Accounting basics for Maltese businesses

Accounts - a scary word for many of us. The simple thought of crunching all those numbers and making sense of them is headache-inducing. This is the side of the business world where things get complicated. It’s no wonder that the majority of people find handling their accounts a challenge.

But this should not stop you from having your own business. We’ve partnered up with accounting firm Zampa Debattista to help you make some sense of the complex accounting world and outline the basics. So, even if you plan on employing an accountant to help you out, at least you’ll have an idea of what’s going on.

Why does a business need accounting? 

The purpose of accounting is to keep track of a business’s finances by recording transactions and other financial events. Examples of transactions are sales and the salary payments. 

Accounting involves much more than compiling a simple list of business transactions in chronological order. It is based on a set of basic techniques and a more detailed set of rules known as standards. As a result, the accounting records are organised and classified according to the nature of transactions entered into. 

Businesses need to keep accounting records as required by law. So, if you plan to start your own business in Malta, the type of legal set up will dictate which rules you must abide by.

How are accounting records used?

Accounting records help understand a business’s financial performance for the period and the business’s financial position at the end of that period. Based on this information, internal and external users are better positioned to make informed decisions.

Internal users are those who have access to all financial information, such as management. They can use information from the accounting records to make decisions about the future that will affect the business. For instance, management can use access to detailed historical information to prepare more realistic budgets. 

On the other hand external users -  who generally only have access to the statutory annual report and include investors, banks, creditors etc - will be in a position to use only the financial statements released externally to make their own decisions. For example, a bank will decide based on the latest financial statements of the business whether it is ready to loan more money. 

Although a bank might occasionally request internal accounts to management, the validity of external financial statements is reinforced by the fact that they are audited by an independent auditor, who would have access to all accounting records, and would express an opinion confirming whether the external accounts show a true and fair view of the business’s financial performance and position. 

The process of recording business financial events and transactions into the books of accounts and presentation to external users in the annual report is known as financial accounting. 

At what stage does a business need an accountant?

Ideally, accounting is factored in before the business is up and running. Why? Because a business will engage in transactions from day one. For instance, at incorporation, by law a new company needs a minimum amount of share capital, which it may receive from its shareholders into its bank account. 

Once the business starts operating, other transactions will happen and these will need to be recorded. In practice, sometimes it is possible to ‘catch up’ with the accounting records after a few weeks or even months (depending on the level of activity). But it is more effective to receive an accountant’s perspective before the business is up and running, based on expectations of activity levels and expertise required. This will help with planning ahead and to start on a strong note. 

A bank account is essential for a business to operate effectively. In recent years, the amount of information requested by banks to open a bank account has increased drastically. Therefore, it is wise to think in advance. However, opening a bank account too much in advance may be counterproductive since an empty or inactive bank account would also raise eyebrows. 

What documents would an accountant require? 

The accountant will require all sales invoices, all purchase invoices and all bank statements, including details relating to payroll (if s/he is also responsible for payroll). 

Agreements entered into and details of ad-hoc transactions are also required. The accountant will also ask further questions to record transactions correctly. For instance, if you buy a company car, the accountant will ask for its estimated useful life and its expected resale value, amongst other things. 

How should a business set up its accounts? 

The best first step is to speak to a professional for guidance on the incorporation and financial side including VAT advice which will be crucial for each sale to be recorded correctly, and to avoid complications later on. Other than that, the main elements to have in place are: responsible people and appropriate software.

People: The individuals could be an in-house team of accountants with an appropriate mix of education level and expertise. The individuals could also be external service providers (in this case you would be outsourcing your accounting function). You could also have a combination of both. 

Software: If you opt not to outsource your accounting and payroll, the software you choose needs to fit in the business expectations. A tailor-made, expensive software may be an unnecessary financial burden for the business, especially for a new start-up not requiring it. It’s a good idea to obtain guidance on this at the start. Off-the-shelf software is usually appropriate for most businesses, but not always the case.

Your accounting software will be designed to allow you to extract a balance sheet at any date. It may also have a function whereby you can create sales invoices templates. However, you can also create a sales invoice template on another application, such as a word processor or a spreadsheet.

How can a business go about keeping things organised? 

The accounts maintenance is something that your in-house accountants or service provider will handle. Small businesses might opt to take care of it themselves. While there is no one definitive filing method, it helps to keep seven files as follows: 

1. Documents yet to be posted: Here you’ll keep unorganised documents which are to be sorted, filed, posted or dealt with accordingly. 

2. Suppliers: Use A to Z dividers to organise each creditor. File documents in chronological order with most recent on top. 

3. Customers: Use A to Z dividers to organise each customer. File documents in chronological order with most recent on top. 

4. Banking: Keep a divider for each bank account and organise statements in chronological order, with the most recent on top. A good method is to assign a reference to each bank transaction, to be able to cross-reference it to the posting on the software and possibly to further supporting banking or receipt documentation filed beneath the bank statement. 

5. Tax: This will have two parts, namely VAT and income tax. 

6. MFSA: This will contain all relevant MFSA documents. 

7. Other: Include dividers for each section required. For instance, you could initially keep three dividers for agreements, management accounts and important correspondence. When your first set of accounts are filed with the authorities, you might assign a fourth divider to hold audited financial statements. 

What are the basic legal accounting requirements?

This depends on the legal set-up of the business. Sole traders and companies are both regulated by the Commercial Code. But, the Companies Act covers requirements specific to companies, such as the requirement of an annual statutory audit. Despite not requiring annual audited accounts, sole traders are also obliged to keep proper books of accounts in order to declare correct amounts of tax liabilities. 

There are two forms of tax that need to be considered: the quarterly VAT declarations and the annual income tax return. Companies are also required to submit audited financial statements on a yearly basis, which means that they need to engage an auditor.

What are the government-set deadlines?

Company VAT: Quarterly VAT returns together with payments need to be submitted by the 15th of the month following the month subsequent to the last month of the quarter (approximately six weeks after the end of the quarter). Therefore, a company with a VAT quarter between 1st January and 31st March has to submit the VAT return by 15th May. Companies using online VAT services have a seven-day extension to submit their VAT returns. 

Company income tax: In the case of income tax, for companies the basic rule is that tax payments are to be made within nine months of the financial year-end. Manual tax returns need to be made within nine months, whilst electronic submissions benefit from a further two-month extension to the deadline. However, companies with a year-end between January and June need to submit their tax return by 31st March of the following year, meaning that companies with a 31st January year-end have 14 months to submit the return. 

On every anniversary of incorporation, companies need to submit an annual return within 42 days. This includes updated company details, share details, and details of involved parties such as directors, shareholders and company secretary. 

In the case of companies, audited financial statements need to be approved by the directors within 10 months from the end of the accounting period, and submitted 42 days after that date. Therefore, a company with a 31st December financial year-end needs to have accounts approved by the directors by 31st October and submitted by 12th December. For first year companies, there is a rule to watch out for that the approval date may be different than ten months after the end of the financial period. 

Sole traders: The deadline for sole traders to submit their tax return and payment for any year is 30th June of the following year. Sole traders also need to submit provisional tax payments on a quarterly basis. In the first two years, this will be based on estimates, whilst subsequently, the provisional payments would be based on historical amounts. Therefore the payment submitted with the tax return would amount to the shortfall of provision tax payments made from actual tax charge. 

Failure to meet the above deadlines results in penalties. When a tax payment is overdue, the company is at risk of incurring interest. For more information on Financial Reporting, you can visit the Business 1st website.

When it comes to accounting, the basic rule of thumb to follow is that if you’re unsure, seek expert guidance. You can find a range of certified accountants as well as tax consultants listed on Yellow. There you can also find the accounting software you’ll need to ensure your business runs smoothly.

Keep discovering ways to build a successful business - www.yellow.com.mt.