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What’s the difference between payroll arrears and falling into arrears?

Payroll (or pay run) is the process of paying every employee on the roll (aka in your employ). In-arrears and in-advance simply describe whether the employee completes the work before or after payment.

Advance: Payroll occurs before the employee completes the work. Paying in advance is popular with employees and can be a good hiring incentive.

Arrears: Payroll occurs after the employee completes the work. Paying in arrears is popular with businesses and can reduce risks associated with paying employees based on predictions.

Payroll can also run in a combination of advance and arrears.

Books in arrears: On the other hand, your books or accounts are in arrears when you have bills to pay and no money to pay them. Often represented in red, these kinds of arrears are the sort we like to avoid.

What does a sole trader become when you start hiring staff?

Great question! They remain a sole trader. While the word sole suggests working alone, a sole trader may actually have a team of people working for them in their business. The sole part is about responsibility. As a sole trader you are ‘legally responsible for all aspects of your business including any debts and losses and day-to-day business decisions’. Setting up a business as a sole trader is usually simple and involves minimal costs.

From a bookkeeping perspective, sole traders claim their expenses (including staff wages) against their personal taxable income, can use their regular bank account for the business and have personal financial responsibility if anything goes wrong.

Other types of business structures

The other common business structure is a company. Companies exist as separate legal entities with specific rights and obligations including separate company accounts and tax returns. A company structure can limit liabilities but is more complex and expensive than operating as a sole trader.

Other business structures include partnerships, trusts, co-operatives and joint ventures. The Federal Government website https://business.gov.au/planning/business-structures-and-types/business-structures has some great information about the various business structures to help you find the best option for your business.

Does this invoice go in accounts receivable or accounts payable?

Try to think of it this way: we are talking about your accounts, so we need to view these terms from your perspective.

Accounts receivable are the accounts (aka invoices) from which you expect to receive money. These are the invoices you raise in Xero (or otherwise create) for your customers to pay.

Accounts payable are the accounts (aka invoices) you must pay someone else. These are the invoices someone sends to you for services they have provided.

Accrual? What do you mean I can count money I don’t have?

Accrual or cash? It all comes down to when you record your sales and expenses. If you choose to record using the accrual method, you will indeed include money you don’t actually have yet.

Accrual accounting: You record your sales and expenses when you invoice or incur them. When you send an invoice, you (or your bookkeeper) record the sale immediately. Likewise, when you book someone to provide you with a service, like cleaning the office windows, you record the expense immediately. Work invoiced in 2023 but paid in 2024 is recorded in 2023.

While some consider it more complicated, accrual accounting gives a clearer view of your actual financial position. It is mandatory to use the accrual method of bookkeeping and accounting under ATO rules if your business GST turnover exceeds $10million per year.

Cash accounting: You only record your sales and expenses when money changes hands. You record the transactions when you make a payment or receive money in your bank account. Work invoiced in 2023 but paid in 2024 is recorded in 2024.

Cash accounting is simpler and works well enough for many sole traders and small businesses with low costs. As it only shows an immediate snapshot of business finances, cash accounting can open you to forgotten upcoming expenses if you are not careful.

Some businesses run two sets of reports so they can see a clear picture of where they are right now and where they are going.

Want to hire a specialist who knows these terms inside and out? We are here for you. Contact us today.