Chapter 13

Mastering Tricky Situations

In This Chapter

Making journal entries: If you have a debit, you must have a credit

Recording new bank loans and loan repayments

Supporting the consumer economy (and recording hire purchase debt)

Tweaking the bottom line (whose bottom?) with expense adjustments

Matching income against expenses

The line between what an accountant does and what a bookkeeper does is a grey one. Some bookkeepers only do the bare minimum and leave the accountant to do the rest. Other bookkeepers prepare accounts that are damned near perfect, and all the accountant does is double-check the entries and make a few final adjustments.

This chapter is for bookkeepers who fall into the damned near perfect category, or even the completely perfect category: Bookkeepers who are ahead of their game and who want to create a set of accounts that’s as clean as a whistle. I talk about the very trickiest transactions that a bookkeeper encounters, such as how to record new loans, figure out hire purchase entries, make adjustments for prepaid expenses, journal provisions for employee leave, and a lot more.

Keen to hone your skills to a razor-sharp edge? Then read on …

Recording Journal Entries

Most of the transactions I describe in this chapter don’t involve a bank account, and instead involve a general journal, which is a special kind of journal, typically an adjustment, that transfers amounts from one account to another. If you use a spreadsheet, you record these adjustments in a general journal worksheet; if you use accounting software, you record these adjustments using the general journal menu.

Unlike most other bookkeeping transactions, when you record general journals you need to have an understanding of debits and credits. If you feel at all befuddled about debits and credits, have a quick read through Chapter 3 and then return to this chapter.

Many journal entries don’t include GST, because they are an adjustment between accounts, rather than a payment or receipt. However, if you’re in doubt about whether or not a journal includes GST, always seek advice from your company accountant.

Plunging Into Debt

Part of growing any business usually means needing to take out loans of some kind. In the first part of this chapter, I explain how to record new loans and loan repayments, and reconcile loan accounts.

Going into the red

Imagine the business that you’re doing the books for receives a bank loan, with the funds deposited directly in the business banking account. Recording new loans can be daunting at first, but here’s how it’s done:

1. Create a new liability account called Bank Loan.

2. Record a new deposit in your receipts journal, allocating this deposit to your new Bank Loan account.

   In MYOB or Xero, you do this via Receive Money. In Reckon Accounts or QuickBooks Online, you do this via Make Deposits.

3. Make sure you don’t include any GST on this transaction.

   Why? Because a loan itself doesn’t include any GST, even though you may plan to use the loan to purchase something that does have GST on it.

Now imagine that this business receives another bank loan, but this time the funds go straight to a third party, such as a car dealer or a retailer of equipment, without touching the business bank account along the way. You use a different tactic:

1. Create a new liability account called Bank Loan.

2. Record a general journal entry that debits an appropriate asset account and credits the Bank Loan account.

   In MYOB, you do this via Record Journal Entry. In Reckon Accounts or QuickBooks Online, you go to Make General Journal Entries. In Xero, you go to Manual Journals from the Adviser menu. (If you can’t see this menu, you may need to change your user role settings.)

   I show an example entry in Figure 13-1 (in which I’m using MYOB), where I purchase a motor vehicle for $24,200, including GST. In real life with a vehicle purchase, I would probably have on-road costs such as registration and insurance as well (I show this detail in Figure 13-4), but right now I’m keeping things nice and simple.

3. Make sure you account for any GST on this transaction.

   Unless you buy an asset second-hand from a private individual, most new assets such as motor vehicles and equipment include GST as part of the sale price. In Australia, use the ‘CAP’ tax code to indicate this purchase is a capital acquisition, and in New Zealand, use the standard ‘S’ tax code. (For more about tax codes, refer to Chapter 6.)

Aiming towards the black

An unhappy fact of life is that for every bank loan, you have loan repayments. So, how do you account for loan repayments in the books?

Easy. You record loan payments as a withdrawal from your bank account, and you allocate these withdrawals to the relevant liability account, usually called something like Bank Loan. (If you can’t see an account by this name, refer to the preceding section.) Loan repayments don’t have GST on them, so always code these transactions as non-reportable (Australia) or non-taxable (New Zealand).

If you use desktop-based accounting software, see if the software features allow you to record loan repayments automatically. For example, you may be able to schedule transactions for loan repayments so that your accounting software automatically records this transaction on a certain day each month. Similarly, if you use bank feeds and bank rules, set up a rule to automatically allocate loan repayments to the correct account.

Recording loan interest and fees

As a conscientious bookkeeper, you don’t only have to record loan repayments, but also loan interest and loan fees. Working from the loan statements, record a general journal for every interest entry or bank fee charged, dating this journal with the date that the interest or fee was charged.

Think carefully about GST reporting when recording loan interest or fees. In Australia, bank charges (with the exception of merchant fees) and interest expense are GST-free, which means you don’t claim GST on either expense, but you report these transactions on your Business Activity Statement. In New Zealand, bank charges and interest expense are classified as an exempt supply, which means you don’t claim GST on either expense, and you also don’t report these transactions on your GST return. (For more about tax codes, refer to Chapter 6.)

A typical general journal probably looks something similar to Figure 13-2 (which has been done using Reckon Accounts). Note that I debit Interest Expense and I credit the Bank Loan account. Remember that bank loans are liabilities, so crediting a liability account increases the outstanding balance.

When you finish all the journals, confirm your work. Generate a Balance Sheet report for the month that you’ve recorded interest payments up to (for example, if you enter interest expense transactions for January to March, generate a Balance Sheet as at 31 March), and check that the balance of the loan as it appears on the Balance Sheet matches against the bank statement.

If you find the loan on the Balance Sheet doesn’t match up against the bank statement, you’re best to try to reconcile this account in the same way as you reconcile any other bank account. Refer to Chapter 10 to find out everything you ever wanted to know, and more, about reconciliations.

Working with Hire Purchase, Leases and Chattel Mortgages

Fast cars, shadowy corridors and an untrustworthy femme fatale — woops, I thought I was writing a film noir script for a minute. I’ll start again: Fast cars, shadowy corridors and … trade finance. Ah, to be a realist. In this section, I look at three additional kinds of finance options: Hire purchase, leases and chattel mortgages. All three forms of finance are common in both Australia and New Zealand, and each one requires slightly different bookkeeping tactics.

Your starting point is always to get hold of the original paperwork, and double-check exactly what type of finance you’re working with. This paperwork is sometimes a tad confusing, so if you’re at all unsure, contact the bank, finance company or company accountant and ask for assistance.

Taking on a new hire purchase debt

Hire purchase is a loan allowing you to buy goods, such as equipment, vehicles or other assets on credit. You pay interest on this loan, and ownership transfers to you when the final loan payment is made.

In this section, I use the purchase of a new motor vehicle as an example for recording a hire purchase debt. I do this not only because motor vehicles are the most common thing that businesses buy on hire purchase, but also because this transaction is relatively complicated. In other words, if you can figure out how to record a hire purchase transaction for a motor vehicle, you can probably figure out any hire purchase transaction!

Your first step is always to get your hands on the original hire purchase agreement and make your way to where the figures are. The total amount of the debt typically has six elements:

• The amount of principal being borrowed (from which a deposit has sometimes been paid)
• Miscellaneous fees such as booking fees, dealer delivery fees, legal fees, valuation fees and stamp duty (stamp duty applies to Australia only)
• Insurance and registration (new vehicles only)
• Extras (roof racks, tow bars, window tinting and so on)
• The total interest payable
• GST (note that in Australia, GST isn’t charged on either stamp duty or registration and, in New Zealand, GST isn’t charged on interest)

In Figure 13-3, I show a typical extract from a hire purchase document summarising the purchase of a motor vehicle.

Figure 13-4 leaps straight into showing you what the journal for this transaction is. Here are a few tips explaining how this journal works:

• I use the tax code of ‘CAP’ to show that the vehicle is a capital acquisition. In New Zealand, you don’t need to report capital acquisitions separately, so the tax code is just ‘S’.
• In Australia, be aware that special rules for GST apply for cars with a value exceeding the car limit. At the time of writing, the car limit for the 2014–15 year is $57,466, but this limit is reviewed every year. Seek advice from the accountant if you encounter this situation.
• With any new purchase, try to separate out capital costs (such as delivery and stamp duty) and expenses (such as registration and insurance).
• You allocate the total amount of the hire purchase debt to a liability account called Hire Purchase plus a description of whatever it is you’re purchasing. (You’ll probably have to create a new account by this name.)
• Look up the total interest that is charged on this loan, and allocate this total to a liability account called Less: HP Interest Charges. (You’ll probably have to create a new account by this name.)

In Australia, for any hire purchase agreements that were entered into before July 2012, you couldn’t claim all the GST on a hire purchase asset upfront if you reported for GST on a cash basis. This could have implications even now if you’re doing the books for a business with hire purchase agreements that were initiated before this date.

Recording hire purchase payments

Most bookkeepers allocate hire purchase payments to an account called Hire Purchase Liability, and code this transaction as non-reportable (Australia) or non-taxable (New Zealand). This treatment is correct from an accountant’s perspective. The accountant then journals the total interest payable on the hire purchase once a year, debiting Interest Expense and crediting Hire Purchase Liability.

However, some business owners prefer to allocate hire purchase payments to an expense account called Motor Vehicle Hire Purchase. Although this treatment isn’t strictly correct — the payments are a repayment against a loan, and only the interest on this loan is an expense — you do get a more accurate reflection of month-to-month profitability with this method, especially in the earlier years of a hire purchase obligation, when both the interest and depreciation on the hire purchase asset are relatively high.

Of course, the most accurate method is to refer to the payments schedule provided by the finance company and split each payment between principal and interest expense. In practice, few accountants expect bookkeepers to go into this level of detail, and are fine to make an adjustment once a year to tweak the accounts.

Living it up with a new lease of life

A lease is a particular form of finance where a finance company buys an asset (such as a motor vehicle or new piece of equipment) on behalf of a business and then rents it back to the business. The business pays rent every month for an agreed amount of time, and then, if it chooses, at the end of this period buys the asset from the finance company for a reduced price.

Recording leases is usually pretty simple: You record the payment coming out of the business bank account, and allocate this payment to Lease Expense. You only have a couple of technicalities to bear in mind:

• In Australia, some leases have a small amount of stamp duty included. Stamp duty doesn’t attract GST, so you need to split every lease payment transaction into two allocations: One for the taxable component, and another for the non-taxable component.
• In some scenarios, such as a relatively short-term lease on an asset with a long life expectancy, accountants choose to show leased assets in the Balance Sheet. If this applies to the business you’re doing the books for, the accountant will provide you with a journal to record this asset in the books.
• The first instalment of a lease sometimes includes additional amounts for registration and insurance. Find out what this first instalment includes and split it up correctly across the appropriate expense accounts.
• Leases often involve a residual — a lump-sum payment payable at the end of the lease term that roughly equates to the value of the asset. If a business chooses to pay this residual, the asset transfers into its name. When (and if) this residual is paid, you allocate the whole amount to an asset account such as Motor Vehicles or Plant & Equipment — remembering, of course, that this residual payment almost certainly includes GST.

Signing up with a chattel mortgage

A chattel mortgage is a form of finance where ownership transfers to the purchaser right from the start (with hire purchase, ownership only transfers to the purchaser at the point that the final payment is made, and with leases, ownership only transfers to the purchaser if the purchaser chooses to pay the lump sum residual at the end of the lease term).

You use the same method to record a chattel mortgage transaction as you do a hire purchase transaction (refer to ‘Taking on a new hire purchase debt’, earlier in this chapter) but with two important differences:

• First, when you record a chattel mortgage, you don’t record future interest charges, as I do in the last line of Figure 13-4.
• Second, you deal with GST differently. With a hire purchase debt, GST is charged on the interest component of purchase. With a chattel mortgage debt, interest is not charged on interest. (Note: Regardless of whether you report for GST on a cash or an accrual/invoice basis, you claim back all the GST in one big lump in the first Business Activity Statement or GST return following both hire purchase and chattel mortgage agreements.)

Adjusting the Bottom Line

Three accountants are being interviewed for a job. They’re all experienced, well-presented and amply qualified. So the HR officer poses the question (one that he personally, being a touchy-feely type, finds difficult to answer): ‘What is two plus two?’

‘Four’, replies the first candidate, quick as a flash. ‘Statistically anything between 3.9 and 4.1’, replies the second, with a nerdy twitch of the eyebrows. ‘Two plus two?’ counters the third, ‘I must ask a question in return — what would you like the answer to be?’

Accounting is not a science, rather an art form. I’m not talking tax evasion here — rather, I’m describing how the job of an accountant is often to tweak the figures, not only to get the best result from a tax perspective, but also to match expenses against income and come up with financial statements that make sense. As a bookkeeper who’s on top of their game, it pays to understand the nature of these adjustments and also, in some situations, be able to make the journals yourself. So in the next few pages, I explain some of the most common types of adjustments that accountants (and bookkeepers) make.

Reallocating prepaid expenses

Prepayments are expenses that a business pays for in one lump sum (such as annual insurance or commercial bill interest), but which are really expenses paid in advance for months or even years ahead. The problem for you is this: If you record prepayments as an expense in the month when they’re paid, you understate the profit for that month but overstate it for the following months.

Don’t sweat. You can keep things sweet by using a series of simple journal entries to spread expenses evenly over the months or year ahead. Here’s your battle tactic:

1. Create a new asset account called Prepayments.

   This account is always a current asset account.

2. Allocate the payment of the expense to this prepayment account.

   For example, if you’re paying $12,000 (plus GST) for an insurance premium, you don’t allocate this expense to Insurance Expense, rather you allocate it to Prepayments. And remember, even though you’re allocating this payment to an asset account, don’t forget to claim the GST.

3. Divide the amount of the prepayment by the number of months it covers.

   For example, if I pay $12,000 in advance for an insurance premium for the next 12 months, I divide $12,000 by 12 to arrive at $1,000 per month.

4. At the end of that month, record a journal entry that debits the expense account and credits the prepayment account for the monthly amount.

   In Figure 13-5, I record a journal entry that debits Insurance Expense for $1,000 and credits Prepayments for $1,000.

   Make sure you don’t claim any GST with this journal entry. You already claimed GST when you recorded the original payment (if in doubt, check back to Step 2), so you can’t double-dip.

5. If possible, set this journal up as a repeating journal so that it happens automatically at the end of each month.

   Whether or not you can do this depends on what accounting software you’re using (if any). In MYOB software, repeating journals are called recurring transactions; in Reckon Accounts and QuickBooks Online, repeating journals are called memorised transactions.

Accruing future expenses

An expense accrual is an adjustment for expenses that you haven’t received a bill for yet, but which the business has incurred. Many smaller businesses that report on a cash basis don’t bother with accruals. However, most larger businesses make accruals for expenses at the end of each financial year, and sometimes more often than that, so that they can accurately match expenses to the period in which they’re incurred. (For an explanation about cash versus accrual accounting, refer to Chapter 3.)

(By the way, a provision is pretty much the same as an accrual — being an adjustment for expenses or income not yet billed — but with the difference that the exact amount or the exact timing is uncertain. I talk more about provisions in the section ‘Figuring out leave provisions’.)

Here are some examples of accruals that accountants, or bookkeepers, often make:

• Accounting and tax agent fees: In Australia, the accountant sometimes makes a journal entry on the last day of the financial year for the accounting fees that the business is going to incur for the year just gone.
• Bills not yet received: Accountants sometimes make an accrual for bills expected from suppliers for work done in one financial year, but not received until the next.
• Commission payable: Maybe the business pays commission to agents monthly, 20 days after the end of each month. In this case, the accountant may make an accrual at the end of each month for the commission payable.
• Franchise fees payable: Typically, a franchisee pays the franchisor in the month or quarter after each reporting period. However, the accountant needs to make an accrual for franchise fees at the end of each month, so that the franchise expense belongs to the correct period.
• Wages payable: If a business has a large payroll and pays employees fortnightly, and the financial year ends just before payday, accountants sometimes do a journal to recognise the expense of unpaid wages.

The reason accountants and bookkeepers make accruals is to meet the matching principle of accrual accounting, which aims to bundle together income and associated expenses into the same period. For example, by making an accrual for commission at the end of each month, you match the commission to the same month as the sales to which it belongs.

Enough of all this theory: If you want to do an accrual, how do you go about it? Just follow my lead:

1. Create a new liability account that describes the accrual that you’re about to make.

   I like to be specific when describing accrual accounts, using names like ‘Accrual for Bills Not Yet Received’ or ‘Accrued Commission’, rather than vague descriptions such as ‘Accrued Expenses’.

2. At the end of each period (this can be weekly, monthly or quarterly), record a journal entry that debits the expense account and credits the liability account for the amount owing.

   For example, if you pay sales commissions every month, you calculate at the end of each month how much commission is due, then you make a journal entry debiting Commission Expense and crediting Accrued Commission. You can see how this journal looks in Figure 13-6.

   Don’t claim any GST with this journal entry. You can’t claim GST until you either receive a bill or make a payment.

3. When you pay this expense, allocate this payment to the relevant liability account, not the expense account.

   For example, when you pay commission at some point during the following month, you allocate this payment to Accrued Commission, not Commission Expense. (And at this point, you can claim the GST if applicable.)

4. Check that the balance of your accrual account returns to zero and, if not, make an adjusting journal entry.

   Sometimes when you finalise accounts, you realise that your accrual wasn’t completely accurate. For example, maybe you calculate commission to be $1,000 for a particular month, but the payment ends up being for $990. You need to make a final adjusting journal that debits the Accrued Commission account and credits Commission Expense for the remaining $10.

An alternative approach, and one that many accountants who only make journals once a year prefer, is to reverse accruals on the first day of the following month, recording a journal entry that debits the accrual and credits the expense. Then, when the expense occurs, this payment gets allocated to the relevant expense account.

Figuring out leave provisions

A leave provision is an entry in your accounts that allows for leave entitlements owing to employees. For example, if I have an employee who currently earns $52,000 per year, and she’s got four weeks of annual leave and two weeks of sick leave up her sleeve, making six weeks altogether, then I have a potential liability of approximately $6,000.

If you’re lucky, you may find that the responsibility for calculating and recording leave provisions falls to the company accountant, rather than you as a bookkeeper. But if you’re not so lucky — a likely scenario for a bookkeeper working in not-for-profit organisations — you’re going to have to get your head around this whole messy business. So here goes:

1. Generate a Balance Sheet for the last day of your financial year and highlight the balances of all the leave provision accounts.

   Look for liability accounts called Provision for Long Service Leave, Provision for Holiday Leave and so on. Oh yes, and if your organisation makes journals for leave on a monthly basis, rather than an annual basis, then you print up a Balance Sheet for the month just gone, rather than for the year just gone.

2. Generate a report that shows how much leave employees are due.

   Most organisations make provisions for annual leave and long service leave, but some organisations also make provisions for a whole swag of other entitlements such as sick leave, time-in-lieu owing and accrued rostered days off.

   For more info about calculating employee entitlements, scoot back to Chapter 9.

3. Chat to the company accountant about whether you need to adjust the leave figures at all.

   Some accountants like to adjust leave figures, adding leave loading to annual leave, or adjusting long service leave accruals by calculating the probability of how many employees are going to stick around long enough to be eligible.

4. For each leave provision, calculate the difference between the Balance Sheet and the value of leave owing.

   For example, if the leave report shows $5,000 outstanding in annual leave and the Balance Sheet shows $4,000, the difference is $1,000. (Of course, if nobody has recorded leave provisions before now, the difference is $5,000.)

5. Record a journal entry to adjust every provision account.

   To increase the balance of a provision account, debit an expense account called Wages Leave Provision Expense (create an expense account by this name if you don’t already have one) and credit the provision account. To decrease the balance of a provision account, debit the provision account and credit Wages Leave Provision Expense. You can see how this works in Figure 13-7, where I increase the Provision for Annual Leave account by $1,000.

6. Check that the balances of your provision accounts are correct.

   Even after a mind-numbing number of years doing this journal entry caper, I still sometimes have a brain freeze and muddle my debits and credits. That’s why I always check the Balance Sheet to see if the new balances of my provision accounts now match up with the leave reports.

By the way, most small businesses don’t worry about leave provisions; not only are the journal entries somewhat tricky, but also, in most circumstances, you can’t claim unpaid leave as a tax deduction anyway. (In Australia, you can’t claim unpaid leave at all; in New Zealand you can only claim unpaid leave as a taxable deduction if the leave is taken within 63 days of the end of the financial year.) Generally, only larger businesses that hire out staff and have a large payroll, as well as community and not-for-profit organisations, go to the trouble of recording leave provisions.

Separating private expenses from business ones

Many businesses, especially businesses that have a home office, end up with a bit of a jumble of business and personal transactions. Your job is to make sure that all legitimate business expenses get claimed, and that no personal expenses end up in the mix.

I’m going to give some examples from my own clients, where the bookkeeper needs to adjust for personal usage:

• One client of mine claims 100 per cent of his motor vehicle expenses throughout the year. However, his log book shows that he can only claim 85 per cent of motor vehicle expenses, meaning that his bookkeeper needs to adjust for the non-claimable 15 per cent.
• The same client runs his business from a home office and claims all electricity bills as a business expense. The bookkeeper later makes an adjustment, only claiming 20 per cent of electricity as a business deduction.
• Another client of mine pays a cleaner every week from her own pocket for cleaning both her home and the office. She doesn’t claim any of this expense during the year, so her bookkeeper makes an adjustment once a year for 25 per cent of the total cleaning bill.

Adjusting expenses is easy. To adjust for an expense that has been overclaimed (such as a business claiming 100 per cent of a motor vehicle when it can only claim 85 per cent), do a journal that debits Owner’s Drawings and credits the relevant expense account for the amount that was overclaimed. For example, in Figure 13-8, the business owner has claimed $8,000 of motor vehicle expenses, claiming 100 per cent each time. I need to adjust for 15 per cent personal use, so I debit Owner’s Drawings (an equity account) for $1,200 and credit Motor Vehicle Expense for $1,200. You can also see that because GST was claimed against these vehicle expenses in the first place, I’m also careful to include GST in my adjustment.

To adjust for an expense that has been underclaimed, do a journal that debits the relevant expense account and credits Owner’s Drawings for the amount that was overclaimed.

Small businesses are also allowed to make GST adjustments once a year for personal expenses in the final Business Activity Statement or GST return for that year. Although this method is quick and easy, I prefer to account correctly for GST throughout the year. Firstly, because I don’t like hidden surprises and, secondly, because my month-to-month Profit & Loss reports are more accurate if I adjust for GST on an ongoing basis.

Note: I’m assuming in both these examples that you’re doing the books for a sole trader, because this is the kind of business where personal and business expenses most often become intertwined. However, if you’re doing the books for a partnership, you adjust Partners’ Drawings instead of Owner’s Drawings or, if you’re doing the books for a company, you make adjustments against the Directors’/Shareholders’ Loan account.

Bringing Income into Line

Although tidying up accounts usually involves making adjustments to expenses, you get some situations where you need to adjust income also. To close off this chapter, I talk about two situations where you may need to make income adjustments: The first is matching income to the correct period if you receive payment in advance; the second is recording dividend income correctly.

Shifting income received in advance

Occasionally businesses receive money in advance from customers. For example, I can think of two of my clients who tend to get a flurry of advance payments just before the end of the financial year, with many clients paying thousands of dollars upfront for work that hasn’t even started yet. Another client, a not-for-profit organisation, survives on large government grants that are always paid six or twelve months in advance.

The name of the game, from an accounting perspective, is matching the income to the period in which it is earned. Here’s how:

1. Create a new liability account called Unearned Income or Income in Advance.

2. Figure out when the work that belongs to this income is going to take place, and when you want the income to show up in the accounts.

   So, if you receive a government grant of $12,000 in advance for 12 months, you want to show $1,000 of grant income every month for the next 12 months. Or, if a customer pays $5,000 in June for a website design that you’re going to do in July and August, you want to show $2,500 as income in July, and $2,500 in August.

3. Allocate the whole amount of payment to Unearned Income.

4. At the end of each month, make a journal entry that debits Unearned Income and credits the relevant income account for the amount earned.

   See Figure 13-9 for how the deed is done.

5. At the end of the job, project, contract or whatever, check that the balance of Unearned Income returns to zero.

   Make sure that when the income is earned and the deed is done, your Unearned Income liability account clears back to zero. Too often I go to check the accounts for a client and find amounts sitting in Unearned Income that have sat there for so long that nobody can even remember what they were for.

In this example, I show a ‘traditional’ approach for recording unearned income. However, if you use accounting software and the unearned income only spans one period — maybe you receive the money in June and then do the job in July — an easier approach is to generate a sales order to the customer, and apply customer prepayments against this order. Most accounting software is intelligent enough to realise that order prepayments automatically go to a liability account. When you later convert this sales order to an invoice, the software automatically transfers the deposit from a liability account to income.

Grossing up dividends

At first, recording dividend income seems easy (by dividend income, I mean dividends you receive from shares such as BHP Billiton or Telstra or whatever). You simply allocate the moolah against an income account called Dividend Income or something similar, and you’re done.

But here’s the rub: You actually get two kinds of dividends: Franked dividends, which are company dividends that include an imputation credit; and unfranked dividends, which are company dividends that don’t include an imputation credit (franked dividends are the more common of the two). Imputation credit is just a fancy word meaning tax credit, currently paid at a rate of between 28 and 30 per cent in both Australia and New Zealand.

Occasionally, dividends may also include a credit for Withholding Tax. How you allocate this tax depends on whether the dividend is paid to an individual or a business entity — check with the company accountant if you’re not sure.

Almost all dividend statements show how much the imputation credit is worth, but if you’re not sure, you can usually calculate this amount yourself. For example, if you know that the company tax rate is 30 per cent, the maths works out so that every 70 cents dividend paid includes a 30 cent tax credit. So if you receive a dividend for $70, you automatically receive an invisible tax credit of $30. (I say ‘invisible’, because you have nothing to show for this tax credit until tax return time.) Note: In some situations, you may receive a partly franked dividend, so I recommend that you always double-check the dividend remittance advice for the value of the tax credit.

Being the truly brilliant bookkeeper that you are, your job is to gross up dividends when you record them in the books, meaning that you allocate the gross value of the dividend to Dividend Income, and allocate tax credit to an asset account called Imputation Credits. The gross value equals the net amount you receive, plus the value of the tax credit.

Maybe an example will help explain what I mean. In Figure 13-10, I receive a franked dividend from Woolworths. The amount of the payment from Woolies is $140, and the paperwork that comes with the dividend says I have a tax credit of $60. I do the following:

1. I enter the value of the payment as the amount received (that’s $140).

2. I gross up the dividend by adding $140 and $60 together, making $200.

3. I allocate $200 to Dividend Income as a positive amount.

4. I allocate the tax credit (that’s $60) to Imputation Credits as a negative amount.

Voilà. My debits match my credits, and I have the feeling that the world is set to rights.

You really only need to record dividend income as income if shares are owned by the business itself. You don’t need to record income if the shares are in the name of an individual. For example, if a business has a sole trader structure and the owner of that business has shares in his or her own name, this dividend income isn’t really part of the trading results for that business. Even if the owner chooses to deposit dividend income into the business bank account, you’re best to allocate this income against an equity account called Dividend Income, and make a note to tell the accountant about these transactions at the end of the tax year.