Bookkeeping for companies

business.gov.au explains that a company is a separate legal entity: it can incur debt, sue and be sued. Shareholders own it and directors control its operations, and the money the business earns belongs to the company.

For the books, that means one simple test. Every entry should be a transaction of the company itself. A director's or shareholder's own spending has no place in them, and any amount passing between the company and those people is a transaction in its own right that needs recording as one.

Running every company receipt and payment through a bank account in the company's name, and nothing else, keeps that test easy to apply.

Section 286 of the Corporations Act 2001 puts the obligation on the company. Its financial records must be in writing, and must:

• correctly record and explain the company's transactions
• correctly record and explain its financial position and performance
• be good enough for true and fair financial statements to be prepared and audited.

The obligation also covers transactions the company carries out as a trustee. business.gov.au lists keeping financial records among the common obligations of companies and directors.

The Act's definition of financial records is wider than the ledger. It includes:

• invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers
• documents of prime entry
• working papers and other documents needed to explain how the financial statements are made up, and the adjustments made in preparing them.

The last item is the easiest to overlook. Keep each month's reconciliations, a note explaining every journal entry that isn't an ordinary transaction, and the schedules behind year-end adjustments, filed where they can be found alongside the figures they explain.

Drawings belong to sole traders and partners. In a company, money moving between the company and the people behind it takes other forms, such as payment for shares, wages, a loan in either direction or a dividend. Each is recorded differently, so record each amount in the account your accountant advises and keep the paperwork that says what it was.

The aim is to classify each owner-related transaction correctly. Personal spending, share contributions, loans and distributions need to be distinguished from genuine company income and expenses, such as wages paid to a working director. Flag unclear items and confirm their treatment with your accountant before the period's reports are finalised.

The ATO says a record should include, where relevant, the relationship between the parties to a transaction. For a company, the dealings most worth noting are those with its directors and shareholders, their families and other businesses they own. A short note on the entry, such as "supplier is owned by a director", makes those transactions easy to find later.

The Act requires a company's financial records to be retained for 7 years after the transactions they cover are completed. That is longer than the 5 years business.gov.au gives for most business records, so a company needs a storage plan that lasts the full period.

business.gov.au says records must be stored in a way that prevents them being changed or damaged, and that digital records should be backed up, with a secure off-site copy if possible. For a 7-year period, plan for changes of system: keep exports of old data in a format that can still be opened.

A bookkeeper can keep the records, but the obligation to keep them stays with the company. Directors can stay on top of it with a short monthly pack:

• bank and card reconciliations to the month-end statements
• the profit and loss statement and balance sheet for the month
• lists of unpaid customer invoices and unpaid supplier bills
• a list of owner-related items still waiting to be settled with your accountant.

business.gov.au points directors to ASIC for more about their obligations.