Your accountant uses these six terms in every meeting. Once you know them, your own financial statements start to make sense.
Cash versus profit
Profit is revenue less costs for the period. Cash is money in your bank. The two differ often. Say you invoice S$100,000 and pay S$70,000 of costs, but customers still owe S$35,000. Profit is S$30,000. Cash moved by S$65,000 received less S$70,000 paid, a fall of S$5,000. The company is profitable and the bank balance dropped.
Accruals
The accrual basis records income when you earn the income and a cost when you incur the cost, whatever the date of payment. A December electricity bill which arrives in January belongs in December. Without accruals, your monthly profit swings with payment timing and tells you nothing about the real month.
Depreciation
Depreciation spreads the cost of equipment over the years you use the equipment. A S$9,000 machine used for 3 years costs your accounts S$3,000 a year. IRAS does not accept this charge as a tax deduction, because capital expenditure is not deductible. IRAS gives capital allowances instead. The standard allowance writes off one third a year over 3 years. Computers and assets costing S$5,000 or less each are written off in one year, up to a total of S$30,000 per Year of Assessment. Your accountant adds back the depreciation and claims the allowance in your tax computation.
GST payable
GST payable is the GST you charged customers (output tax) less the GST you paid on business purchases (input tax). The difference goes to IRAS. The rate is 9%. Suppose you sell S$10,000 and charge S$900. You buy S$4,000 of supplies and pay S$360. You owe IRAS S$540. The S$900 you collected never belonged to you, so keep the money in the bank until the return is paid. You register for GST when taxable turnover passes S$1 million in the 12 months to a calendar year end. The return is due one month after each accounting period ends.
Director’s loan
A director’s loan records money which moves between you and your company outside salary and dividends. If the company pays your personal bills, you owe the company. If you put your own cash into the business, the company owes you. Withdrawals with no record also turn into a loan balance. Auditors ask about the balance, so settle the balance with a repayment, or with a salary or dividend backed by proper paperwork, before the year end.
Retained earnings
Retained earnings are the profits after tax which your company kept since the start, less the dividends paid. Take S$40,000 brought forward, add this year’s profit after tax of S$30,000, and deduct a S$20,000 dividend. Retained earnings stand at S$50,000. A company pays dividends only out of profits, so a company with accumulated losses pays none. Singapore dividends reach the shareholder free of tax, because company tax is final.
Read your statements with these six terms in hand. Ask your accountant to point to each one in your latest set of accounts.
Send the latest profit figure or your question by WhatsApp to +65 9876 3553 or by email to henry@cschow.com.sg.
Henry Chow
Public Accountant, C S Chow & Co