4.6 Establishing bank accounts Flashcards
What is special entity?
accounting principle recognising that the owner’s finances are separate to those of the business and therefore business transactions should be recorded separately
Why is it important for business owners in Australia to open a separate business bank account?
An essential part of establishing a business in Australia is opening a business bank account. While most business owners may already have an individual bank account for their personal use, it is highly recommended that the transactions of the business be performed through a separate bank account.
what are the key benefits of doing so compared to using a personal bank account for business transactions?
- The ‘separate entity’ accounting principle states that we should always record the transactions of the business and its owners separately. This is far easier to do with separate bank accounts.
-it is easier to monitor the financial performance and position of the business if it has a separate account to that of its owner.
-It is easier to calculate business expenses, such as bank fees, and revenue, such as interest earned, which makes it less time consuming and costly to prepare tax returns for the business.
Factors to consider when choosing the right bank account
complex: What factors should business owners in Australia consider when choosing the right bank account and financial institution for their business, beyond the basic requirements of proof of identification and agreeing to the bank’s terms?
Opening a business bank account can be as straightforward as walking into a local branch with the required proof of identification, and agreeing to the terms offered by the bank. However, choosing the right bank account from the right financial institution requires consideration of the following factors:
- Bank fees
- interest rates
- overdraft facility
- credit cards
- convince and support
what is a bank fees?
Banks may charge hidden or ‘not so obvious’ fees. While these fees are legally required to be stated in the product disclosure statement (PDS), it is the customer’s responsibility to read the paperwork carefully and ask questions if unsure.
What are interest rates?
This is probably the most important factor in determining the choice of bank account as the interest rate will determine how much money the business will earn on the amount of money they have in the bank account, or how much they have to repay on any loans.
explain overdraft facility?
Some financial institutions allow a business to withdraw more money than they have available in their account. This is known as a bank overdraft facility and can be an important feature for a business that might temporarily fall low on cash flow.
what is credit cards?
Having a business credit card can also be convenient for the owner. Different credit cards have different features, including the maximum amount that can be used, as well as the interest rate on unpaid balances. The terms of the credit card should also be closely evaluated when deciding on which financial institution to open an account with.
what is convenience and support?
Some financial institutions offer a more practical way of banking. While smaller banks and credit unions can often offer a lower interest rate, they often lack the infrastructure (physical banks and ATMs) to support the business owner with their banking needs in a way that larger commercial banks can. Having a local branch with supportive staff and a variety of secure internet banking options and apps available is a convenience that can ease the burden of running a business for its owner.
