How to Prepare Your Financial Statement as a Sole Trader

April 17, 2024

How to prepare a financial statement as a sole trader

As a sole trader, knowing how to prepare your financial statement is crucial. Sometimes, you may not have the luxury of an in-house accountant.

Even if you do, you should be able to make sense of the numbers. Otherwise, you will remain in the dark about your business. Such will impair your ability to make sound financial decisions in your enterprise.

Consider Sam Walton’s autobiography Made In America. Al Johnson, the CEO of Walmart at one time, stated the following about Walmart’s owner and founder:

“Every Friday morning for six years, I would take my columnar pad with all the numbers on it into Sam’s office for him to review. Sam would jot them down on his pad and work through the calculations himself. I always knew I could not just go in there and lay a sheet of numbers in front of him and expect him to just accept it.”

You may already know the importance of preparing your financial statement. However, taking the steps to do it may seem daunting.

In this guide, we’ll break down the process into simple steps. All you have to do is follow our step-by-step process and illustration. In the end, you will have a working knowledge of how to prepare your financial statements as a sole trader.

Key Financial Statement of a Sole Trader

Financial statements are vital tools that offer insights into your business’s performance. It enables you to make informed decisions and meet regulatory requirements.

Without your financial statement, you will make decisions based on feelings. This is a recipe for disaster and one of the reasons businesses fail.

Let’s talk about the key financial statements for a sole proprietorship and how to prepare them. These are the Income Statement, the Balance Sheet, and the Cash Flow Statement.

These three statements work together to give a clear picture of the financial health of your business.

Income Statement: This shows how much money the business made and how much it spent over some time, usually a month, quarter, or year. It includes revenues (money earned) and expenses (money spent). It is otherwise called the Profit and Loss Statement.

The net income represents the excess of revenues over expenses for that period. If expenses exceed revenues, the sole proprietorship incurs a net loss. If the reverse is the case, then, you have your net profit.

Balance Sheet: This gives a snapshot of what the business owns (assets) and what it owes (liabilities) to outsiders at a specific point in time. The balance sheet is like a financial picture of the business at a certain moment.

Cash Flow Statement: A cash flow statement shows the movement of cash within the business. This inflow and outflow of cash is based on 3 sources and categories: operations, investing, and financing.

This is an extremely important financial statement. It gives at a glance, a snapshot of the business’s financial health and reveals the movement of actual cash in the business.

Why “actual” cash? For instance, the income statement uses what is called the accrual basis of accounting. In this case, you calculate money as it is earned but not received yet.

What this means is that an invoice sent to a customer represents sales made even when you have not received a cash payment. You record such sales even if they are on credit. So, the income statement does not reflect cash flow like the cash flow statement.

Also Read: 7 Bookkeeping Strategies that Can Help Your Business in Nigeria

Step-by-Step Framework on How to Prepare Your Financial Statement as a Sole Trader

Here’s a general guide on how to prepare your financial statement as a sole trader. We will illustrate with a fictitious statement of accounts to give you an idea of what each statement looks like. Actual figures will vary based on your business operations and transactions.

Organize Your Financial Records:

Keep track of all your business transactions. This includes proof of income, expenses, assets, and liabilities. Maintain a systematic record-keeping system, either manually or using accounting software.

Income Statement:

List your revenue: Include all income generated by your business, such as sales, service fees, and any other sources of income. Then, deduct your expenses including rent, utilities, salaries, and any other relevant costs. To calculate your net income, subtract your total expenses from your total revenue.

Income Statement for the Year Ended December 31, 2023

Revenue

Sales ₦500,000

Other Income ₦10,000

Total Revenue ₦510,000

Expenses

Cost of Goods Sold ₦200,000

Operating Expenses ₦80,000

Depreciation ₦5,000

Other Expenses ₦15,000

Total Expenses ₦300,000

Net Income ₦210,000

Balance Sheet:

List your assets. This includes cash in hand or cash at the bank, inventory, equipment, and accounts receivable. Accounts receivable is simply the amount owed to your business.

Your fixed assets represent the business “properties” that are not easily convertible to cash within a year such as machinery. Current assets represent assets that are more liquid and can be converted to cash within a year. Your stock or inventory is a current asset. Knowing the value of these assets is one of many reasons why stock-taking is important.

List your liabilities: Include all your business liabilities, such as loans, accounts payable, and other debts. The difference between these assets and liabilities is called owner’s equity. To calculate the owner’s equity, find the difference between your assets and liabilities. This difference represents your interest and stake in the business. It’s the residual value of your business after liabilities are taken from your business.

Also Read: How to Calculate Value-Added Tax in Nigeria

Balance Sheet as of December 31, 2023

Assets

Current Assets

Cash ₦50,000

Accounts Receivable ₦20,000i

Inventory ₦30,000

Other Current Assets ₦5,000

Total Current Assets ₦105,000

Fixed Assets

Property, Plant & Equipment ₦100,000

Less: Accumulated Depreciation ₦10,000

Net Fixed Assets ₦90,000

Total Assets ₦195,000

Liabilities and Owner’s Equity

Current Liabilities

Accounts Payable ₦15,000

Short-term Loans ₦10,000

Other Current Liabilities ₦5,000

Total Current Liabilities ₦30,000

Long-term Liabilities

Long-term Loans ₦25,000

Other Long-term Liabilities ₦8,000

Total Long-term Liabilities ₦33,000

Owner’s Equity

Capital ₦132,000

Total Owner’s Equity ₦132,000

Total Liabilities and Owner’s Equity ₦195,000

At the end of the financial year, both assets and liability sides must reflect the same amount. Your equity which is your net worth is the amount of capital you invested in your business.

This amount increases when your investment increases or profits. And the greater your equity, the more money is available for other activities like investment. You can get over the stress if you know how to prepare a financial statement as a sole trader.

Cash Flow Statement:

Record your operating activities: Include cash transactions related to your daily business operations. Then, include investing and financing activities. You do this by recording any cash transactions related to investments and financing. Examples are loans or asset purchases.

Cash Flow Statement for the Year Ended December 31, 2023

Operating Activities

Net Income ₦210,000

Adjustments for:

Depreciation ₦5,000

Changes in Working Capital

Increase in Accounts Receivable ₦5,000

Decrease in Inventory ₦2,000

Increase in Accounts Payable ₦2,000

Net Cash from Operating Activities ₦220,000

Investing Activities

Purchase of Property, Plant & Equipment ₦40,000

Other Investing Activities ₦5,000

Net Cash used in Investing Activities ₦45,000

Financing Activities

Repayment of Loans ₦10,000

Owner’s Equity Contribution ₦20,000

Net Cash from Financing Activities ₦10,000

Net Increase in Cash ₦185,000

Beginning Cash Balance ₦50,000

Ending Cash Balance ₦235,000

Shifting to Accounting Software:

Preparing accounting statements means you are familiar with the basics of accounting principles. However, this is rarely the case for most sole proprietors and business owners.

Equally important is the need to automate your accounting systems. This move is an investment that will make the work much easier for you and your team.

Human errors, time, and cost implications in the long run are some of the reasons you should consider using accounting software to prepare your financial statements.

When you choose the right accounting software, you streamline the process and reduce errors. There are various accounting software options available that can help automate tasks and generate financial statements.

Also Read: The Impact of Tax Evasion and Tax Avoidance in Nigeria’s Economy

Conclusion

The importance of learning how to prepare your financial statement as a sole trader cannot be overstretched.

Financial statements, like the best budgeting methods, refine your business roadmap. They provide you – the sole trader – with data. Data then translates to information which means guidance and informed decision making.

Your income statement tells you about the profitability of your business. The Balance Sheet shows at a glance your financial position. Your Cash Flow Statement shows cash direction and movement.

As a sole proprietor, basic accounting knowledge will do your business a world of good. Use our illustrations and examples to set up your systems guided by current accounting principles, concepts, and principles in Nigeria.

21 Accounting Terminologies You Should Know and Their Meanings

tgbemishorunke

April 5, 2024

Financial accounting enables a business or enterprise to keep a record of money-related transactions, including expenses and profits. Certain accounting terminologies are used to describe the different kinds of financial transactions.

What are Accounting Terminologies?

Also called financial terms, these are the words or phrases that best describe the various financial transactions. These terms also help one become familiar with what goes on within the business ecosystem, as well as make the comprehension of numbers better.

Top 21 Accounting Terms You Should Know

From allocation to balance sheet and bookkeeping; several terms help in breaking down the concept of financial accounting. Find out their meanings below.

1. Allocation

When funds or money is allocated; it means that it has been set aside for a specific (financial) use. Allocating money is usually done ahead of time and usually added to a budget. That way, the business maps out an amount for a specific use and uses the money, when approved, for that purpose.

Also Read: The Impact of Tax Evasion and Tax Avoidance in Nigeria’s Economy

2. Assets

This is a resource or property owned by a company or business. Just like profit and loss, asset is one of the most common accounting terminologies. Here are a few things you need to know about assets:

State of the Assets

There are two (2) major types of assets:

Current: these are assets consumable or usable within a year.
Non-Current: these assets can be held and used beyond a year.

Liquidity Levels

Liquidity has to do with the ease of sourcing money or capital by way of putting up assets for sale. While you can easily trade off some assets, others may not have the same kind of liquidity.

Cash is an example of a liquid asset because it can be spent. This is unlike a property, which must first be put up for sale (listed), sold and cash gotten.

3. Balance Sheet

Want to know the financial standing of a business? Check its balance sheet. This is a financial statement detailing a company or business’s financial transactions.

What can you find in a balance sheet?

All the assets are controlled by the business.
Liabilities
Equity is obtained after calculating the amount left for the owners.

4. Bank Statement

This is a periodic (monthly) statement that a business receives from the bank. It is usually the financial transactions within the period and how much is left.

5. Bookkeeping

This is one of the most important financial accounting terms, as it has to do with the recording of financial transactions often in an accounting system.

6. Capital

This is the money a business can use at any point in time to scale operations. You can also use capital for other purposes, including acquiring new businesses or taking over existing ones.

7. Cash Flow

Cash flow refers to the amount of money a company receives or loses over a specific time. Usually, a business anticipates a specific amount of money to flow in. Understandably, the company will use this inflow for important purposes.

8. Cost of Goods Sold

When a business is calculating its finances, it also factors in the Cost of Goods Sold (COGS). This refers to the amount spent when producing an item. The calculation is usually the cost of materials and labour.

9. Credit

This is an entry made on the right side of a T-account, indicating the increase of liability or the decrease in a company’s expense account or assets.

10. Debit

This is the opposite of credit and entails a decrease in liabilities and an increase in the expense account or asset.

11. Debt

This refers to the amount owed to a business or company. The money owed could be via the provision of a service or unpaid goods. It could also be loans.

12. Debt Retirement

When the services, bonds or money that represent an amount owed are paid off; it is called debt retirement.

13. Depreciation

An accounting term that references the decline in the overall worth of an asset. You can determine what the depreciation is when you compare the previous valuation to the current price.

14. Diversification

This is an accounting term used to highlight the reduction of a business or company’s risk exposure by way of putting money into or investing in a wide range of assets. The idea is that if Asset A doesn’t make good returns, Asset B or C would.

15. Dividends

A Limited Liability Company distributes a part of the profits made to the shareholders. This profit is called a dividend. This money is paid only after the company has offset the taxes, and liabilities and handled all expenses.

16. Equity

This is the difference between liabilities and assets. You can also see it as the business owner’s interest in the company and its financial worth.

17. Expenses

Simply put, this is the money that goes out of a business. Expenses are usually incurred due to the business activities in the cause of service provision and revenue generation.

18. Federal Income Taxes

These are the taxes on the net or annual income of individuals and businesses. You are to remit these monies to the Federal Government through the designated agencies.

Also Read: How to Calculate Value-Added Tax in Nigeria

19. Fiscal Year

This is a consecutive 12-month timeframe during which the financial standings of a company are measured or calculated.

20. Gross Profit

You derive this kind of profit after deducting overhead expenses (including the cost of goods sold) from a company’s profit.

21. Net Profit and Loss

Also called a Profit and Loss (P&L) statement; this is a financial statement detailing the amount of money a business made or lost after deducting the overhead expenses.

Through the P&L statement, you’ll know not just how much revenue was generated, but also the areas or channels that took the most money. This is in addition to having an idea of your business’s ability to generate more and better profits in the future.

Final Words

Knowledge of accounting terminologies helps you understand what you have on the balance sheet. In addition, it also helps you in interpreting figures or entering new ones.

From small businesses to companies, having a robust financial standing is important. Oftentimes, getting a professional to audit your books helps one find out possible loopholes that take the most money out of the business.

Which of these accounting terminologies are you just hearing for the first time? Share with us in the comment section.

7 Bookkeeping Strategies that Can Help Your Business in Nigeria

tgbemishorunke

April 5, 2024

Bookkeeping strategies for business owners in Nigeria

Before we discuss the various bookkeeping strategies one can implement in Nigeria, let’s talk about definition of bookkeeping.

What is bookkeeping? Bookkeeping, a financial accounting process, is a process of recording financial transactions in a business. Certain strategies can help you maximize this to the fullest potential.

In this article, we help business owners in Nigeria to leverage these tactics to scale their businesses.

The Meaning of Bookkeeping Strategies in Nigeria

Managing a business’s financial accounts requires an eye for details and getting it right can make all the difference in how the revenue is used. Most bookkeeping professionals would suggest taking an inventory and deciding on the accounting method to use. The choice of accounting software can also make all the difference.

Best Practices for Bookkeeping Your Business’s Finances

In this section, we expose the seven (7) primary ways to leverage bookkeeping for maintaining a good business record. In Nigeria, these are the 7 bookkeeping strategies that are guaranteed to work:

1. Separate Business from “Pleasure”

One mistake you don’t want to make is using the same account to receive and disburse money for your business and personal purposes.

The rule of thumb is to maintain separate accounts for your business and personal expenses. Smaller businesses, often overseen by the owner or a few people are often prone to making this mistake.

Here’s what to do:

Open a separate bank account for your finances and another for your business.
If possible, let the business account be out of your control, but be supervised by someone you trust or preferably, a professional. That way, filing taxes and balancing the financial account is easier.

2. Choose the Right Accounting Software

Most human-like inputs can be automated with the aid of software. Your business’s finances can also be streamlined by selecting the best accounting software. From reducing the paperwork to making faster computations, the ideal software reduces your efforts drastically.

To pick the best software, experts suggest keeping the following in mind:

Adaptability to Your Business’s Needs

The preferred software is not just one that automates calculations but also one that fits into what your business needs at the moment. An adaptable software can also be configured in the future as your business’s operations scale.

Explore the Software’s Features

Not all software packs a punch. While some are good for issuing invoices and generating reports; others go the extra mile to track the inflow of money and outgoing expenses.

So, put the features in mind when choosing software for your business.

Also Read: Tax Return Complete Guide: How to File FIRS Tax Return in Nigeria

3. Always Reconcile Your Bank Statements

It’s important for any business keenly interested in managing its finances properly to use bank statements to get a clearer picture of things.

The bank statements provide vital details about the business’s finances, including the inflow of monies, expenses or outflows and the balance as of the time in view.

Experts recommend these tips for reconciling your bank statements:

Don’t let the statements pile up. Periodic checks (either monthly or quarterly) help you know the financial standing of the business.
Compare the information in the bank statement with what you have in the business’s books. If there are discrepancies, go back to where they occur and fix those.

4. Set up and Manage Your Payable and Receivable Accounts

This is one area of bookkeeping where proper structure needs to be in place. The Accounts Receivable (AR) and Accounts Payable (AP) are the two most important accounts a business must have. While the AR deals with the money owed to the business due to goods sold or services rendered; the AP keeps track of the business’s financial obligations, such as payments to suppliers for raw materials and utility bills.

Diligently recording and managing the respective accounts helps your business keep track of the revenues generated and amounts spent. Taking advantage of early payment discounts and settling amounts owed on time are excellent strategies for keeping the finances in good check.

5. Maintain an Accurate Documentation of Products/Goods

Taking periodic inventory helps prevent product misplacement. It can also be a good move to check theft. By documenting the items on the shelf, your business will know when best to stock up and when to develop better marketing strategies in the case of products/goods that seem not to be purchased as much as the others.

When taking stock, here are some details you mustn’t lose out:

The number of products or goods left.
The manufacturing batch/number.
Purchase costs.
Dates purchased.

6. Follow Industry Standards for Financial Reporting

While some businesses may have a dynamic financial accounting process; it’s important to follow some of the industry standards.

Thus, your company’s books must include the following types of financial reports:

Cash Flow Statements

This financial report states the amount of money that comes into the company and how much is left.

Income Statement

This report doesn’t state how much comes into the business. Rather, the statement shows the different avenues through which the company makes money. Common sources are goods sold and payments.

The income statement also includes:

Profits generated over a specific time. This is usually quarterly or annually.
The expenses the business makes within a period.

Balance Sheet

This financial report is where the liabilities and assets of a company are detailed. It is subject to change or update as the liabilities and or assets pile up or diminish.

Also Read: How to Calculate Value-Added Tax in Nigeria

7. Hire Professionals to go through the Books

You’ll have a clearer picture of how the business is performing, financially. As the owner or top executive, you’re better off spending more time in board meetings and chasing new investors than sitting and looking through the books.

That’s why experts recommend outsourcing the company’s bookkeeping to a professional who not only understands what it means to maintain and present a clean bill of financial health but also follows the best practices to get the job done.

That way, you’ll focus on strategic ways to grow the business, while the experienced bookkeeper puts in the needed hours to keep your books up-to-date.

Concluding Thoughts

By avoiding some common bookkeeping mistakes; your business can be sure of continued success owing to the clean financial reports. Investors would also be prepared to hear you out and commit to your venture. It all starts with getting the books in order and hiring a professional bookkeeper who understands the use of technology and industry standards.

Have you tried any of these bookkeeping strategies in Nigeria before? How did it go? Share your experience with me.

Tax Return Complete Guide: How to File FIRS Tax Return in Nigeria

tgbemishorunke

April 5, 2024

Filing your tax return is a legal obligation in Nigeria just like anywhere else. The Federal Inland Revenue Service (FIRS) oversees this crucial obligation. Also, state agencies like Lagos Inland Revenue Service (LIRS) demand an annual tax return filing from taxpayers who conduct business in their territory. These bodies ensure that businesses fulfill their legal duties while contributing to the nation’s development.

Filing your tax returns isn’t merely a bureaucratic requirement. It’s a fundamental aspect of responsible citizenship and corporate governance. Failure to meet up with this requirement attracts penalties.

In this comprehensive guide, we’ll walk you through the process of filing your FIRS annual tax return in Nigeria. We will provide insights, tips, and essential information to carry out your obligation effectively.

Understanding Tax Returns:

Don’t confuse annual returns with annual tax returns. Tax is regulated by FIRS or State IRS depending on the type of entity. On the other hand, annual returns are regulated by the Corporate Affairs Commission.

Every company registered in Nigeria is required to file an annual return with the CAC. This requirement gives information about the company, its shareholders, directors, and other relevant details. It is meant to keep The Commission up to date on the current status of the company.

However, at its core, a tax return in Nigeria is a comprehensive report that taxpayers prepare to disclose their financial activities over a specified period. This report serves as a means of compliance with tax laws and regulations enforced by the FIRS.

In Nigeria, there are primarily two types of taxes filed with the FIRS:

Companies Income Tax Returns: For registered companies, the Companies Income Tax Returns (CITR) form the cornerstone of tax compliance. It outlines the company’s earnings, deductions, and tax liabilities for the fiscal year.

Personal Income Tax Returns: Individuals, including employees and self-employed professionals, are required to file Personal Income Tax Returns (PITR) to declare their income, claim deductions, and fulfill their tax obligations.

Also Read: How to Know if a Company is in a Deep Financial Distress

Key Steps in Filing Tax Returns:

Filing of annual tax returns mostly kicks off at the beginning of a new year. Filing your tax returns requires careful preparation and attention to detail. Here are the key steps involved:

Documentation: Collect all necessary financial documents, including income statements, expense records, and relevant receipts.

Update Your Financial Records: Before you begin the filing process, ensure that your financial records are accurate and up to date. This includes maintaining a balance sheet, profit and loss statement, and other pertinent financial documents. Learning how to prepare your financial statement is simple and crucial to every business regardless of size.

Financial Statements Audit: Engage a certified auditor to review and audit your financial statements. An audited report enhances the credibility of your annual returns and ensures compliance with regulatory standards.

Verify Shareholding Details: Confirm the accuracy of your company’s shareholding details. Ensure that any changes in ownership or structure are reflected in your annual returns.

Prepare Director’s Report: Draft a comprehensive report highlighting your company’s activities, achievements, challenges faced, and plans during the financial year.

Completion of Tax Forms: Fill out the appropriate tax forms based on your entity type (e.g., CITR for companies, PITR for individuals).

Submission: Submit your completed tax forms along with supporting documents to the FIRS within the stipulated deadline.

Benefits of Promptly Filing Your Tax Returns

Filing your tax returns on time offers numerous benefits. It shows that your business is tax-compliant which is beneficial in many ways. One is the ability to access government credits or contracts. It also offers the following advantages:

Legal Compliance: Timely filing ensures compliance with Nigerian tax laws. As we have already stated, this benefit removes the risk of penalties and legal complications.

Maintaining Good Standing: In business, being in the good books is important. It is more than taxes. It also has much to do with being a law-abiding business entity. Consistently filing your tax returns enhances your company’s reputation and standing in the business community. This will lead to more trust and credibility for your business.

Securing Contracts: Timely submission of annual returns is often a prerequisite for securing public and private contracts. Compliance with filing deadlines is crucial. It will position you to seize many lucrative business opportunities.

Access to Business Opportunities: Many government and private entities require evidence of annual tax returns before engaging in business transactions. Timely filing opens doors to various opportunities and partnerships.

Penalties for Non-Compliance:

The FIRS imposes penalties for tax evasion and late filing. If you miss the deadline, you will pay extra. If you miss an entire year, there will be additional interest on those unpaid taxes. You will agree that 10% extra annually will accumulate quickly over time. Tax evasion can also lead to a legal charge depending on the circumstances.

The financial burden aside, non-compliance with tax filing requirements can have severe legal consequences. Businesses risk removal from official business lists. The implication of this strips such businesses of the authority to conduct business legally.

Assets seizure is another penalty not talk of the disruption to business operations. Additionally, individuals in positions of authority within the company may face personal liability and legal repercussions for non-compliance.

Resources and Assistance:

Fortunately, there are resources and assistance available to aid taxpayers in the filing process:

FIRS Website: The FIRS website provides valuable information, downloadable tax forms, and guidelines for taxpayers.

Tax Consultants: Professional tax consultants can offer expert advice and assistance in navigating the complexities of tax filing.

Tax Software: Utilizing tax software can streamline the filing process. It will automate calculations, and minimize errors.

Tax Education Programs: FIRS conducts tax education programs and workshops to enhance taxpayers’ understanding of their obligations and rights. As part of their efforts to educate the public more, there are contents of such programs on their YouTube channel.

Conclusion:

Filing your FIRS tax return in Nigeria is a fundamental obligation that demands diligence, accuracy, and timely compliance. By following the steps outlined in this guide, you can file your annual tax return with ease.

In addition to this guide, seek assistance from the resources we have listed if needed. Try to avoid the pitfalls of non-compliance and learn how to calculate your VAT.

For more information and assistance with filing your annual tax returns, visit the FIRS website.

How to Calculate Value-Added Tax in Nigeria

tgbemishorunke

April 5, 2024

How to calculate your value-added tax in Nigeria

Not many people know how to calculate Value-Added Tax (VAT) in Nigeria. Many do not also know what it’s all about. But, if you have ever bought goods at a departmental store you will notice a small amount – VAT – on your sales receipt.

VAT is a consumption tax. It is levied on the value added to goods and services at each stage of the production and distribution chain. It’s that small extra cost added to things you purchase, and it’s collected by businesses but paid by the person buying the stuff.

The law demands that the seller indicate the VAT element alongside the cost of the goods and remit the tax to the government.

In Nigeria, VAT plays a crucial role in generating revenue for the government. As a business owner, it’s essential to grasp how to calculate VAT to ensure compliance with the tax regulations.

This blog post is here to help make VAT less confusing. Let’s break down the process and show you how to calculate value-added tax (VAT) as a business owner in Nigeria.

Why Should Your Business Know About VAT in Nigeria?

All taxable persons are required to register for tax and obtain a Tax Identification Number (TIN) upon commencement of business. However, only businesses that meet the threshold for VAT are required to collect, pay, and file VAT returns. Such a business must have an annual turnover of N25 million or more.

For businesses in Nigeria, knowing about VAT is super important. It affects how you set prices and make money. By figuring out VAT, your business can avoid problems, and handle money better.

Different countries have their rates. In Nigeria, the current rate is 7.5. The VAT Act…2014 requires that you pay VAT on all goods manufactured and /or assembled in or imported into Nigeria. This also includes all services rendered by any person in Nigeria except VAT-exempt goods such as basic (raw) food items, baby products, medical services, and services rendered by Community Banks, etc.

Also Read: The Impact of Tax Evasion and Tax Avoidance in Nigeria’s Economy

Basic Calculation of VAT in Nigeria:

The formula to calculate VAT is straightforward. As we stated earlier, In Nigeria, the standard VAT rate is 7.5%.

Sum all the goods/services your customer ordered

Suppose you run a fashion outlet online, and a customer orders the following (Values in Naira)

Shoes 50,000

Shirt 12,000

Sunglasses 15,000

Total 77, 000

2. Multiply the total of goods/services by 7.5 and divide by 100

Using the VAT rate of 7.5%, multiply the total of your goods/services by 7.5 and divide your answer by 100:

77,000 x 7.5/100 = 5,775

The VAT here is 5,775.

3. Add VAT to the total

See example below;

Shoes 50,000

Shirt 12,000

Sunglasses 15,000

Total 77,000

VAT (7.5%) 5,775

Grand Total 82,775

This is what the customer pays at check out.

How to Calculate Inclusive vs. Exclusive VAT:

It’s crucial to understand whether your prices are inclusive or exclusive of VAT. If your prices are inclusive, the VAT is already included in the total amount, and you need to back-calculate to find the original net sales amount. So, in remitting the taxes to the FIRS, a business is also expected to deduct certain VAT expenses (called Input VAT) that they also incur.

How to Calculate and Deduct Tax Returns

Businesses charge the required 7.5% VAT on invoices for their services to clients or for the sale of goods to customers.

For example, if you buy an Air Conditioner from a retail outlet ( let’s call the outlet ABC Goods) for N100,000. If that amount is already inclusive of VAT, then the VAT amount is N7,894.74. That is, 7.5% of N100,000. Now, N100,000 – 7,894.74 =N93,023.26. Keep this last figure in mind. It is the cost of the AC minus VAT.

But remember this business, ABC Goods is a retail outlet. Meaning that they bought the TV at a lower price before fixing their selling price (100,000) which includes their markup and VAT (calculated above)

Now, let’s check out the outcome from the supplier’s end. Supposing that ABC Goods bought the Ac from the supplier at N80,000 inclusive of VAT of 7.5%. Applying 7.5% to the cost price means that ABC goods paid a sum of N6,000 in VAT.

Now that we have established this, let’s use the information to calculate how much ABC goods have to remit to the Federal Inland Revenue Services

VAT Output ( included in your invoice paid to ABC Goods) – N7,894.74

Value-Added Tax Input ( included in ABC good’s invoice paid to the supplier) – N6,000

VAT Remittable to the FIRS – N7,894.74 – 6,000 = N1,894.74

Not all items can be classified as VAT inputs. For example, apart from paying 7.5% VAT on the AC purchased for resale, ABC goods can’t claim VAT on say their marketing costs and the like. This extends to VAT paid to other services such as legal, consulting, fittings, etc. The reason for that is not in the scope of this post.

Also, businesses can only claim back the VAT they’ve paid on items they plan to sell or use directly to make new products. So, if a business buys something to resell it or to use it to make something new that they’ll sell later, they can get back the VAT they paid on those items. However, if they buy something for a different reason, like for personal use or their office, they can’t claim back the VAT.

Also Read: 5 Best Accounting Software & Tools for Restaurant Business Owners

Filing VAT Returns:

Businesses are required to file VAT returns with the Federal Inland Revenue Service (FIRS) monthly, ideally 21st of every month. The VAT return includes information such as total sales, VAT collected, and VAT paid on purchases. Just like having a guide on filling annual tax return is crucial, not understanding VAT and how to calculate it can expose businesses to several risks:

Financial Penalties: Lack of awareness or miscalculation of VAT may lead to underpayment.

Cash Flow Issues: Incorrectly managing VAT could impact a business’s cash flow. As a result, you may have to set aside enough money to cover the tax obligations.

Price Setting Challenges: Failure to factor in VAT when setting prices may result in incorrect pricing strategies. Of course, this will affect your profit margins and competitiveness in the market.

Legal Consequences: Non-compliance with VAT regulations has legal consequences. This includes audits and potential legal actions by tax authorities. Businesses that consistently face tax issues risk damaging their reputation. Customers, suppliers, and partners may lose trust in a company that struggles with basic financial responsibilities.

Conclusion

A lack of knowledge about value-added tax and how to calculate it in Nigeria can have far-reaching consequences. Knowing how to calculate your value-added tax in Nigeria can affect your business’s financial stability, reputation, and overall operational effectiveness.

In addition to that, your business needs to invest time and effort in understanding and managing their VAT obligations. Follow the basic formula and consider whether prices are inclusive or exclusive of VAT.

This way, you can ensure accurate financial reporting and compliance with tax regulations. Regularly filing VAT returns is key to maintaining a smooth relationship with the tax authorities and contributing to the economic development of Nigeria.

5 Best Accounting Software & Tools for Restaurant Business Owners

tgbemishorunke

April 4, 2024

Best accounting software for your restaurant business

Everyone running a scalable restaurant business desires to know the best accounting software.

For starters that don’t have the slightest idea, 60% of restaurants close within their first year of business due to financial mismanagement.

That alone is a very terrifying stat, But as scary as it might sound, the solution is a rather easy and practical one.

Following a study by Cornell University, poor accounting practices are often to blame for the downfall of many restaurant establishments.

Using the right accounting software and tools has helped restaurant owners successfully manage their financial management processes, track expenses, and monitor cash flow effectively.

According to a recent report by Statista, 82% of small businesses that use accounting software see a reduction in manual data entry errors, leading to increased accuracy and efficiency in financial reporting.

Being a restaurant owner, finding the right accounting software that suits your business needs is usually a very challenging task.

But to assist with making the right decisions for your business, we have compiled a list of the top 5 accounting software and tools specifically meant for restaurant businesses.

Top 5 Accounting Software & Tools for Restaurant Businesses

Below is the list of the most efficient top 5 ranked accounting software that every restaurant business owner can happily settle for:

1. QuickBooks Online

QuickBooks Online is a popular choice among restaurant owners for its user-friendly interface and robust features. With QuickBooks Online, you can easily track sales, expenses, and inventory, generate financial reports, and manage payroll seamlessly.

Pricing plans usually start at $25 per month, making it an affordable option for small to medium-sized restaurants. The software’s user reviews has it rated 4.5/5 stars on Capterra.

Also Read: The Impact of Tax Evasion and Tax Avoidance in Nigeria’s Economy

2. Toast

Toast is a cloud-based POS system that also offers accounting and financial management features tailored for restaurants.

In addition to processing payments and managing orders, Toast helps with tracking sales data, analysing menu performance, and monitoring inventory levels.

Pricing plans is customisable based on the size and needs of your restaurant, with basic options starting at $79 per month. User reviews rate the tool at 9/10 on Trustpilot.

3. FreshBooks

FreshBooks is a versatile accounting software solution that caters to a variety of industries, including restaurants. While using the software, you can create professional invoices, track expenses, and manage client payments all in one place.

The user-friendly interface and integrations with popular payment gateways make FreshBooks a convenient choice for restaurant owners.

Pricing plans start at $15 every month with user reviews leaving the software with a 4.7/5 star rating on Software Advice.

4. Xero

Xero is also a cloud-based accounting software that has a range of necessary features for restaurant businesses, such as budgeting tools, expense tracking, and financial reporting.

With Xero, you can automate bank reconciliations, streamline payroll processes, and collaborate with your accountant easily.

Pricing plans start at $20 per month, making it a cost-effective option for many restaurant owners. The software is highly recommended by 95% of users on G2.

5. Sage Intacct

This is a comprehensive financial management solution designed for larger restaurant chains and franchises. With features such as accounts payable and receivable, budgeting, forecasting, and advanced financial reporting.

Sage Intacct offers scalability and customization options to meet the specific needs of complex restaurant businesses.

Pricing for Sage Intacct usually varies based on the size and requirements of your organisation, with customized packages available upon request. User reviews have it rated 4.3/5 stars on TrustRadius.

How to Choose the Right Accounting Software for Your Restaurant Business

When choosing the right accounting software for your restaurant business, there are several key factors to ponder upon to ensure you select the best option suited to your needs.

First of all, look for software that offers features essential to the food service industry, such as inventory management, revenue tracking, and integrations with point-of-sale systems for seamless card transactions.

Furthermore, consider the efficiency of the software to support the growth of your restaurant business, as well as its ease of use and compatibility with your already existing systems.

Evaluate the software’s reporting capabilities, data security measures, and customer support services to ensure a smooth implementation and usage experience.

To make even better-informed decisions, gather feedback from other restaurant owners and industry experts.

You can also request demos or free trials from software providers. Using the information gathered, you can compare pricing plans to find a solution that fits your budget and requirements.

Also Read: How to Know If a Company is in a Deep Financial Distress

Frequently Asked Questions About Accounting Software

Q: What are the key features to look for in restaurant accounting software?

A: When choosing restaurant accounting software, look for features like inventory management, integrations with point-of-sale systems, financial reporting capabilities, and multi-location support to better optimize your financial operations effectively.

Q: How can restaurant accounting software help me manage my expenses better?

A: Restaurant accounting software can help you track and categorize expenses, monitor cash flow, identify cost-saving opportunities, and generate detailed reports. These detailed reports can help you analyze spending patterns. In addition to that it can help you make informed decisions to optimize profitability.

Q: Is it essential for restaurant businesses to have cloud-based accounting software?

A: Cloud-based accounting software offers accessibility, real-time data insights, automatic updates, and data security benefits. Furthermore, this can greatly benefit restaurant businesses, especially those with multiple locations or remote management needs. It allows for flexibility and efficiency in financial management.

Q: How can restaurant accounting software help with tax compliance and payroll management?

A: Restaurant accounting software can automate tax calculations, facilitate tax reporting, and ensure compliance with tax regulations. It can also simplify payroll processing by tracking employee hours, generating pay stubs, and handling tax withholdings accurately.

Q: Can restaurant accounting software help to forecast and plan for financial growth?

A: Yes, restaurant accounting software can provide advanced financial forecasting tools, budgeting features, and performance analysis capabilities. Oftentimes, this tool can help you plan for growth, set financial goals, and make strategic decisions to drive success and profitability in your restaurant business.

Final Thoughts

In conclusion, choosing the right accounting software and tools can greatly benefit your restaurant business.

It does this by improving efficiency, accuracy, and overall financial management.

Exploring these top 5 accounting software options is highly recommended to find the best fit for your restaurant’s needs.

By experimenting with the right tools, you can make your business financial processes stress-free. In addition, you can also monitor performance effectively, and take the best steps to drive success in your restaurant business.

The Impact of Tax Evasion and Tax Avoidance in Nigeria’s Economy

tgbemishorunke

April 4, 2024

Tax avoidance and evasion and its impact in Nigeria

Are you aware that tax evasion and avoidance contributes to what is hindering the growth of the Nigeria’s economy?

The issue of tax evasion and tax avoidance are two common concepts. We shall discuss how these two are growing concerns among the citizens. This article seeks to explain the two terms and how they possibly impact the nation’s economy.

What is Tax Evasion?

This is a term that describes the use of illegal methods to misrepresent one’s tax responsibilities. In such a case, a taxable individual or company tries to use illegal or unlawful means to pay less money than they should have.

Examples of Tax Evasion

When someone is said to be evading tax payments; the payment is doing any of the following:

Underreporting Income

Since tax payments are a certain percentage of one’s income, it is unlawful to underreport one’s income. In this case, the tax evader tries to deceive the tax authorities that he or she earns less so the payments would be lower than they ought to be.

Deliberate Refusal

Someone with a valid means of income is said to be evading tax payments when he or she doesn’t want to pay. This can be in the form of refusing to acknowledge the tax when it’s due or not paying at all.

Tax Avoidance

Avoiding tax payments is not the same as evading these payments when they are due. Tax avoidance as a term refers to the leverage or capitalization of the loopholes in the country’s tax system to pay less.

Generally, this process is not entirely frowned upon which is why the witty taxable persons capitalize on it to set some money aside before paying their taxes.

By lawfully altering one’s taxable income, the person can now have less amount of money to pay as tax.

You can avoid some tax payments if you’re able to use the applicable tax laws to reduce your payments. You can achieve this legitimately in two ways:

Seeking a professional’s counsel on how to avoid certain tax payments.
Reducing the taxable income by showing proof of making important expenses from your income.

How Does Tax Evasion and Tax Avoidance Impact Nigeria’s Economy?

The simple answer is usually that non-remittance of taxes reduces funds available to the Nigerian government to provide basic amenities. However, it goes deeper than that. Further downsides include a dwindling international finance outlook and limited revenues for the government.

Below, let’s talk about the number of effects that tax evasion and avoidance will have on the nation’s economy.

1. Absence of Basic Amenities

Through successive governments, Nigerians have continually complained of the absence of basic amenities and infrastructures, such as stable electricity, the building of government-owned/public schools, paving of good road networks, healthcare services and payment of civil servants salaries and gratuities/pensions.

Most of these could have been offset in the shortest time possible if most of the taxable individuals and companies/businesses had been meeting up with their responsibilities.

By avoiding these payments, the government is short of one source of revenue.

2. Negative International Finance Outlook

It’s no news that countries often seek external financing from other countries or financing bodies. The most popular among them are the International Monetary Fund (IMF) and the World Bank. These funds, when obtained, are often used to execute developmental projects.

By taking in less taxes, Nigeria often has to rely on external funding sources to execute some important projects.

The downside is that since the country doesn’t receive much revenue from taxes; it becomes increasingly impossible to meet up with the terms of these taxes, such as financing the loans and paying the piling interests.

The outcome includes:

The country’s debt ratio will keep piling up.
More funding sources or financiers wouldn’t be too keen to lend money.
In some cases, the country may be able to secure more funds, thus, casting it in a bad light as one that doesn’t have what it takes to generate better revenue.

3. Reduction in International Trades

The surplus realized from tax payments could have been used to finance international or cross-border trades, but that doesn’t always happen when funds are limited. As such, Nigeria may be unable to engage in trades that would have generated more revenues for the country.

4. Lower Standards of Living

The middle class in Nigeria may be able to have their heads above water, but the poor are the worst hit when the country doesn’t generate better revenue from taxes.

While the middle class could afford some amenities, the poor often entirely depend on the government to provide these. When the money needed to make these amenities and needs available are not forthcoming; it often leads to a lowered standard of living.

Also Read: How to Know if a Company is in a Deep Financial Distress

Is Taxation Dead in Nigeria?

The tax policies that have been revived by the Finance Tax are expected to breathe fresh air into the country’s taxation system. There is also the issue of attitudinal change on the path of taxable citizens. These taxable citizens for one reason or the other avoid paying taxes.

For more taxes to be paid in Nigeria, the following need to be addressed:

Public Awareness

Awareness programs and campaigns should be conducted to sensitize the citizens on the need to pay taxes. Efforts should also be made to introduce the different benefits of doing so.

Government-induced Confidence

One major reason for tax evasion in Nigeria is the taxable citizens are not convinced of what the money would be used for. Seeing how some of the public facilities have been left to ruins and efforts haven’t been made to fix those; these set of people wouldn’t be convinced that their payments would be put to good use.

Thus, the Nigerian government needs to subtly woo its taxable population by embarking on remarkable projects that would be of immense importance to the public.

Concluding Thoughts

Nigeria has a lower percentage of the taxable population remitting taxes to the government. This has forced the hands of the government to seek external funding or provide limited amenities with the available funds.

While it is possible to avoid taxes to some extent, the government can still take in more and generate higher revenues by convincing the citizens to put the money to good use.

How to Know if a Company is in a Deep Financial Distress

tgbemishorunke

April 4, 2024

How to know when a company is under financial distress

Is it possible to know when a company is drowning in a deep financial distress? The answer is yes.

When insolvency comes knocking (literally), investors and business partners go back in time to see if there’s anything they should have probably done better. At such a time, the business is in deep financial distress, but the public may not know it yet.

In this article, you’ll learn of the different signs to help you know when a company is in financial distress.

What Causes Financial Distress?

Mismanagement of funds, diversion of resources (including funds and assets) and bad investment decisions are the top reasons why a company or business declares bankruptcy.

Higher production costs, a steady decline in profits and premature expansion are some reasons why some businesses suffer financial setbacks.

Signs of a Financially Distressed Company

When you notice the following happening, it’s time you begin to take action before the company becomes insolvent.

1. Managerial Defections

You know for sure that a company is about to go bankrupt when the top business executives jump ship. When the senior members of the management team begin to leave or join other companies; it’s proven that all is not well.

2. Delayed Payments to Creditors

Most businesses are indebted to creditors and offset their bills as soon as the funds are available. While being indebted to creditors is not entirely bad; it leaves a sour taste in the mouth when the following begins to happen:

Delayed or extended payment days for the creditors.
Being chased down, called out or dragged to the law court by the creditors.
Extended creditor days also mean that the company’s credit score might be negatively impacted and securing future loans is nearly impossible.

3. Insider Selling

Companies with stocks often experience shares-dump, whereby most of the shareholders begin to sell their bags.

Executive holders and institutional investors who are privy to the company’s financial issues would likely sell off most of their stocks just so they don’t lose much if the business goes bankrupt.

4. Pay Attention to the Company’s Books

During the quarterly or annual reports; the public can be let into the financial standings of a company. Take what the books say seriously.

Here are some telltale signs of a financially distressed company, judging by the books:

Auditor Replacement: a company’s auditor can be replaced for various reasons, ranging from strained working relationships and disagreements on the financial records. Keep an eye open if the company constantly changes its auditors.
Discrepancies in the company’s financial records.

5. Cash Flow Issues

You know that the business is on the way to declaring bankruptcy if it has a consistent streak of negative cash flow. Going by the age-old saying that “cash is king;” a company that doesn’t generate enough cash might just be on the way out of business.

While periodic cash dips are common, it calls for concern when the following happens consistently:

Limited revenue generation because customers aren’t paying up (or on time).
Loan refinancing and;
When the company keeps borrowing to finance the operations and investment purposes.

6. Notice the Desperate Grab for Cash

A business is gasping for cash when it becomes desperate to generate money by deploying different strategies. While some opt to reduce the prices of goods or services; others opt to sell off some of the treasured business assets to raise money.

7. Defaulting on Bills

Aside from paying off the creditors; a company also needs to pay up its bills. When these bills begin to pile up and nobody is picking the tabs; it could be because the instrument (cash) needed to make it all go away is not available.

8. Cutting Costs at all “Costs”

You should be worried about a company’s financial standing if it continually tries to cut costs by way of:

Reducing the quality of services or products offered.
Not meeting up with order fulfillment.
Zero or late response from the customer desk, indicating either that the staff responsible is no longer working there or the company doesn’t have the right answers to customers’ queries.

9. Changes in the Market Environment

While companies are poised to remain in business because of the quality of products/services offered; others may be unable to stay for long when a strong competitor appears.

A dramatic change in the market environment by way of changes in what the customer base wants could put a hole in a company’s finances.

10. Tampered Financial Statements

A company becomes fudgy with its accounts and makes efforts to tamper with the financial statements when it has something to hide. From inflating the units of products sold to misrepresenting the amount in the bank; these are warning signals that the business is in financial distress.

11. A Financially-Distressed Company is in Debt

Debts are “normal” but not paying back on time or utilizing the money for something useful is where the problem is.

A warning sign that a company is in financial distress is when its debts are not adding up.

How much (in debt) has the company taken in recent times?
What type of debt does the company have? Long-term debts are not always a good sign.
Check if the long-term debts are used to finance short-term liabilities. It’s a warning sign of financial stress.

12. Distressed Companies Remove Certain Privileges

If a company has been offering perks like pension plans, insurance covers and health benefits; those might be reduced when it becomes financially distressed.

By cutting down on these perks, the company hopes to save some money to start rebuilding its finances.

So, pay attention when some employees start talking about not getting these perks in the last couple of months.

Conclusion

Financial-induced friction is common in the business world, but if not well-handled, can metamorphose into a long-term streak often resulting in bankruptcy.

The signs mentioned in this article are prevalent among businesses that are on the path to insolvency. As an investor, you want to watch out for those and make important decisions as to how to salvage your commitment to the company.

As always, having a reliable financial expert helps such a company to find better ways to fix its financial distress.