How to Do Bookkeeping for Small Business in Canada – Reading this guide will tell you how bookkeeping can be easy, simple and uncomplicated. You will learn how to master this skill through our comprehensive text. Bookkeeping is the process of maintaining financial records for businesses. This includes journals, ledgers, accounts receivables, inventory, payrolls, etc.
It is one of the fundamental skills which help managers run their businesses efficiently by streamlining daily cash transactions so that they can be analyzed at a later time for tax purposes.
Table of Contents
What is Bookkeeping?
Bookkeeping is a method of recording all the financial transactions of your business. At its most basic, it’s the process of keeping track of your income and expenses, but it can involve much more.
No matter what type of bookkeeping system you choose, every financial transaction has to have a corresponding document, such as an invoice, receipt, or purchase order, proving that the transaction took place.
Bookkeeping is an essential process for any business, no matter how big or small. Whether you’re an independent operator selling homemade products or a massive corporation, bookkeeping is the first step in the accounting process.
Bookkeeping vs. Accounting
Most people tend to confuse bookkeeping and accounting, especially in a small business. Bookkeeping is a smaller part of the larger accounting process. Accountants will use the financial records to summarize, analyze, and interpret the business’s financial situation at the end of the year.
Keeping accurate records during the year makes accounting much easier. If every transaction is already classified and has the supporting documentation, compiling the end-of-year report doesn’t require extensive audits and extra work.
Examples of accounting financial statements include:
- Balance sheet
- Income statement
- Cash-flow statement
Many small businesses only produce these financial statements once a year, but frequent reporting can also help you evaluate your business growth and make adjustments as needed.
How do I do bookkeeping for my small businesses?
Good bookkeeping is absolutely essential for you, no matter how big or small your business is.
Bookkeeping involves recording your businesses sales, purchases, expenses, assets and liabilities and then compiling these into a financial statement to see how well your business is doing.
You record your business transactions and through this, you can create your Balance Sheet and also determine your profit and loss.
Here are some bookkeeping tips
- The core of bookkeeping is to record your business transactions into an accounting software, such as QuickBooks. These software’s have a double entry system and it makes it much easier to record your transactions as compared to excel or other manual ways of recording.
- The CRA highly prefers that all of your business expenses should go from your business account and all the income should also come into your business account as well. Your personal account should not be involved in your business transactions.
- Bookkeepers also need to make sure the business bank balance or business visa card balance should match at the end of each month, if the balance doesn’t match then you cannot reconcile it and your profit and loss won’t be displayed accurately.
What do you include in a bookkeeping entry?
Bookkeepers should enter each transaction from the bank statements or business visa statements; they should make sure to include the detail of the DATE, VENDOR NAME and, of course, the amount.
Classifying the expenses can get a little complicated. For e.g. a Laptop is considered a purchase for an electronic business but the same laptop will be considered an asset to someone who runs an IT consulting business.
How do you know if you recorded everything correctly?
After recording everything you need to check that the:
- Business Bank account, visa card, line of credit, inter-company loan, and loan balances are matching
- You should make sure the GST/HST are recorded accordingly and they match with the CRA
- The Payroll Liabilities and income tax balances should also match with the CRA
- You should also make sure
- The Assets are recorded appropriately
- The Investments accounts are reconciled and
- The Expenses classification are done correctly
What Is the Role Of a Bookkeeper
Bookkeeping is the part of accounting that’s concerned with the collection and organization of financial documents. This means that it is the bookkeeper’s job to gather, organize, and file every bit of data related to your company’s finances. A bookkeeper is in charge of compiling:
- Invoices
- Receipts
- Payroll records
- Bill statements
- Bank and credit card statements
- Tax forms and returns
While accounting encompasses these data-gathering duties, this field also tends to involve analyzing the numbers and making profit and loss projections. However, bookkeeping as a term doesn’t necessarily include such long-term calculations and analyses. That said, good bookkeeping ensures that you have the numbers and data that you need to help your accountant make predictions about your business’ future, and diagnose your business’ financial health.
The Importance of Bookkeeping in a Small Business
Tracking Profitability
Tracking your company’s profitability lets you follow your earnings over time and plan for ways to improve it in the future. Profitability measures let you easily and quickly track transactions and determine how much your business earns on inventory. Some helpful profitability ratios that let you gauge your company’s efficiency include:
- Gross margin ratio
- Profit margin
- Return on assets ratio
- Return on equity
- Return on capital employed
Maintaining Cash Flow & Improved Financial Management
As a responsible small business owner or bookkeeper, you should be aware of your company’s revenue streams. With accurate bookkeeping, you can tell how much your business is making in terms of income and track your spending to ensure that you have enough cash on hand to cover your business expenses. Proper financial records make it easier for you to analyze the financial state of your firm and determine areas that need improvement.
Bookkeeping Helps You Prepare for Taxation
If you run a start-up you can save time by recording all transactions as they come up. This saves you from tracking important financial information for the end of the fiscal period at the last-minute. With proper bookkeeping, you can determine the types of taxes and calculate the amount payable in advance.
Easier Reporting
As a business owner, you’re responsible for reporting crucial financial data about your firm to potential investors and other stakeholders. Bookkeeping programs that incorporate graphs, charts, and other visual aids make it easier to increase data precision and improve communication when you’re wooing investors.
You’re also responsible for communicating with your employees and allowing them to know the financial state of your firm. They need to know if the company is making some progress and how they contribute to its growth. Bookkeeping accounting ensures that you have the right information to talk to your team and make them feel like they’re part of the company.
Evaluate Performance & Plan for the Future
Accurate bookkeeping helps you trace your firm’s financial records and evaluate its performance levels. You can look back, see patterns, and even draw comparisons with previous business years. Bookkeeping allows you to have a greater understanding of the areas within your business where you can trim costs.
You may need to re-strategize and make adjustments to ensure you stay on top of your business.
Proper bookkeeping also allows you to determine the areas within your company that could benefit from improvements. If you’re a small business owner, it’s necessary to set projections and forecast the future of your business. Bookkeeping accounting lets you know if your small business needs extra employees or requires operational changes.
Which Financial Records Should You Keep?
An obsession with documentation is a good trait to have as a small business owner. Be sure to keep the following:
- Receipts
- Invoices
- Payroll records
- Bank and credit card statements
- Investment statements
- Tax returns
Take the time to organize your records, whether that means buying a filing cabinet or breaking out the label maker. Saving your records in the cloud also ensures that they’re easily accessible in a digital format from any device. Making sure your records are well-organized can save you a big headache if you’re ever subjected to an audit.
As a business owner, you’re required to keep financial and tax records for six years after the tax year in which they were received; it’s a good idea to keep these archived records in both paper and digital formats for added security. Records older than six years can be securely disposed of by hiring a professional document shredding company. For digital records, QuickBooks allows you to easily delete or condense historic transaction data to save you storage space and secure sensitive financial information.
Preparing Financial Reports
Financial reporting makes up a large chunk of what bookkeepers do on a day-to-day basis. A detailed financial report usually includes the following three elements:
As a business owner, you’ll most likely have to create a complete financial report at least once a year, for tax purposes. However, there are plenty of reasons to make quarterly, or monthly financial statements as well. Frequent financial reports are a great way to check on your budget, and figure out where you can make adjustments if necessary.
Bookkeeping Methods
Manual Bookkeeping
Manual bookkeeping is the “traditional” way of preparing and documenting your business’ financial records. In this method, you might use a pen-and-paper ledger, or an offline program like Microsoft Excel or Word to record income, expenses, interest, and any of the other cash flow items that appear in a financial report. The manual method can work if you prefer a hands-on approach, but it can also be time consuming, and it leaves more room for human error.
Online Bookkeeping Method
Online bookkeeping uses software that takes care of most of the calculations and data entry for you. A program like QuickBooks cloud accounting software, for example, can help you track income and expenses much faster than you could with a traditional ledger.
It’s also possible to link your cloud accounting software to other financial programs that your business uses, like your online banking or mobile payment apps. With all your software linked through the cloud, payments that you make and receive can be automatically recorded to a digital ledger. The software program can then make the calculations for you, giving you an accurate picture of your total income and spending that’s updated every time your money moves.
QuickBooks cloud accounting software also has options for payroll, expense tracking, and inventory. A program like this makes it a lot easier to check your records on your laptop or smartphone even when you’re out of the office.
What is the Difference Between Single-Entry and Double-Entry Bookkeeping?
In single-entry bookkeeping, each transaction is recorded as a single entry in a ledger, while in double-entry bookkeeping, a transaction is recorded twice. For example, if you make a $30 sale, in the double-entry system that transaction could be recorded as a gain in your income ledger, and as a deduction to the total value of your inventory.
Single-entry bookkeeping is simpler — you only have to record each transaction once. This can be sufficient for very small businesses that aren’t incorporated. For example, if you work full time but have a side business selling handmade jewelry, single-entry bookkeeping is probably enough to record your profits and expenses from that side business, so you can claim the amounts on your taxes.
However, if your business is incorporated, or if it’s your sole source of income, the single-entry method just won’t cut it. The double entry method leaves less room for error, making it the better choice for balancing complex books. Plus, it’s really not that much more complicated. With the help of cloud accounting software for small-business bookkeeping, you can pretty much automate the process.
Keep in mind, single-entry bookkeeping’s simplicity doesn’t allow for GAAP conformation. This inability to conform to GAAP’s requirements may not apply to very small businesses which only need to be able to illustrate a method of meeting reporting requirements for taxes and employees. Any company that must highlight cash flow retained earnings, or any other changes in a position financially must use a double-entry accounting system.
Cash Versus Accrual
Both the single-entry and double-entry methods can work in tandem with cash or accrual bookkeeping.
To understand the difference between these two methods, take this example. Say you ordered some new machine parts from a manufacturer. You ordered the parts in January, and the manufacturer sent you an invoice that same month. However, you don’t actually pay the fee until you’ve received the parts, in February.
In the cash method of accounting, you record the transaction only when the money has actually changed hands. So, even though you received an invoice in January, you’d record the expense as a cash transaction in February, on the date that it was paid.
In the accrual method, on the other hand, you would record the expense in January, on the date that you received the invoice — regardless of when you ended up paying for the parts.
So, which of these methods should you use in your bookkeeping to get the best, most accurate picture of your spending habits? That may depend on the size and complexity of your business.
The cash method of bookkeeping is undeniably easier. By recording cash transactions when the money actually changes hands, you can simply cross-reference your bank statements with your bookkeeping records to ensure accuracy. That said, the cash method also has the potential to be slightly misleading — if you were late on a bill payment one month, for example, your records might end up showing a large sum paid for utilities one month, and nothing at all another month, leading to confusion.
This method also doesn’t account for inventory loss. Maybe you ordered some supplies but didn’t end up using them. Recording just the cost of those supplies with the cash method might give you an inaccurate picture of how much you are — or should be — spending on supplies.
The accrual method is a bit more difficult, in that your bank statements might not reflect the amounts on your income sheet. However, the accrual method is the required method for large corporations in Canada, and besides that, it tends to provide you with a more accurate picture of your overall finances.
QuickBooks accounting software can help you ease into the accrual method of accounting by ensuring that your records are accurate, based on information from your credit card or payment apps. If you plan on growing your business in the future, you’ll probably want to get used to using this method.
Conclusion
Bookkeeping is an integral part of running a small business. Bookkeeping services cost a lot and the quality of the service decreases if not conducted by an expert. This means that your business can’t escape from hiring or outsourcing an accounting professional for managing your books and records. On the other hand, it takes a toll on the business due to its direct exposure to financial risks and losses.