No matter where your business is located, be that Tsim Sha Tsui, Mong Kok, Kwun Tong or anywhere else in HK, Tax Returns are one of the key documents needed to be completed and filed in the life of any Hong Kong small business. They are also useful in substantiating the purpose of your business and the amount of income you are expecting to receive from your company. This gives other stakeholders and interested parties an idea of how healthy your business is.
A tax return can also be used in securing loans or applying for grants and can serve as proof of financial stability of the company and its ability to pay off debt obligations.
Mistakes or errors in tax returns can lead the Government Tax Departments to impose penalties. Therefore, it’s vital to have a qualified and experienced accountant working on your books.
In a world of growing technology, business owners want to be able to do it all. DIY accounting is one of the things that many entrepreneurs think they can handle. After all, it’s just numbers and keeping track of money, right?
While we wish that DIY accounting was as easy as that sounds, we’re here to tell you why doing your own books isn’t always the best idea.
With all the other hats you have to wear in order to make your business successful, there is a good chance that you don’t have time to do your books with accuracy and professionalism. If you don’t have time to spend several hours a week on your books already, then you might not want to add another task onto your plate.
Also, unintentional errors that might happen could ultimately end up costing you more time and money than you had saved by doing it yourself. No matter how careful you are, mistakes will happen. Maybe you entered something incorrectly, or maybe you don’t know how to categorize an item properly. Either way, there’s more work to fix it and make sure it doesn’t happen again – more time that could have been spent on something else in your business.
You miss opportunities to improve your business. Once your bookkeeping is done (even if it isn’t done right), you move on to other things. If you aren’t looking at the numbers regularly or analyzing them for ways to improve, then you miss out on the opportunity to find new clients, increase sales, or lower costs some other way.
You could run into legal problems with the IRD or other authorities.
The Hong Kong Internal Revenue Department (IRD) may forgive or overlook a minor error in a tax filing, but if they think you’ve willfully withheld information or committed fraud, they can levy hefty fines against you.
But we’ve got you! To increase your fighting chance to avoid unnecessary conflicts with Government tax departments, we’ve compiled the top 5 accounting errors that untrained Hong Kong bookkeepers often make and how to avoid them.
5 Common Hong Kong Accounting Mistakes
Data Entry Errors
Transposition errors, accounting transaction errors, two separate entry errors —these mistakes occur when bookkeepers enter the wrong numbers or letters. For example, instead of typing “14”, they may mistakenly type “41”. This can lead to major issues later on because it can cause system-wide miscalculations. The easiest way to prevent transposition errors is to double-check all entries before saving them.
It could also be the result of a misunderstanding about how an accounting transaction should be recorded. For example, one company might think to record a cash payment for an expense as a “debit” to cash and a “credit” to salaries expense. Another company might record that same transaction as a “credit” to cash and debit to salaries expense. Which is correct?
Another example, if you make a cash purchase of $200 for inventory and pay $100 with a credit card and $100 in cash, it requires two separate entries in your accounting system: one debit to your bank account for $100 and another debit to your credit card account for $100. If you forget the entry for the cash payment or enter both payments to the bank account or credit card account, one of your accounts will be off by $200.
Here are some best practices for minimizing data entry errors:
When you have a lot of data to enter, it’s easy to make mistakes, so always review your work as soon as you complete it. That way, you can catch any errors quickly and correct them before they become lost in the system and difficult to find down the track.
Use automated data entry software
In addition to maintaining easy-to-understand books and records, it’s also important to keep a paper trail for every transaction. Whether you use physical receipts or electronic ones, make sure you have a system in place to store them in an organised fashion.
Manual data entry can be laborious. But it’s not necessary to actually do it manually—all thanks to emerging software tools that help you automate these recurring tasks. Automated data entry software could help you with your data entry along with data collection and organization.
Automated data entry software will allow you to minimize errors and increase accuracy. Depending on the software that you will be using, its features vary that will surely help you with your tasks. These softwares use at least one of the following: OCR (Optical Character Recognition), ICR (Intelligent Character Recognition), OMR (Optical Mark Recognition), BCR (Barcode Recognition). There are a number on the market, and can help reduce the data entry workload dramatically.
Bookkeepers do much more than simply enter data into a spreadsheet or accounting software. They must also collect data from a variety of sources, including invoices, receipts and business records. If they don’t have an efficient and organised system in place for doing this, they’re likely to miss something important. This could lead to inaccurate reports or even missing payments!
One way of ensuring this does not happen is to use cloud-based storage solutions like Dropbox or Google Drive to store all documents in one central location. This makes it easier for your bookkeeper to find documents when needed so that nothing gets missed. Just make sure you have passwords and access security to ensure no leaking of important documents.
Documentation is critical in the world of accounting. Bookkeepers need to keep a detailed and organized record of all their transactions and keep them on hand for years after the fact. If a customer claims they never received the product or service, or if a business owner needs to have their financial information audited by the IRD, documentation is key for providing proof in both cases. However, many untrained bookkeepers fail to keep this detailed documentation, which can result in losing out on income or even facing legal trouble from tax fraud charges.
If you neglect to record certain expenses of the business, your company may forfeit important tax deductions. Without adequate supporting documentation, the IRD may not consider expense items to be legitimate.
Several helpful practices to achieve compliance include the following:
One way of ensuring this does not happen, is to instill policies that require all actions be documented with supporting documents. This will not only help a new bookkeeper get up to speed but it will also give you an audit trail should you ever need it later on.
It’s important to have a copy of every entry you made in your records, so that you can easily explain an audit or any discrepancies, if necessary. This will allow you to verify the information on your financial statements as well as protect yourself against lawsuits, fraud or theft.
Record transactions as they occur
Recording transactions as they occur helps with keeping track of your finances. Most untrained bookkeepers fail to do this, especially when it comes to expenses. Instead, they record all expenses at once or in batches. This may lead to inaccurate records and loss of receipts.
To avoid this, record transactions as they occur so that you don’t lose track of your expenses during the course of the year.
Neglecting to Track Reimbursable Expenses
One of the biggest mistakes in bookkeeping is neglecting to track reimbursable expenses. A reimbursable expense is one that you can collect back from your company, usually because you’re also paying it on behalf of your company.
Reimbursable expenses are a big deal. They’re one of the primary ways business owners get paid. Because when you pay for something out of your own pocket, you are essentially loaning money to your business. If the business doesn’t pay you back, you have lost money.
When you don’t, you can lose out on money that is rightfully yours. It’s also important to make sure that your expenses are legitimate and deductible in the eyes of the IRD.
Here are easy ways to keep track of reimbursable expenses so you don’t miss out on getting paid for them by your clients.
Know what qualifies as a reimbursable expense.
Some business owners don’t realize that certain costs qualify as reimbursable, and they end up paying them themselves when they don’t have to — losing out on a valuable source of income in the process. Common reimbursable expenses include mileage or auto-related expenses, lodging and meals while traveling, transportation costs (such as flights) and cell phone bills.
Provide employees with a form for reporting costs.
If employees incur business-related costs when traveling or running errands, give them an opportunity to record these expenses on a designated form. This form can include space for the date, the name and address of the place where the expense occurred, a description of the item or service purchased, its cost, and other relevant information. By using this form on a regular basis, employees can keep track of all their business-related expenditures and easily report back to you on what they spent.
Procrastinating on Completing the Bookkeeping
Stalling bookkeeping is one of the biggest mistakes you can make. It’s like sweeping your used clothes under your bed — though you may not see the mess, it is still there, and its getting worse. And once you begin to tackle the problem, it can seem overwhelming. But if you keep at it day by day, you’ll be able to get your business back on track.
If you are letting receipts pile up in your bag or wallet, here’s some tips to help you get started on tackling the mess:
Commit to entering receipts daily.
Keep a copy of your receipts in a file folder so they don’t get lost. It is easy to lose receipts if they are piled up in your bag or wallet.
Use an automated receipt tracking app like Expensify or Shoeboxed that allows you to easily upload photos of receipts and automatically convert them into data you can use for reports.
Sending out reminders for anything that’s past due.
This will make sure every invoice gets paid promptly and your books stay accurate.
For example, if you’re waiting until June 15th to send out invoices because you’re giving clients a discount for early payment, set up a reminder system so that you can get them out before the due date and still get paid in time.
Integrating business and personal expenditures
You take a client for dinner, but you don’t have a company card so that you could withdraw money. Not to be alarmed. You can simply use your personal card and withdraw money, correct?
It may appear simple to pay for business endeavors with personal finances in the spur of the moment. However, in the long term, combining your finances creates a bit of a maze for bookkeeping. Here are some ways to avoid this mistake:
Obtain a separate bank account or credit card exclusively for small businesses.
This means that there will be different transactions on the same bank statement that relate to the business and the person’s personal finances. For example, a single statement might show transactions for paying employees or buying office supplies. This is problematic because it makes it hard to track business expenses accurately.
One way of ensuring this does not happen is to obtain a separate bank account exclusively for small businesses. If you want to keep your personal and business finances separate, you should also obtain a separate credit card for your business.
Monitor A Petty Cash System
One way of ensuring this does not happen is to implement and monitor a petty cash system for daily expenses. But if you do make mistakes, it’s important to realize that the IRD may look at any expense deducted from your business as business spending — even if it wasn’t.
Whether it’s a bill for office supplies or for your kids’ school lunches, the IRD will treat all expenses as deductible unless you can prove otherwise. This means you could potentially be fined for claiming personal expenses as business ones, so keep careful records of all transactions just in case.
Many entrepreneurs make this mistake of using their business bank accounts for expenses that are not related to work. For example, you might use the petty cash system meant for employee reimbursement to pay for your personal expenses such as buying groceries or paying for a meal or two out with friends.
One way of ensuring this does not happen is to implement and monitor a petty cash system for daily expenses.
These are just some common errors that untrained bookkeepers might commit. Frankly, even trained bookkeepers might commit some of these errors at some point. What makes it different though, is that you may demand accountability for the errors.
If you are struggling with any of the above, the simple solution is to outsource your Hong Kong bookkeeping to the professionals. Contact Pinetree today for a free quote on your accounting needs.
If you need to know more, you may contact me at email@example.com, call us on +852 3529 2328 or visit our website www.pinetree.hk