At the contrary of mainland China, Hong Kong companies do not have to file taxes with the Inland Revenue Department on a monthly basis. As such, not keeping proper books and accounting records have become much prevalent among Hong Kong businesses, especially those operated from overseas. Our company deals with preparing financial statements for Hong Kong companies in the process of filing for their profit return. Time and again, we have come across huge issues in doing so, with business owners at a loss to find receipts for expenses, not keeping invoices they issued to clients, and basically scrambling to provide us with the necessary data to prepare financial statements that can go through the audit process. Some would take months to do so find themselves fined by the IRD due to the delayed filling.
Based on my years of experience dealing with clients in this situation, below are 7 tips which, if followed properly, can help Hong Kong companies with their bookkeeping process and make the company audit and profit return filling a breeze, even if one does not keep a fully fledge accounting system.
#1: Periodically scan and backup your receipts
Receipts are required to proof your expenses and business expenditures. In the busyness of today’s life, they are easily lost or misplaced. Many receipts’ ink fades within a couple days making them useless. As a small business owner, setting up a schedule for scanning your receipts (including credit/debit slips, F&B receipts, transportation receipts etc.) is a must. Make sure to set up specific folders on your computer to do that, at a minimum on a monthly or quarterly basis. Furthermore, make sure to regularly backup those receipts to the cloud using, for example, Google Drive or Microsoft OneDrive.
Please keep in mind that there is a statutory requirement in Hong Kong to keep accounting records for 7 years, so it is a good thing to also have the physical receipts classified and stored safely in a storage box just in case.
#2: Use Freshbooks to issue invoices for clients – Move to the Cloud!
If you do not have a large number of monthly transactions, and don’t use an accounting system that can also handle invoicing (example: Quickbooks), Freshbooks (or other similar cloud invoicing software) comes handy. It is an affordable (and professional!) way to invoice your clients. At the end of each quarter, or when you need to have your financial statements prepared, you just need to log in and download all paid invoices and you are done, for the revenues part.
#3: Keep and file your bank statements
Bank statements covering the whole accounting year under consideration must be provided when preparing the year end financial statements. Whether you receive your statements in paper from your bank, or have access to it through your bank online banking website, I advise to make it a habit to regularly file/download these statements in a separate folder, and make sure to keep backups in the cloud (for paper statements, you will need to scan them first). Hong Kong banks will charge you HKD50 or more, per month or per statement, to resend missing ones. Some online banking systems only make the statements available in downloadable PDF format just for a few months, so if you do not download them early enough they become unavailable, forcing you to have to submit an application to get a duplicate, and pay for the “service”.
#4: Keep your personal and company finances separate.
This is a big one. Even for smaller businesses, the best practice would be to have a business account for your company and use it for all company transactions, including receiving payments and paying vendors. Most Hong Kong banks also offer business credit cards so it is advisable to get one to use for all business expenditures that require a credit card (such as purchasing plane tickets online). Pay yourself a salary each month and use proper loans if you need to transfer money from the company to yourself or vice versa.
#5: Get a professional to review your bookkeeping process regularly.
In order to avoid nasty surprises when audit time comes, it pays to have a professional come in to take a look at your bookkeeping process at least on the quarterly basis. This also helps with accountability since you know you will need to be ready at the end of the quarter, and therefore resist procrastination.
#6: Avoid cash
While the use of cheques in Hong Kong is considered by many to be painful, it certainly helps with record keeping and internal controls. Keeping track of your business spending can quickly become a nightmare when it is done with cash. It is easy to lose track of write-offs because there is no record of purchases, which mean you end up paying of your own money for expenditures that could reduce your taxable profit. On the revenue side, you need to give incentive for clients to pay through non-cash methods such as bank transfers, cheques, Paypal or credit cards. Yes this might cost a few percentage points, however in the long term it reduces the opportunities for fraud and help you keep your business finances organized.
#7: Use Octopus for your business
This applies more to businesses operating within Hong Kong. As you probably know, Octopus is the most used payment method in Hong Kong and has become omnipresent in all areas of life in Hong Kong from transportation to retail. If your employees need to take the MTR regularly on trips for company purposes, it makes sense to have Octopus cards for the business. For companies in retail, or operating online stores, they can also consider becoming an Octopus merchant to receive payments through this payment method.
I hope the above tips will be found useful if you are a small business owner operating a company in Hong Kong. If you need further assistance with your bookkeeping or small business accounting in Hong Kong, feel free to contact Sinovantage today to further discuss your needs.