Simple Sole Trader - bringing in funds

#1

Hi,
It’s a fair while since I’ve had anything to do with accounting, and I was pretty rubbish back then!

I’m starting a small import/direct sales business in Australia. If the business grows I’ll probably move it to a Pty Ltd structure, but to get my toe in the water I’ll start Sole Trader. I wont have a dedicated bank account for this business. I will be using a couple of different foreign exchange services funded from my personal bank accounts for stock purchases.

My first task is to understand how to bring in my Owners Equity so I can then purchase stock.
I’m planning just using the Owners Equity account as per the Guide. I’ve guessed that I’ll need a Cash Account in my name for the transactions?

This is what I think I would do:
Make a Receipt using Received in = my cash account.
Should I be using “Other” as the Payer and just put my name in?
I’m not too sure if I need to select an account in the line item, or simply put in an amount and leave the rest blank?

I have a Purchase Order (in foreign amounts) which I “Copy to Purchase Invoice”
In Settings I create a new exchange rate reflecting the rate I will receive.
I then do New Payment on the invoice, using my Cash Account and for the AUD value.

I then need to deal with the transfer fees through another Payment, but that seems straight forward enough.

Thanks

#2

I strongly recommend that you do. Managing your business will be much easier.

Here is the first example of why it will be easier with a dedicated bank account. You have nowhere to put the money. In Manager, you will need to fall back on using expense claims to record expenditures on behalf of the business from personal funds.

Normally, you would enter a receipt to your bank account and post it to Owner’s equity.

Cash accounts are for physical bills and coins. You are unlikely to run an import/sales business from your pocket, because you will not be able to pay foreign suppliers, freight forwarders, customs, etc. that way. So you will constantly be using your personal accounts and entering expense claims.

#3

Thanks Tut.

A separate real bank account just isn’t going to happen right now.
If a cash account isn’t going to work, why wouldn’t I just make a nominal “Bank Account” within Manager and drop funds into that to work with within Manager? Let’s call it “The Bank of Me Account”. It’s entirely academic if it’s me or ANZ who are the bank surely?

You say “enter a receipt to your bank account and post it to Owner’s equity.” That’s what I need to understand clearly. So I make a receipt Received in = “The Bank of Me Account”, but where/how does the “post to Owner’s equity” happen?

I can’t really see why it matters if I pay a business bill directly out of my personal account or out of an account with the business name on it, as long as I have a record of the transaction.

Given all the money is my personal funds I’m not sure I quite see the imperative for having a separate real bank account. All I care is that I can see where the money is coming and going in the business activities, if it’s turning a profit, and of course what the tax man needs to know.
I get it that having a separate bank account would make reconciling actual with recorded funds easier, but frankly I don’t care that much if I’m out by a bit, and the number of transactions will be pretty low so it’s not such a big deal.
If it starts looking like it’s longer term viable then I’ll incorporate, setup accounts etc.

I should add, what I care about most at present is an accurate picture of COGS.
Cheers

#4

@Often_confused, to answer your op: you cannot have any equity unless you have dedicated funds or pledged assets for your business.

You can however record your equity as you buy assets on behalf of your business. You can create a zero valued payment with a positive line for inventory and a negative line for your equity. The bank or cash account selection is optional here.

That’s a gold nugget right there.

It doesn’t really matter if you have a few transactions a month but that doesn’t scale up and there’s no discernable tipping point. One day you will just lose track.

As a business owner, you’re the worst possible source of accounting information, and here are some examples why:

  1. you have plenty of other important tasks competing with accounting for priority.
  2. you are not as specialized and well-staffed as a bank for the purpose of tracking payments (and bank do make mistakes, so what does that tell you about your statements?)
  3. finally and most importantly, you are going to let yourself off the hook when you make a mistake, but you’re not going to let your bank off the hook.

Of course there are many other reasons, but I believe if those three fail to convince you to setup a separate bank account for each business then nothing will.

#5

For sure, that’s what I’m trying to record - my pledge of funds to the business so the business can then spend the funds. My intention is to pledge exactly the amount the business requires to pay it’s bills, as they come due and are paid.

I think I follow that, maybe that’s all I need to do. Each time I make a payment, be it for goods or services I just add a negative line for the total amount to Owner’s Equity account. Seems simple enough. I’ll try going down that path. Thanks very much.

I guess this is just an example of my accounting ignorance, but I can’t see for the life of me why it makes one iota of difference if I take my money out of one bank account and put it in another and call it “Business Equity”, or if I just record it as such within my records. In both cases it’s just a record on a piece of paper (or in a database). Surely it’s like budgeting to buy a car for example - I don’t need to open a bank account called “Car”, I just keep a record of how much I’ve put aside each week?

As I said, the main thing I need at present is a clear picture of my real COGS so I can set my pricing to provide a functional margin. If the business is viable longer term then I’m going to have to use an accounting package, so I might as well learn one now while the business is tiny. Manager seems a nice package that can grow if the business does. So I just need to learn how to enter my records correctly in Manager.

This is a business that at this stage is likely to have something in the realm of 5-10 transactions a month, it’s not that complex. If it looks like it’s going to grow significantly I’ll incorporate and structure it “properly”, with input from my accountant. If it’s looking like it’s not going to grow then I’ll either toodle along as a bit of a hobby or forget it. I really don’t care which way it goes - making some good money is nice, retirement is too.

Of what?
How much money the business owes me? That’s in Manager.
How much money is in my bank account? I get a statement which shows that.
If I’ve neglected to enter a transaction into Manager? That’s possible, but in the short term fairly unlikely with the small number of transactions happening.
The tipping point for when to incorporate and isolate the business from personal accounts will come from liability issues more so than financial, and it will occur well before the business volume grows significantly larger than the few transactions a month, there is no doubt about that!

As a business owner;

  1. Yes I’ve other tasks to do, but the fact is doing the record keeping is one of them at this stage, like it or not, so I just want to get the process correct from the start.
  2. What that tells me is that I need to keep good records of my own. Irrespective of which bank account holds the money. So why would I muck about with another bank account, fees, time at the branch etc just to simplify finding 5-10 transactions a month for a few months? If the business proves viable I’ll be closing that account and opening a new one in the Company name. Doesn’t make sense to me.
  3. FYI after a couple of decades of reconciling bank accounts fairly carefully with no significant errors to speak of, I gave up on wasting my time on such fruitless and tedious activity. I glance down it looking for the big dollar amounts I expect to see and for any glaring anomalies and call it quits. Yes, maybe I’ve lost some money by doing that, but the chance is fairly small, the amounts probably also, and I haven’t missed it so who cares? So perhaps I am going to let my bank off the hook!

You’re right, nothing will convince me to setup another bank account at present.
I must be an accountant’s nightmare :smiley:

#6

A separate bank account is used so you spend less time and brain power on accounting and more on running your business.

You are correct it is not necessary. Using a computerised accounting system is not necessary either. However using one is faster and easier particularly if you use it as designed.

The simplest way of managing your accounts is

  • have a physical bank account for businesses transactions.
  • do not enter anything manually, use bank import to enter all transactions.
  • use bank rules to process by far the majority of the transactions, manually editing only the few exceptions.

Using a personal bank account means you must manually sort personal from businesses expenses when doing your accounts. Doing so prevents delegating the task with businesses growth. It also means you must at least partially process your private expenses when doing your businesses data entry.

The added complexity is likely to result in increased fee from your accountant.

#7

@Often_confused, given that you have already decided to proceed down the road of mixed personal and business banking, I offer the following suggestions:

  • Create a cash account in Manager. Name it something like Petty cash.
  • Record all your business expenditures and receipts in Petty cash.
  • When the tax auditor comes calling, look up the balance in Petty cash and set aside folding money equal to that amount so you can explain that the amount in the cigar box (or whatever is large enough to hold it) is your petty cash repository.
  • Resign yourself to the fact that you will never be able to reconcile anything and will expend a great deal of effort searching out and segregating business records.
  • Accept that in any form of business dispute, you will never be able to prove you have made a payment without revealing your personal financial information.
#8

You seem to know what you’re doing. Good luck mate :+1:

#9

If your businesses really is going to have only a few transactions a month for the foreseeable future, then indeed efficiently or record keeping may have minimal effect on your time efficiently.

Even if you had a businesses bank account, occasionally transactions are entered on a personal account for various reasons. When that occurs I use a journal entry or zero value transactions (with a balancing line item to owner equity) to enter the transaction. In theory you could do that for all transactions.

The alternative is put all your transactions in Manager including your personal transactions but structure the accounts in Manager to separate them there.

I suppose it comes down to the cost of having an extra bank account. A basic internet bank account is very cheap in my country but may not be in yours.

By the way, as you are a sole trader you just need another personal bank account & card which you use for your businesses transactions. It needs to support transaction downloading, but interest rate would not be critical as you intend to leave minimum funds in it. You don’t need a company or trust bank account, which banks often change more for.