. 1.4 THE BOOKKEEPING PROFESSIONAL It is essential that all professional bookkeepers subscribe to the following principles: 1 be a good communicator 2 always act ethically 3 maintain currency 4 obtain feedback on services. Communication and the bookkeeper Bookkeepers will need to communicate with business owners, managers, clients and customers, as well as creditors and suppliers, employees, banks, the Australian Taxation Office (ATO) and other regulatory bodies. It is, therefore, essential that bookkeepers possess excellent communication skills. Poor communication could result in a bookkeeper providing incorrect information, which could lead to loss of employment, loss of clientele and loss of professional standing. In business today the ability to communicate with individuals inside and outside the organisation is a major factor in success. To be effective communicators, bookkeepers need to use different types of communication to suit the needs of the person or organisation they are communicating with. These include: verbal and non-verbal communication written communication electronic communication. Each of these communication styles has advantages and disadvantages. It is important that the communication style allows for the information to be transferred and understood in the appropriate timeframe to suit the user. Financial information communicated to business owners may include less detail than that communicated to managers. The ATO may allow the bookkeeper to communicate using electronic means, whereas it may be more appropriate to communicate with debtors verbally then followed by a written personalised letter. The bookkeeper will need to be aware of the information required by the different users and how they will want that information communicated. The bookkeeper will also need to be aware of communication barriers that may distort the information being provided and factor these barriers into the communication method chosen. These barriers may include the user s: lack of knowledge of the accounting system and processes used by a bookkeeper urgency to obtain up-to-date information inability to comprehend the financial information provided potential language differences. 8 Acting ethically Theaccountingandbookkeepingprofession,likeallother professions, requires its practitioners to maintain a high regard for the profession and to always act ethically. If professional ethics are maintained, then everyone is able to operate with confidence, trust and integrity.

11 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES Acting ethically means to act in a way that treats clients and the public honestly, truthfully and with respect, and to avoid behaviour or practices that are considered dishonest, untruthful, fraudulent or would bring the profession into disrepute. Professional ethics in the finance sector are imposed on bookkeepers and accountants through the Tax Agents Services Act 2009, the Accounting Professional and Ethical Standards Board, professional associations and the Privacy Act Professional ethics covers the following essential principles: Integrity: requires bookkeepers to be honest and truthful in their professional dealings with others Objectivity: requires bookkeepers to ensure integrity in their business judgements by ensuring that any decisions are not biased, do not unduly influence others or result in a conflict of interest Professional competence: requires bookkeepers to be knowledgeable and to carry out their services diligently and skilfully to ensure that clients and others receive competent services Confidentiality: requires bookkeepers to ensure that information relating to their clients and others that is of a personal or sensitive nature is kept secret and not divulged to others unless authorised to do so Professional behaviour: requires bookkeepers to ensure compliance with rules, regulations and laws relating to their operations in the financial services industry. Tax Agent Services Act 2009 To ensure a high level of integrity in the accounting and bookkeeping profession, registered bookkeepers are required under the Tax Agent Services Act 2009 to maintain a Code of Professional Conduct. This code attempts to formalise the conduct and actions that are expected from bookkeepers in respect of their competence, honesty and integrity, independence and confidentiality. The Act specifies how breaches of the Code of Professional Conduct by a registered bookkeeper may be handled. These include: cautioning the bookkeeper requiring the bookkeeper to complete a course of training placing restrictions on the bookkeeper s operations requiring the bookkeeper to practise under supervision suspending or terminating a bookkeeper s registration imposing financial penalties. Apart from the serious legal repercussions for those who are found violating the Code, it is the reputation of the profession as a whole that suffers when a bookkeeper or an accountant behaves unethically. People who do so can lose their job, lose their reputation, lose their insurance and forfeit membership to any professional bodies. Professional associations Australia s bookkeeping and accounting associations require members to adhere to codes of ethics and codes of conduct that ensure public confidence in the profession. These codes, which also include disciplinary processes, provide for the governance of the accounting profession and act as a mechanism for the self-regulation of the industry. The following websites provide details of how professional bodies apply ethics in the bookkeeping and accounting profession: standards 9

12 BOOKKEEPING & ACCOUNTING ESSENTIALS ACTIVITY 1H Make a list of activities that would be considered unethical for a professional bookkeeper. Maintaining currency Professional bookkeepers work as part of a team under the supervision of a qualified accountant but they also work autonomously without supervision. Bookkeepers will, therefore, require excellent product knowledge; always provide excellent customer service; be capable of working within a regulated environment; and need to make sound judgements. A bookkeeper will be able to meet these requirements by undertaking continuous professional development. Professional development is the process by which a professional person maintains the quality and relevance of their skills throughout their working life, thereby enabling them to undertake their duties effectively. With the introduction of the GST, significant financial compliance requirements and continuing changes to taxation legislation, bookkeepers must ensure they have the technical knowledge and skills to efficiently undertake the tasks required. The need for bookkeepers to be qualified and registered has never been greater. The Tax Agent Services Act 2009 and the various accounting associations make it mandatory for bookkeepers and accountants to undertake continual professional development. This should be structured as part of a bookkeeper s ongoing professional activities. Organisations should include professional development in the bookkeeper s annual work plan; while contract bookkeepers should set personal professional development targets. These work plans and targets should be constantly monitored to ensure compliance with industry requirements and to guarantee the continued currency of the bookkeeping services provided. ACTIVITY 1I Access the websites of professional bookkeeping or accounting associations or networks and make a list of the professional development activities being offered. Obtaining feedback Professional bookkeepers should continually seek feedback on their performance to ensure they are meeting their employer s or client s requirements. Bookkeepers employed in organisations will receive feedback from managers and accountants within the organisation and contract bookkeepers should be seeking to provide customers with improved services. The customer experience is very important in both retaining current clients and building a client base. Customers need to be able to express their concerns and opinions on the services the bookkeeper provides. Common methods of seeking customer feedback may include: a feedback questionnaire can be mailed out with the invoice or statement an with a feedback questionnaire can be included when announcements/news are sent to clients. Contract bookkeepers should also put in place policies and procedures to allow clients to make suggestions or to lodge complaints. It is important that clients find it easy to provide feedback and to see that recommendations for improvement in services is acted upon immediately. 10

13 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES By obtaining feedback the bookkeeping employee or the contract bookkeeper is able to improve his or her performance while also improving the services and reputation of the organisation they are employed by. 1.5 THE BOOKKEEPER AND COMPLIANCE REQUIREMENTS Most industries are required to comply with a range of legislative requirements. Bookkeepers and accountants operating in the financial services industry need to ensure compliance with the following: Tax Agents Services Act 2009 A New Tax System (Goods and Services Tax) Act 1999 Australian Accounting Standards Board (AASB) PAYG withholding system Superannuation Guarantee (Administration) Act 1992 Retention of financial records Privacy Act 1988 Trading acts and codes The Tax Agents Services Act 2009 Organisations registered for GST and/or registered as an employer must report their GST amounts and employee PAYG deductions to the ATO on the organisation s Business Activity Statement (BAS). When a contract bookkeeper provides services relating to the BAS for a fee or reward the Tax Agent Services Act 2009 (TASA 2009) requires the bookkeeper to be registered. BAS services include the calculation of BAS liabilities, entitlements and obligations and representing an organisation for its BAS activities with the ATO. If a bookkeeper is not registered a penalty may be imposed under the civil penalty provisions of the TASA In addition, contract bookkeepers will be required under the provisions of the TASA 2009 to hold professional indemnity insurance effective as from 1 July A New Tax System (Goods and Services Tax) Act 1999 Organisations with a turnover of $ or more, or not-for-profit organisations with a minimum turnover of $ , must register for the Goods and Services Tax (GST) and apply a 10 per cent tax to goods and services deemed taxable supply. The tax collected must be reported and remitted to the ATO by the due dates stipulated in the legislation. When an organisation registered for GST incurs GST on its acquisitions it is able to claim the GST paid as a tax credit, thereby reducing the amount it owes to the ATO. As bookkeepers are an integral part of the recording function in the accounting system it is imperative they apply GST to transactions in accordance with the regulations and that they keep up to date with changes in GST legislation. The ATO informs registered organisations of changes to the legislation. In addition, the bookkeeper is able to access up-to-date information relating to the GST by searching for GST on the ATO website. Australian Accounting Standards Board The Australian Accounting Standards Board (AASB) is responsible for the setting of accounting standards in Australia. The accounting standards apply to all entities regulated 11

14 BOOKKEEPING & ACCOUNTING ESSENTIALS by the Corporations Act This includes public companies and large proprietary companies formed under corporations law, as well as managed investment schemes such as unit trusts. This Act also ensures that the AASB standards have the force of law, for example: a company s directors must ensure that its financial statements comply with accounting standards auditors of companies are required to state whether the accounts have been made out in accordance with accounting standards substantial penalties apply to company directors for non-compliance with the law. Consequently, a bookkeeper who is employed by an organisation that falls within the definitions of Australian corporations law will need to ensure that the organisation s financial affairs are accounted for in accordance with the requirements and standards of the AASB. The AASB website ( will assist bookkeepers to maintain their knowledge of the Australian accounting standards and their developments. PAYG withholding system Under the PAYG system, employers are required to withhold income tax from wages, salaries and payments to employees, directors and others and must forward the tax withheld to the ATO. In addition, employers must issue employees with a pay advice for each payment, issue payment summaries to employees and report to the ATO on withholding payments deducted during the financial year. In some organisations, the bookkeeper is responsible for administering the payroll system and as a result he or she must be aware of the employer s responsibilities under the PAYG system and relevant compliance requirements. Superannuation Guarantee (Administration) Act 1992 The Superannuation Guarantee (Administration) Act 1992 established compulsory employmentbased superannuation under which employers are required to provide a minimum level of superannuation support for employees who meet certain employment conditions. This is referred to as the Superannuation Guarantee. Employers are currently required to contribute 9 per cent of earnings towards an employee s chosen superannuation fund. As a result of this legislation, bookkeepers responsible for maintaining an organisation s payroll system will need to comply with the recording, disclosure and reporting provisions of the Act. Retention of financial records Bookkeepers need to ensure that the documents used in the accounting system are retained as evidence that transactions have occurred. These documents may be required by various government bodies when conducting audits into income tax, GST issues and/or the Superannuation Guarantee. The period of retention of financial documents generally ranges from one year to seven years, and in some cases must be retained for the life of the organisation. Consequently, all organisations should have a document retention and destruction policy to ensure compliance with various legislative requirements. This policy should: identify the documents and records to be retained and the retention period determine the method of retention, such as hard copy or electronic copy 12

15 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES detail the storage, archive and security methods detail the document destruction policy. The ATO website provides assistance in the area of records management, for example: a software program titled: Record keeping evaluation tool that assists organisations to identify documents that should be retained a document titled Record keeping for small business a document titled Penalties for not keeping proper records. Privacy Act 1988 Bookkeepers have access to sensitive and confidential information, such as bank account numbers, tax file numbers, customers and employees personal details and other private information. The Privacy Act 1988 regulates the way organisations collect, use, store and disclose information. The details of this act can be accessed at Consequently, when undertaking bookkeeping activities, the professional bookkeeper must ensure that information of a personal nature pertaining to the organisation, employees, customers, suppliers and so on is protected and remains confidential. By protecting personal information the bookkeeper not only complies with the law but also follows good business practice. This gains the confidence of the community and ensures his or her personal integrity. Trading acts and codes Contract bookkeepers providing services to the public should also be aware of their obligations under the following: Competition and Consumer Act 2010 Electronic Funds Transfer (EFT) Code of Conduct Business names legislation for each state and territory. ACTIVITY 1J Consider the following scenario. Jane has been performing bookkeeping services for her clients for over 10 years. She specialises in day-to-day bookkeeping functions and BAS preparation. Although she has no formal qualifications and does not belong to a bookkeeping association, she is considered by her clients to be an excellent bookkeeper. She is knowledgeable on all the issues relating to GST and PAYG withholding from employee payrolls and assists many of her colleagues with BAS issues. Explain the compliance issues facing Jane as a practising bookkeeper and any penalties that may apply if she is considered non-compliant. 1.6 SETTING UP AND MAINTAINING THE ACCOUNTING SYSTEM TO MEET COMPLIANCE REQUIREMENTS Organisations that have to comply with legislative requirements will need to establish systems, procedures and policies to ensure that the information provided from the system allows the organisation to meet its compliance responsibilities. Generally, when an organisation has employed accountants and bookkeepers to undertake all financial compliance-related activities, the owner(s) or their appointed representatives under the law must take full responsibility when non-compliance is 13

16 BOOKKEEPING & ACCOUNTING ESSENTIALS determined and penalties applied. Contract bookkeepers, on the other hand, who provide services for a fee must take the responsibility for ensuring financial compliance. The organisation s accountant and the bookkeeper will be an integral part in this process as they: have the knowledge and skills to identify the information required by legislation understand how an accounting information system can provide the required information can set up and maintain the system to ensure continued compliance are in a position to modify the system to meet ongoing compliance issues. Compliance requirements Bookkeepers need to be involved in the establishment, monitoring and appraisal of accounting systems to ensure that the system provides the appropriate compliance information. This is of particular importance in relation to compliance with the following: A New Tax System (Goods and Services Tax) Act 1999 PAYG withholding system Superannuation Guarantee (Administration) Act A New Tax System (Goods and Services Tax) Act 1999 GST-registered organisations are required to issue a valid tax invoice when providing goods or services to customers. See Table 3.1 in Chapter 3 for compliance requirements for tax invoices. The Act also requires GST-registered organisations to calculate, report and remit GST to the ATO. The GST amount is reported on the organisation Business Activity Statement. Table 1.2 shows the GST options and compliance requirements facing organisations. TABLE 1.2 GST options and compliance requirements ATO Business Size (based on GST turnover) Calculate GST Report GST Remit GST Due Dates of Payment Greater than $20 million Monthly Monthly Monthly 28th day of the following month Less than $20 million Option 1 Quarterly Quarterly Quarterly 28 October, 28 February, 28 April, 28 July Option 2 Quarterly Annually Annually 28 February (or as stated by ATO) Option 3 Quarterly 28 October, 28 February, 28 April, 28 July Organisations with a GST turnover greater than $20 million must use the accrual method of reporting and recording GST. Organisations with GST turnover less than $20 million have a choice of using either the accrual method or the cash method of incurring GST. Accrual method of reporting GST Under the accrual method, the GST amount is calculated on the value of the tax invoice issued or received regardless of when the invoice is actually paid. The net GST amount must be reported to the ATO and remitted to the ATO by the due date. So, if an invoice is issued to a debtor with payment due in 30 days the amount payable to the ATO is the amount when the invoice is issued not when it is paid in 30 days. Similarly, if a tax invoice has been received from a supplier with payment due next month the amount claimable as a GST credit is calculated at the date of the transaction not when it is paid in a month s time. 14

17 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES An example is outlined below. Chalmers Trading issued and received tax invoices during the month of May which included the following amounts of GST. Tax invoices issued to customers Tax invoices received from suppliers GST collected GST paid Goods sold on a cash basis $5 000 Goods purchased on a cash basis $2 000 Goods sold on a credit basis $ Goods purchased on a credit basis $4 000 Total GST collected $ Total GST paid $6 000 This amount of GST is payable to the ATO. This amount can be claimed as a reduction to the GST payable to the ATO. Under the accrual method of recording GST, Chalmers Trading owes the ATO $ for GST collected and can claim a credit of $6000 for GST paid. This results in a net amount of $9000 owing to the ATO. Cash method of reporting GST The cash method of reporting GST only identifies the GST received in cash or paid in cash irrespective of when the tax invoice was issued. Consequently, if an invoice is issued to a customer with payment due in 30 days the GST will not be paid to the ATO until it is received from the customer. Similarly, if a tax invoice is received from a supplier with payment due in the following month, the GST credit cannot be claimed until the supplier has been paid in cash. An example is outlined below. If Chalmers Trading in the previous example used the cash method of reporting GST, the GST on the $ worth of goods sold on a credit basis would not be payable to the ATO until the amount was received from the customer. Similarly, the GST on the $4000 worth of goods purchased on a credit basis could not be claimed until the amount was paid to the supplier. So, the GST position of Chalmers Trading under the cash method of recording GST would be as follows. Tax invoices issued to customers Tax invoices received from suppliers GST collected GST paid Goods sold on a cash basis $5 000 Goods purchased on a cash basis $2 000 Total GST collected $5 000 Total GST paid $2 000 This amount of GST is payable to the ATO. This amount can be claimed as a reduction to the GST payable to the ATO. Under the cash method of recording GST, Chalmers Trading owes the ATO $5000 for GST collected on a cash sale and can claim a credit of $2000 for GST paid on a cash purchase. This results in a net amount of $3000 owing to the ATO. If in the following month the credit customers paid for the amount owing on the credit sale, Chalmers Trading would have to pay the GST of $ to the ATO. Similarly, if Chalmers Trading paid the supplier for the goods purchased in the previous month then the business could claim a GST credit of $4000. This would result in a net GST amount in the following month of $6000 payable to the ATO. As a consequence of GST compliance choices and requirements, it is essential that accountants and bookkeepers establish an accounting system that is capable of: recording GST accurately on valid tax invoices calculating GST correctly in the organisation s accounts reporting the correct amount of GST to the ATO remitting the correct amount of GST to the ATO by the due date. 15

18 BOOKKEEPING & ACCOUNTING ESSENTIALS PAYG withholding system The PAYG withholding system used in Australia requires employers to withhold income tax from certain payments made: to employees, company directors and office holders under voluntary agreements and labour hire arrangements when a supplier has not quoted an ABN. Employers are required to register with the ATO and are then responsible for calculating and collecting income tax using the appropriate PAYG withholding tax tables, and reporting and remitting the amount to the ATO on its BAS. Payments to the ATO depend on whether the employer is classified as a small, medium or large withholder. Table 1.3 summarises the payment options. TABLE 1.3 PAYG payment options PAYG instalments withheld Withholder category Payment options $1 $ Small withholder Monthly or quarterly $ $1 million Medium withholder Monthly Over $1 million Large withholder Weekly As a result of the PAYG withholding obligations facing an organisation, it is essential that the bookkeeper be involved in the establishment and maintenance of the payroll system to ensure the system enables compliance with the legislation. Superannuation Guarantee (Administration) Act 1992 Organisations must contribute towards an employee s superannuation fund at the rate of 9 per cent of an employee s ordinary time earnings in accordance with the Superannuation Guarantee (Administration) Act Amounts owing to each employee s superannuation fund must be paid quarterly as follows: Quarter July September October December January March April June Superannuation Guarantee payment 28 October 28 January 28 April 28 July As the employer contribution is based on an employee s earnings, bookkeepers need to ensure that the payroll system is capable of calculating the correct amount of earnings and superannuation liability and of paying the liability to the correct fund by the due date. If a payment is incorrect or not paid by the due date, the employer must pay a penalty to the ATO. ACTIVITY 1K Consider the following scenario. Sara and Barry have recently obtained their qualifications as bookkeepers and have decided to establish a partnership named Best Bookkeeping Services. The business has registered for GST on the cash reporting basis and will provide customers with 30 days credit. Sara and Barry will both be paid a salary from the business. Explain the compliance issues facing the business. 16

19 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES The accounting system Bookkeeping is the process of recording financial transactions into the accounting system for the purpose of producing financial statements from which interested parties can make financial decisions. For this process to occur the accounting system requires data to be input into the system for processing. This is the case for both manual and computerised systems. Both manual and computerised accounting systems are based on tried and proven practices and procedures that enable the accounting system to derive the financial information required by interested parties. Systems processing consists of three phases. These are input, processing and output. An accounting system requires data from business documents as input, which are then processed either manually or electronically from which financial reports are produced as output. A manual accounting system In a manual bookkeeping system, specific details of business transactions are recorded in the business journals before they are posted to the ledgers. The main ledger is called the General ledger which contains the accounts listed in the chart of accounts. Other ledgers, called Subsidiary ledgers, may be maintained for debtors (accounts receivable) and creditors (accounts payable). The General ledger includes an organisation s chart of accounts which forms the basis for the financial statements. The accounts include assets, liabilities, owner s equity, income and expenses. These accounts will be increased or decreased with amounts recorded in the journals by either debiting or crediting the account according to the rules of double entry accounting. The purpose of the General ledger is to bring together, or accumulate, amounts relating to each account to enable account balances to be determined. A trial balance is normally prepared to ensure that the accounts are in balance. The account balances can then be used to prepare the financial statements. Manual bookkeeping requires the sequential process of preparation of journals, followed by postings to accounts in the General ledger, followed by the preparation of the financial statements. This process is illustrated in Figure 1.1 below. FIGURE 1.1 The manual bookkeeping process 17

20 BOOKKEEPING & ACCOUNTING ESSENTIALS A computerised accounting system A computerised accounting system performs the same functions as a manual accounting system except the data is processed electronically. Many organisations use computerised accounting systems that record and process a transaction as it occurs. Other organisations may process transactions daily or weekly. Contract bookkeepers process transactions in their computerised accounting systems when they are provided with a client s source documents. Computerised accounting systems are suitable for use by all organisations, large or small, and can provide the following benefits: greater speed and efficiency resulting from the immediate processing of transactions minimisation of errors as data keyed to the system updates all subsystems instantly instant access to an extensive range of reports providing interested parties with timely information. A computerised accounting system, like a manual accounting system, needs input data in the form of business documents. Unlike the manual system, a computerised accounting system requires data to be keyed into the accounting software program where it is instantly processed, allowing for management reports and financial statements to be printed as required. This process is illustrated in Figure 1.2 below. FIGURE 1.2 The computerised accounting system Business activities and ownership structures The type of activity carried out by an organisation (business) and how the organisation is owned will influence what is recorded in the accounting system and how it is reported. Business and organisational activities are associated with the following industries. Primary and extractive industry: refers to businesses that are involved in mining resources such as bauxite, iron and coal; or using the country s natural resources such as aqua culture, fishing or forestry; or farming the land such as graziers. Bookkeeping clients may include dairy farmers, horticulturalists, wine growers and aqua culturists. 18

21 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES Manufacturing industry: refers to businesses that convert the production from the primary and extractive industry into products for consumption by other manufacturers or consumers. Specific types of manufacturing businesses include steel fabricators, furniture manufacturers and car manufacturers. Wholesale industry: refers to businesses that obtain the goods produced by the manufacturing industry and distributes them to the retail industry. Retail industry: refers to the businesses that obtain goods from the manufacturing industry or the wholesale industry and offer the goods to other businesses or the general public. Bookkeeping clients include florists, hardware stores, food retailers, computer retailers and chemists. Service industry: this industry provides services to the economy. Examples include accountants, lawyers, doctors and health services. Not-for-profit industry: refers to charities and organisations, such as sporting clubs, where the intention is not to make a profit but to carry out activities for the benefit of its members and others. An organisation operating in any of these industries may be owned by any of the following forms of ownership. Sole trader: When a business is owned and controlled by one person it is referred to as a sole trader business. The owner receives all profits and bears all losses and is responsible for all debts. Partnership: A partnership business is owned by two or more people. Under Australian law, most partnerships can have a maximum of 20 partners. The partners usually enter into a partnership agreement that may specify each partner s capital contribution to the business, partner s salaries and drawings and other operational matters. In Australia partnerships are governed by the relevant state Partnership Act. Company: A company is a business, which has been incorporated under the Corporations Act 2001, which is administered by the Australian Securities and Investments Commission (ASIC). When a business is incorporated the company issues shares to its owners who are called shareholders. Companies can be identified by the words Ltd (for public company) or Pty Ltd (private company) in their business name. Cooperative: A cooperative is an organisation formed by producers or consumers in order to increase profits or reduce costs to members. Farmers, for example, may form a cooperative to process and market their produce. Clubs, societies, charities and professional associations: These organisations are not formed to make a profit but to provide benefitsforitsmembers.anysurplusesmade by the organisation are normally spent on furthering the objectives of the organisation. The distinctions between different industry activities and the different forms of ownership will have a significant impact on the accounts of an organisation and, consequently, what is reported in the financial statements. Cash and accrual accounting systems When establishing an accounting system, the method of accounting will play an important role in the design of the system, what is reported in the financial statements and how the organisation is managed. All accounting systems, manual or computerised, will record transactions using either cash accounting methods or accrual accounting methods. 19

22 BOOKKEEPING & ACCOUNTING ESSENTIALS Cash accounting This method of accounting is used when transactions such as selling goods or services are conducted on a cash-only basis and an organisation does not provide credit to its customers, nor does it receive credit from its suppliers. It makes payments to suppliers using only cash, cheque or a card facility such as a credit card or debit card. Consequently the accounting system will only record and process cash transactions including cash and cheques received, electronic funds transfer (EFT) and cheques issued. These are illustrated in Figure 1.3 below. FIGURE 1.3 Cash accounting documentation Accrual accounting This method of accounting incorporates both cash and credit transactions. An organisation provides its customers with credit enabling them to pay at a future date for goods and services they have acquired. These customers are called debtors or accounts receivable. The advantage of accrual accounting is that an organisation can record the sale before the cash is received from the customer. Many large retailers provide their customers with up to two years credit in an effort to increase sales. A disadvantage of accrual accounting is that cash is not available until customers pay their accounts, and in some cases the customer will not pay, which then involves the organisation in debt collection activities. An organisation can also be granted credit from its suppliers who are referred to as creditors or accounts payable. The organisation therefore obtains the product or service from the supplier and pays for it at a later date. An accrual accounting system when an organisation provides credit and receives credit will need to: establish business documents that record the sale or supply of goods on credit and also allow for the return of the goods by the customer provide policies and procedures for the recording and reporting of credit transactions establish a policy for the granting of credit to approved customers be capable of recording and processing invoices and adjustments from suppliers when credit has been provided manage the accounts once credit has been provided to customers or received from suppliers. Figure 1.4 shows the documents that support an accrual accounting system. FIGURE 1.4 Accrual accounting documentation In both cash and accrual accounting systems, a cash or bank account will be required to record cash received and paid out. In accrual accounting systems, customers are provided with credit. These credit customers, or debtors, are granted terms of credit specifying when goods must be paid for 20

23 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES and any discount that may be given if they pay promptly. Such accrual systems will need a Debtors or Accounts Receivable account, a Discount Expense account and a Bad Debts account for writing off a debtor in the event that the customer cannot pay the account. If an organisation has been provided credit by its suppliers, it may be granted a discount for prompt payment. The organisation will need to ensure that the accounting system incorporates a Creditors or Accounts Payable account to track amounts owing to suppliers, and a Discount Received account is made available to record discounts taken from suppliers. ACTIVITY 1L From the following information you are required to determine the following: 1 The business activities operated by the business. 2 The business ownership method. 3 The type(s) of accounting system in operation. 4 The major accounts that will need to be included in the accounting system. Jill and Hugo are shareholders of Jilly s Wines Pty. Ltd. which grows grapes for winemaking. Most of the grapes are sold to major winemakers for blending. Jilly s provides these major winemakers with 45 day terms of credit and allows them a 5 per cent discount for prompt payment. Jilly s purchases its supplies on credit and is required to pay within 30 days and receives a 3 per cent discount for prompt payment. A small quantity of each grape harvest is processed by Jilly s for bottling. The bottled wine is sold to the public at the winery s small boutique restaurant. The restaurant sells food and beverages to the public on cash only basis. Establishing an accounting system The following steps provide a simple guide to assist the development of an accounting system Step 1: Determine the information required by users of the accounting system. It is critical that the requirements of users of the information provided by the system are met. For example, the owner needs to know if the organisation is making a profit, can pay its debts and is complying with legislation, while managers need to know that departments are meeting budgets and controlling costs. Once the information needs of the users have been determined, the accounting system can be developed. Step 2: Determine the method of dealing with customers and suppliers. The development of the system also depends on how an organisation deals with its customers and suppliers. When the organisation does not provide or receive credit it may operate a cash accounting system. However, if credit is provided or received then the accounting system will need to accommodate both accrual accounting and cash accounting concepts. Step 3: Establish the chart of accounts. All accounting systems require a chart of accounts. The chart of accounts is essential as it allows transactions to be coded with the correct account number before being recorded in the system. Step 4: How will transactions be processed? An organisation may choose to use a manual accounting system, or process transactions electronically using a computer software package. It may choose to process the transactions internally or it may elect to outsource the bookkeeping functions to a contract bookkeeper. Step 5: Establish policies and procedures. These are necessary as they guide employees in the correct processes to use to ensure that the accounting system provides accurate and timely information. There is more discussion of policies and procedures later in the chapter. Figure 1.5 is an example of a questionnaire that will assist in the development of an accounting system. A discussion of each question is provided below. 21

24 BOOKKEEPING & ACCOUNTING ESSENTIALS FIGURE 1.5 Accounting system questionnaire 1 Is the organisation owned as: a sole trader h a partnership h a company h other - specify h 2 In what industry does the organisation operate? Retail h Wholesale h Manufacturing h Primary h Not-for-profit h 3 What is the organisation s main operating activity? 4 What does the organisation provide? Goods h Services h Goods and services h 5 What financial reports are required by users? Income statement h Statement of financial position h Cash flow statement h Equity statement h (Profit report) (Balance sheet) 6 What other management reports are required and how frequently? Specify the report State the frequency 7 Is the organisation registered for GST? Yes h No h 8 Does the organisation provide and receive credit? Credit provided to customers: Yes h No h Credit received from suppliers: Yes h No h 9 Does the organisation require a payroll system? Yes h No h 10 How will transactions be processed? Manually h By computer h 11 How regularly will transactions be processed? as they occur h daily h weekly h other specify h 22

25 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES Is the organisation owned as a sole trader, partnership, company, etc.? This question allows bookkeepers to determine the accounts that will need to be established for contributions made to the organisation by the owner and how profits and losses will be distributed to the owners. This question also assists in identifying the organisation s income tax obligations. In what industry does the organisation operate? This question will assist in identifying accounts the organisation may need in its chart of accounts. What is the organisation s main activity? This question will also assist in identifying accounts the organisation will need in its chart of accounts. What does the organisation provide? This question will also assist in identifying accounts the organisation will need in its accounting system. What financial reports are required by users? This question allows bookkeepers to identify the users need for financial statements produced from the accounting system. What other management reports are required and how frequently? This question allows bookkeepers to identify the other reports that users of the system may require, such as budgets, labour reports, sales reports, inventory reports, departmental reports, and so on. Is the organisation registered for GST? This question assists the bookkeeper in identifying accounts required to record GST, and indicates that the organisation has a compliance responsibility that will need to be incorporated into the accounting system. Does the organisation provide and receive credit? This question indicates to bookkeepers if the accounting system will need to manage accounts receivable (debtors) and accounts payable (creditors) and the need to undertake systems reconciliations for debtors and creditors in addition to cash reconciliations. Does the organisation require a payroll system? If so, the bookkeeper will need to establish a payroll system that correctly pays and reports to employees, and ensures compliance with relevant legislation. How will transactions be processed and how regularly will transactions be processed? This question allows bookkeepers to determine if the accounting system, or the parts of the system, require a software program for processing or if manual accounting methods will be adopted. Computer systems do provide for a greater range of reports, and a simpler, timelier and more efficient method of processing. Different systems will also require different methods of file retention and data retrieval. Note: these are general system questions that can identify areas where further consultation with the owner and system users may be warranted to determine more specific requirements. Such an investigation can only be undertaken when a bookkeeper has a thorough understanding of how to process transactions in a manual and computerised accounting system and of different subsystems of the accounting system, is conversant with accepted bookkeeping procedures and has a sound understanding of compliance with relevant legislation. For a contract bookkeeper, the above questions will assist in identifying the range of services that can be offered to the client and the frequency of services provided. 23

26 BOOKKEEPING & ACCOUNTING ESSENTIALS Bookkeeping policies and procedures All accounting systems should be supported by policies and procedures which guide the people who operate the system in its daily operation. This ensures the system achieves its objective of providing timely and accurate information. Policies and procedures manuals are a set of documents that describe an organisation s methods of operation. They can be developed because of an external requirement, such as governmental regulations, or as internal guides for staff. Policies and procedures manuals in the accounting area provide information on how and when transactions will be recorded, when and how they will be processed in the accounting system, what reports must be issued, who receives the reports and by what date and the procedures to ensure compliance with relevant legislation. The development of accounting policies and procedures not only ensures that transactions are recorded and processed in an appropriate manner and that reports are issued to appropriate people as required, but they are also essential in protecting the TABLE 1.4 Examples of policies and procedures 24 Policy and procedures Sales Sales shall be administered by a duly appointed sales manager. Credit sales shall only be permitted to customers who have been granted credit approval. Credit customers accounts must be reviewed and reconciled monthly. Potential bad debts must be referred to the finance manager. Purchases Purchases are to be administered by a duly appointed purchasing officer. All purchase requisitions must be supported by an authorised purchase order. All purchases must be made from authorised suppliers. Cash purchases are forbidden. Suppliers credit limits must be strictly adhered to. Suppliers must be paid within the agreed terms of credit. Suppliers accounts must be reconciled monthly. Cash Receipts Cash received is to be administered by a duly appointed cash manager. Cash and cheques received are to be supported by a tax invoice and recorded in the accounts each day. Each cash register is to maintain a float of $100. Cash held is to be safeguarded in the safe until banked. Cash received is to be banked intact, payments are not to be made from cash in the safe or cash registers (refer cash payments). EFTPOS transactions are to be credited to the bank daily. Cash Payments All payments must be approved by the accounts payable manager. Payments above $50 are to be supported by an authorised internal order and matched to a supplier s invoice. Payments should be made to suppliers via EFT. Cheques may be issued to suppliers if required. Payments below $50 are to be made from the petty cash system. The credit card shall only be used by the business manager on business related transactions only. Banking Daily banking shall be under the direction of the finance manager. The bank overdraft limit shall not exceed $ Cash funds in excess of $ are to be transferred to the investment account. Cash and cheques are to be banked daily in the cheque account. Bank accounts are to be reconciled at the end of each month. Petty cash The petty cash system shall be administered by a duly appointed petty cash officer. The petty cash float shall be set at $400. Payments below $50 must be made in cash from the petty cash system and must be supported by an authorised voucher and a supplier s tax invoice.

27 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES Policy and procedures The petty cash fund shall be reimbursed as required, and at the end of each month, and approved by the finance manager. Accounting and bookkeeping All accounting functions are to be administered by a duly appointed bookkeeper. All accounts must be recorded by the end of each week. A General ledger, Debtors ledger, Creditors ledger, Stock ledger and Payroll ledger shall be maintained. All employees shall be paid fortnightly. All accounts must be reconciled at the end of each month. The BAS is to be maintained monthly. All financial statements are to be prepared and distributed monthly to the owner and all managers. The annual budget is to be monitored quarterly. The accounts shall be audited by an external auditor annually. organisation s assets, such as cash and stock, from theft and fraud. This is achieved by applying sound internal control principles associated with the authorisation of transactions and the segregation of employees duties. Many organisations are required by law to have their accounts audited each year by an external auditor whose function is to ensure that the financial information provided from the accounting system is true and fair, and that the organisation s assets have been protected by its policies and procedures. Table 1.4 illustrates a range of policies and procedures that could be applied in an accounting system. Reviewing and maintaining the accounting system Accounting systems should be regularly reviewed and appraised to ensure that: information being provided is accurate and timely policies and procedures are providing for efficiency within the system the system is enabling compliance with legislative requirements the organisation s assets are being protected. When an accounting system is reviewed, changes are often recommended to bring about more efficiency. In some cases, the review will find that employees are not complying with the stated policies and procedures, in other cases it may be that the policies and procedures are causing difficulties within the system. Systems reviews should be a continual activity within an organisation with a formal review being undertaken every year or two. The review should: ensure that the system is providing its stated objectives ensure the system supports staff ensure transparency of operations ensure procedures are and can be followed provide accountability protect sensitive and vital information examine performance identify any additional resources required identify if the systems should be adapted to meet organisational change. An organisation s accountant, bookkeeper and owner should be involved in the review of the accounting system as they are knowledgeable and skilled in the organisation s systems and are able to act collectively in a consultative manner to enact improvements. 25

28 BOOKKEEPING & ACCOUNTING ESSENTIALS When a review is undertaken it is important that the process is documented. Documentation should show: when the review was done who undertook the review recommendations suggested action plan to consider recommendations implementation details of accepted recommendations. When a review of the accounting system identifies issues that need improvement, solutions should be explored and tested before they are implemented. In most cases, it will not be possible to make changes immediately. Often the changes will need to be prioritised. This will depend on the urgency of the required improvement, the overall effect on the whole system and who will implement the changes. This may be performed by employees within the organisation or an external expert may be hired. A review of a manual accounting system for general bookkeeping and payroll processing may recommend a move to a computerised accounting system for both the bookkeeping and the payroll functions. The selection of a computerised accounting system will require appraisal of a range of computer software packages. Each package will need to be appraised to determine if it meets the reporting requirements of the users of the accounting system, is capable of processing cash and accrual transactions, including payroll transactions, if it provides compliance with legislation, can be easily used by employees and the extent of assistance and future upgrades provided by the software provider. When moving to a computerised accounting system, consideration will need to be given to training staff and updating the organisation s policies and procedures documentation. It is also normal practice when converting from a manual system to a computerised system to perform a parallel run of both systems. A parallel run is when the manual system continues to process transactions and produce reports while at the same time the transactions and reports are processed through the computerised system. The reports from both systems are compared to identify differences which are then corrected in the appropriate system. The parallel run should continue until the differences in both systems are minimal and the organisation is confident that the policies and procedures used in the computerised system can be adopted and the manual system then ceases to operate. ACTIVITY 1M Consider the following scenario. You are a registered contract bookkeeper and have recently acquired a small business client operating as a landscape gardener called Green Things. In the previous year, the client had a turnover of $ but had not registered for GST. The owner, Tom Green, generally maintains a cash only system with his clients paying in cash. Occasionally, he allows a customer to pay in the next month. Suppliers are paid in cash and workers are paid out of his pocket. He has stated that all he needs to know is that he has cash in the bank. Tom does not employ an accountant and prepares and lodges his own income tax return. You are required to write a letter to Tom informing him: of the legislation that his business is failing to comply with why he needs to develop an accounting system that will meet his needs and ensure his compliance the services that your business can offer Tom. 26

29 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES 1.7 SUPPORT FOR BOOKKEEPERS Bookkeepers need to keep themselves informed about changes taking place in the financial services sector. This can be achieved via: The Australian Taxation Office: The ATO has an excellent service that advises bookkeepers who require clarification or advice on taxation related matters. In addition, the ATO website provides a valuable source of information on existing tax laws and procedures. The website regularly provides information on changes taking place within the tax system and provides reminders of important dates and upcoming events. Professional association websites: Bookkeeping and accounting association websites provide their members with a host of information, advice, assistance and invaluable support. The Australian Bookkeepers Network at provides bookkeepers with a range of useful products, services and information. Network groups: Some professional associations encourage their members to form network or focus groups in their areas that assist the bookkeeper in meeting like-minded professionals who can share opinions, discuss changes and offer support when requested. Accountants: An organisation s accountant should be able to provide guidance and mentoring to the bookkeeper as they should be developing an effective working relationship. This is essential when a bookkeeper is working under the direction of an accountant. ACTIVITY 1N Access a bookkeeping association or professional bookkeeping website and identify five areas where support or advice can be obtained. COMPREHENSIVE ASSESSMENT ACTIVITY Julia had been working as an unqualified bookkeeper for five years in a large accounting organisation. However, for the last year she has been operating her own bookkeeping service after obtaining her bookkeeper s registration and joining a bookkeeping association. Julia provides a full range of bookkeeping services to local businesses and has arranged for all accounting services to be undertaken by her previous employer. Julia has a number of clients and scenarios that she is currently dealing with, and has requested your assistance in obtaining information on these matters. Scenario 1 Julia has been asked by her bookkeeping association to present a brief paper explaining the basics of registration of a bookkeeper and the different services that can be provided by a registered and non-registered bookkeeper at the next meeting of the local network group. She would also like you to clarify a BAS service. Scenario 2 Julia believes her letter of engagement disclosing the services she offers could be improved to show greater detail. The current wording follows. Bookkeeping services provided: All general bookkeeping services Preparation of financial statements Taxation compliance 27

30 BOOKKEEPING & ACCOUNTING ESSENTIALS Julia has asked for you to improve on this presentation so that her clients can clearly identify and select the services they need. Scenario 3 Julia has been approached by a small business owner who is a client of her previous employer. The client has requested that Julia become her bookkeeper for all his bookkeeping and accounting services. Julia is happy to accommodate his wishes but has concerns over the ethics involved in accepting the client. Julia has asked your opinion on how she should respond to this request. Scenario 4 Julia is aware of her responsibilities towards maintaining her currency as a bookkeeper; however due to the pressures of work, she has been unable to find the time to explore her options. She has asked you to provide her details of at least three upcoming events that she could become involved in that would assist her to maintain her currency. Scenario 5 Julia has a client, a plumber, who continues to provide his financial records in an envelope each quarter. She is concerned about his records and that he may not be complying with appropriate legislation. She has asked you to draft a letter to the client outlining the importance of maintaining an acceptable accounting system and the benefits that it can provide. In your letter she has asked you to clearly explain to the client the differences between cash accounting systems and accrual accounting systems and the cash and accrual methods of reporting GST. 28

31 CHAPTER 1: BOOKKEEPING POLICIES, FUNDAMENTALS AND PRACTICES Assessment checklist Complete the following checklist to identify whether you consider yourself capable of being assessed against each of the following outcomes. Chapter I can: reference Identify the duties and responsibilities of a bookkeeper and an 1.1 accountant. Explain the services offered by contract bookkeepers. 1.1 Explain when a bookkeeper needs to be registered and the registration requirements Identify activities falling outside the scope of a bookkeeper. 1.3 Explain why a bookkeeper requires effective communication skills. 1.4 Explain the ethics required of a professional bookkeeper. 1.4 Explain how a professional bookkeeper maintains currency. 1.4 Explain the legislative requirements requiring compliance in the 1.5 Financial Services industry. Use the Internet to undertake research of issues facing bookkeepers. Explain the importance of an accounting system and how it can ensure compliance with various legislations Identify different business activities. 1.6 Explain the different types of business ownership structures. 1.6 Identify and explain the basic requirements of manual and 1.6 computerised accounting systems. Explain the importance of reviewing an accounting system. 1.6 List the sources of assistance available to bookkeepers. 1.7 Check 3 If you did not place a 3 against all performance criteria you should repeat the section of the chapter associated with the criteria and/or contact your mentor. 29