Bookkeeping for Small Business in Australia: Basics, ATO Rules and a Checklist

Bookkeeping for small business means recording every sale, expense and payment as it happens, so you can lodge your BAS and tax return accurately and know whether you're making money. In Australia the ATO requires you to keep most business records for 5 years, in English or easily converted to English, and in a form that can't be quietly changed. For most sole traders, a separate business bank account, a weekly 30-minute catch-up and a quarterly BAS routine cover the essentials.

What is bookkeeping for a small business?

Bookkeeping is the day-to-day recording and sorting of your business transactions: money in, money out, who owes you and who you owe. Accounting uses those records to prepare tax returns, financial statements and advice. You can do your own bookkeeping and still pay an accountant at tax time.

Bookkeeping basics come down to four jobs:

• Record income: issue an invoice or receipt for every sale and log it.
• Record expenses: keep the receipt or tax invoice for every business purchase and categorise it (fuel, software, materials, insurance and so on).
• Reconcile: match what your records say against your bank statement, so nothing is missing or doubled. Our guide to bank reconciliation walks through it.
• Track what's owed: know which invoices are unpaid and how overdue they are. That's your accounts receivable.

Done weekly, this takes most sole traders well under an hour. Left until June, it becomes a weekend of digging through emails and bank statements.

What records does the ATO require me to keep?

You need to keep all records relating to starting, running, changing and selling or closing your business that are relevant to your tax and super. The ATO sets five rules: keep those records, protect them from being changed, keep most of them for 5 years, be able to show them on request, and keep them in English or easily converted to English.

The 5 years generally starts from when you prepared or obtained the record, or completed the transaction, whichever is later. Some records must be kept longer, such as records for capital gains tax assets, which you generally keep for as long as you own the asset and then another 5 years after you sell or dispose of it. The ATO's overview of record-keeping rules for business has the full detail.

In practice, a small business keeps:

Digital copies are fine, provided they're legible, labelled so you can find them, and you can still produce them if you change software. A photo of a receipt saved to a folder named by month is a perfectly good system.

Should I use cash or accruals accounting?

Most small businesses use the cash basis, because it's simpler. On the cash basis you count income when you're paid and expenses when you pay. On the accruals basis you count income when you invoice and expenses when you're billed, whether or not money has moved.

For GST, the ATO says businesses with an aggregated turnover under $10 million can choose either method (see choosing an accounting method for GST). The difference shows up when an invoice and its payment fall in different BAS periods:

Cash basis protects you from paying GST on money you haven't received. Accruals gives a truer picture of performance when you carry lots of unpaid invoices or stock. Choose with your accountant, and use the same method consistently. For income tax, the ATO explains the options in accounting methods for business income.

How do BAS and GST fit into bookkeeping?

If you're registered for GST, your bookkeeping feeds your business activity statement (BAS). Each period you report the GST you collected on sales, subtract the GST credits on your business purchases, and pay the difference to the ATO, or get a refund if credits are higher.

Most small businesses lodge quarterly. The ATO's standard due dates are:

Monthly BAS is due on the 21st of the following month, and you must report monthly if your GST turnover is $20 million or more. Lodging online or through a registered tax or BAS agent can give you extra time, as set out on the ATO's BAS due dates page.

A worked quarter for a GST-registered sole trader:

• Sales of $33,000 including GST: GST collected is $33,000 ÷ 11 = $3,000.
• Business purchases of $5,500 including GST: GST credits are $5,500 ÷ 11 = $500.
• GST payable for the quarter: $3,000 − $500 = $2,500.

The habit that saves people is moving the GST portion of every payment into a separate savings account as it arrives, so the $2,500 is sitting there on 28 October. Our guide to calculating GST covers the ÷ 11 rule, and you only need to deal with GST once you pass the $75,000 registration threshold or register voluntarily.

Do I need a separate business bank account?

Not by law if you're a sole trader, but you should have one. Mixing personal and business money is one of the most common causes of slow, error-prone bookkeeping, and the ATO expects you to be able to show the business portion of any expense that's partly personal.

A company is a separate legal entity, so its money belongs to the company and should run through its own account in the company's name. For a sole trader, a second everyday account in your name, used only for business, is enough. Add a savings account for GST and tax and you have a simple three-account setup: business in, tax set aside, personal pay drawn out.

What are the accounting basics for sole traders vs companies?

A sole trader's business income goes on their individual tax return, while a company lodges its own tax return and keeps its money separate from its owners. That changes how you record money you take out of the business.

If you're just starting out on your own, our guide on how to invoice as a sole trader covers ABNs and invoice layout.

What is a good bookkeeping checklist?

Do a short session every week, a reconciliation and review every month, your BAS every quarter, and a full tidy-up before 30 June. Small and regular beats big and rare, because errors are easiest to fix while you still remember the transaction.

Weekly

• Send invoices for all completed work and record them.
• Photograph and file every receipt.
• Record payments received against the right invoices.
• Check overdue invoices and send reminders. InvoiceSonic can send reminders automatically at 7, 14 and 30 days after the due date, which takes this off the list.
• Move the GST and an income tax buffer into your tax savings account.

Monthly

• Reconcile every bank and card account to the statement.
• Review an aged receivables report and follow up anything over 30 days.
• Pay suppliers and record the bills.
• Check income against expenses for the month. Our gross vs net profit guide explains which figure to watch.
• Update your cash flow forecast for the next three months.

Quarterly

• Prepare, check and lodge your BAS by the due date.
• Pay any GST and PAYG instalments.
• If you have staff, check every super payment was made by its due date.
• Review your pricing and spending against plan.

Yearly

• Do a stocktake if you hold stock, and list assets bought during the year.
• Review unpaid invoices and decide which to write off before 30 June.
• Reconcile the full year and give your records to your accountant or tax agent.
• Archive the year's records in a labelled folder you'll keep for at least 5 years.

Should I use a spreadsheet or bookkeeping software?

A spreadsheet is fine for a sole trader with a few dozen transactions a month, no staff and no stock. Move to bookkeeping software when you register for GST and want BAS figures calculated for you, take on employees, or find reconciliation taking more than an hour a month.

If you use a spreadsheet, keep one tab per month, one row per transaction, and columns for date, description, category, amount including GST, GST and running balance. Lock past months once reconciled, which also helps meet the ATO's rule that records are protected from being changed.

When should I hire a bookkeeper or BAS agent?

Hire help when bookkeeping is costing you billable time worth more than the fee, when you take on staff, or when you're consistently late with your BAS. If someone prepares or lodges your BAS for a fee, they must be registered with the Tax Practitioners Board as a BAS agent or tax agent.

A bookkeeper who only does data entry may not need registration, but anyone who provides BAS services for a fee, such as working out your GST or advising on BAS labels, does. Check before you engage someone using the TPB public register. Lodging through a registered agent may also give you extra time to lodge.

A sensible split for a growing business is to do weekly entry yourself, have a BAS agent review and lodge each quarter, and use an accountant for the annual tax return and planning.

This article is general information, not tax, accounting or financial advice. For guidance specific to your situation, see the ATO and business.gov.au, or speak to a registered tax or BAS agent.

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