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Book-Keeping and Financial Statements – Why are they important and who is responsible?MEDIA ROOM
September 29, 2020
From the smallest of businesses and the self-employed to the largest group of companies, proper books of accounts need to be prepared and maintained throughout the lifetime of the organisation and this for a variety of reasons.
Accounting records should provide information on receipts and expenditure, sales and purchases, assets and liabilities.
If no accounts are prepared, besides failure to comply with important legislation applicable in Malta and hence incurring interest and penalties, one would also not be able to monitor the performance of its business, its financial and liquidity position vis a vis previous years and budgets. Balances of debtors and suppliers outstanding as well as transaction history and ageing analysis would also be derived from the accounting system and it is fundamental these are updated and regularly monitored so that the owners can instantly be aware of the amounts owed to and from its business.
Accurate management accounts and financial statements are also required to be furnished in the circumstances whereby an organisation needs to apply for any specific license, to obtain financing from banks and financial institutions, to apply for Malta Enterprise schemes, amongst other. Users of financial statements including shareholders, lenders, interested investors, creditors would need to refer to financial statements to arrive at valuation of companies, calculate gearing ratios, understand the solvency position of the company and extending credit terms. Financial statements are important as disclosures accompanying the figures would be included which would provide further information to these users in reaching an informed decision.
Book-keeping and accounting also form the basis for the calculation of the annual taxes since tax is based on taxable profits as per the income tax return which is based on the audited financial statements. VAT Returns are also based on the figures inputted in the accounting and can easily be computed if and once the accounts are updated. VAT/TAX inspections provide another reason to keep proper books of accounts as these departments would request all the ledgers for the VAT/Tax periods being inspected.
The below also shows the prescribed retention period that records need to be maintained.
|Accounting Records||10 years. If kept in a bound or unified from, 10 years shall commence to run from the date of the last entry|
|Records under Income Tax Management Act||9 years after completion of transaction|
|Records under VAT||6 years from end of year to which they relate|
In accordance to the Maltese Companies Act (CAP.386), the directors are ultimately responsible for the preparation of proper books of accounts, and for ensuring these are audited and submitted in time to the respective authorities. The directors, however, would frequently have other roles to fulfil, and keeping the accounts immediately updated, could be time consuming. A recommended option is outsourcing of book-keeping to ensure the outsourced firm keeps the owners/directors abreast of upcoming deadlines coupled with the advantage of possessing specialised knowledge and being updated with any new regulations being issued.
The directors/owners can still monitor the transactions taking place by having in place together with the outsourced firm, a cloud-based book-keeping solution which allows the owners to view transactions immediately and extracting reports from the online based accounting system, without requesting reports from the outsourced firm. The outsourced firm would then be responsible of ensuring completeness of transactions inputted, performing all necessary reconciliations, submitting the VAT Returns, preparation of management accounts and financial statements and audit coordination, amongst other services.
About the Author
This article has been authored by Christabelle Agius, Senior Manager – Client Accounting Services at CSB Group. She may be contacted on [email protected] for any additional information required on CSB Group’s accounting services, including cloud-based book-keeping solutions.