Okay, so we know this isn’t exactly the most exciting topic, and while it might be tempting to leave your accounting matters to deal with later, it is something you should consider right from the moment you commence business. Procrastinating and a lack of understanding in this area can cost you a lot of unnecessary expense. That’s why we’ve written this article, to help you understand what is required of your company and based on our experience, we’ve included some best practices you should consider.
In Hong Kong, there are not many requirements, but among the few two are essential, one being audit and the other tax filing. But it is important to understand that in order to be able to file tax, you need to close accounts which requires auditing and to audit accounts you need to have proper accounting. In case you’ve had no operations, you will not need to submit audited accounts to the Inland Revenue Department for the tax filing. However, you should still audit your accounts as they are a basic requirement of all companies that you should have ready if requested.
Only a Certified Public Accountant (CPA) can do the audit. The majority if not all CPA’s will typically offer a package for both audit and tax filing, but again to be able to audit accounts the CPA will need proper management accounts. You can appoint your CPA to do your accounting but note that because they are more qualified, they are more expensive while accounting can be done by anyone who knows how to do them but we will explain more about this further on. First, let’s understand what management accounts are.
Management accounts are made up of a Profit and Loss Account, Balance Sheet and General Ledger. Whether you decide to issue management accounts monthly, quarterly or even yearly it is up to you, but sooner or later you must issue them. From experience, however, the later you start to do your accounting the more complicated it will get. It is always harder to recall spending and retrieve supporting documents at a later date. Therefore it is advisable to maintain monthly accounting particularly if you have a regular number of entries. Only if you have a very limited amount of entries should you consider to wait until the end of the quarter or even the year. In essence, the more accounting entries you have, the more often you should maintain your accounts.
Meanwhile, it is also worth dedicating time to managing your accounts on a regular basis as it can give you a clear view of your business. Accounting is a useful tool to manage your venture not to mention a necessary record you will have to provide potential investors with should you decide to apply for funding for example.
To maintain proper accounts you need two things 1) you must be well organized and 2) you need expertise, you either know how to do accounting, or you don’t. So, if you are well organized and know how to prepare management accounts you can consider to maintain your accounting yourself. While it may not be perfect, the most important thing to lower costs is that it should be easy for your appointed auditor to read and understand.
If however, you have no knowledge of accounting the minimum you can do yourself is to maintain well organized supporting documents. Then you can pass those documents to someone who understands how to issue management accounts.
Some people try to do the accounting themselves with little to no expertise to keep costs low but don’t take the risk of submitting messy accounts to your CPA. It might seem like you are saving money on accounting, but if you give your auditor disorganized unclear management accounts with missing documents and information, they will need to spend time redoing them in order to be able to do the audit. The more time your CPA spends reworking your accounts, the more expensive it will be for you in the long run.
At the same time, if your accounts are not well prepared you will face delays, which will also likely mean you will need to rush to get everything ready in time for your Profits Tax Filing deadline. A rush job also entails more fees from the CPA, especially in the case where you want to close your accounts at the end of December when many companies opt to close accounts. CPAs are so busy at this time of year that they are often in a position to turn down your business or to charge a premium. Of course, if you are in a rush, you will have no choice but to pay up. Don’t take the risk.
In summary, here are our main tips for you to consider:
- The first thing you should do is keep all your documents and keep them well organized.
- From the information you have compiled, you can then produce management accounts or appoint someone to do them for you. Noting that if you’ve kept organized records outsourcing your accounting will be less expensive.
- With good management accounts in place, you can then find an auditor to do the audit and normally they will offer to do the tax filing as well.
- Accounting, audit, and tax filing are all connected, if you do the first part well the last part will be easier and cheaper.
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