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Per the Corporation Act’s small business guide, your startup’s accounting requirements depend on whether your company is classified as small or large.
Also, your company's classification can change from one financial year.
So, a company is classified as small for a financial year if it satisfies at least 2 of the following tests:
And a company that does not satisfy at least 2 of these tests is classified as large.
As most startup companies will be classified as small under these tests, we'll look at accounting requirements for small companies below.
Under the Corporations Act, a company must keep sufficient financial records to record and explain their transactions and financial position.
And your records allow true and fair financial statements to be prepared and audited.
Now, financial record here means some kind of systematic record of the company's financial transactions and not simply a collection of receipts, invoices, bank statements and cheque butts.
The Corporations Act requires a small company to prepare an annual financial report if shareholders with at least 5% of the votes in the company direct it to do so, ASIC directs it to do so or it has one or more crowdsourced funding shareholders at any time during the financial year.
Below are the items included in the financial reports:
Unless the shareholders' direction specifies otherwise, the company must prepare the annual financial report in accordance with the applicable accounting standards.
Although the Corporations Act itself may not require your company to prepare a financial report, except in the circumstances mentioned, your company may need to prepare the annual financial reports for the purposes of other laws (for example, income tax laws).
Also, preparing financial reports is good business practice, so your company can monitor and better manage its financial position.
Large proprietary companies must prepare annual financial reports and a directors' report, have the financial report audited and send both reports to shareholders. Also, they must also lodge the annual financial reports with ASIC unless exempted.
If you are a small company that meets 2 of the tests below then you don't need to prepare financial reports (but its good practice to prepare them):
Test (a): gross operating revenue less than $10 million; or
Test (b): gross assets of less than $5 million at the end of the year; or
Test (c) fewer than 50 employees at the end of the year.
And, if you are a large company, you need to prepare audited financial reports and a directors report and have both sent to shareholders.
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