Good Bookkeeping Leads to Better Tax Savings
Introduction
Discover how good bookkeeping helps Canadian small businesses manage their finances efficiently, grow their bottom line, and maintain compliance with tax and government regulations.
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Understanding the Importance of Bookkeeping
The foundation of any successful small business is its financial management. Bookkeeping plays a central role in that success by providing businesses with reliable financial records, maintaining compliance with regulatory and tax requirements, and supplying the business insights and intelligence needed to make informed decisions.
In this section, we will take a closer look at bookkeeping basics, including why it’s important for small businesses to adopt good bookkeeping practices, the components that comprise small business bookkeeping, and tips to help ensure you are getting the most value out of your bookkeeping efforts.
Introduction to Small Business Bookkeeping
As a small business owner, you have a lot on your plate, including how to ensure your finances are in order.
Understanding the “whys” behind your business’s bookkeeping can help you simplify and streamline your processes so you can easily and accurately manage and monitor the money going in and out of your business.
Here are some of the primary functions of bookkeeping and how they benefit your small business.
Maintain compliance with CRA recordkeeping rules.
No one wants to be on the receiving end of a tax audit or government legal penalties.
Maintaining compliance with the Canada Revenue Agency’s (CRA’s) record-keeping
rules helps maintain transparency and credibility and ensures that your business
can provide accurate, complete financial information in the event of an audit.
Support financial reporting/forecasting.
Growing a successful small business depends on understanding where the market is today—and where it’s going.
Maintaining accurate, up-to-date financial reporting provides insights into revenue,
expenses, and profitability, which is vital for understanding how your business is currently performing. Applying historical data to forecasting models also allows you to set realistic goals for the future, adapt to emerging market trends and changing conditions, and make strategic, data-backed decisions.
Catch financial errors/outstanding payments/debts.
Billing errors, delinquent payments, and outstanding debt can cost your business
thousands of dollars if they aren’t caught and resolved quickly.
Proactively monitoring and regularly reconciling financial records helps catch errors
early so you can address discrepancies that could cause financial strain or negatively
impact your business relationship with vendors and customers.
Manage cash flow.
Cash flow impacts every part of your business— from paying rent to strategic planning.
Accurate bookkeeping is a fundamental factor in effective cash flow management.
Understanding how money flows in and out of the business helps you monitor liquidity so you have enough cash to cover operational expenses, meet immediate financial obligations, and take advantage of growth opportunities.
Track profitability.
Throwing money at an underperforming business line won’t necessarily solve the problem.
Keeping your bookkeeping records current makes it easier to track revenue, expenses,
and profitability across your business so you can make informed decisions about the least and most lucrative segments of your business.
Proactively prepare for tax season.
Waiting until the last minute to plan and prepare your business taxes can result in
missed savings, potential penalties, and a lot of extra stress.
Preparing for tax season year-round by keeping your financial records organized and
up to date helps ensure you are receiving all of the deductions, credits, and incentives your business is entitled to and that you file your return on time.
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Components of Small Business Bookkeeping
Understanding why small businesses need to adopt effective bookkeeping practices is just one part of the equation. Let’s dive deeper into all of the different pieces that work together to ensure your business records are accurate, informative, and compliant.
Manage financial transactions.
At small businesses, bookkeepers often oversee a range of financial transactions that are essential to maintaining the business’s financial health, including:
- Recording and categorizing daily payments and expenses
- Preparing and sending customer invoices
- Conducting monthly bank and credit card reconciliations
- Processing payroll and remitting payroll deductions
- Maintaining general ledger and chart of accounts
Compile financial records.
Compiling financial records for your small business requires attention to detail to ensure all of the financial transactions, documents, and data relevant to your business are gathered, organized, and summarized accurately.
The tasks involved in compiling financial records generally include:
- Collecting and organizing financial documents
- Entering transactions into accounting software
- Reconciling bank statements
- Managing accounts receivable and accounts payable
- Verifying payroll records
- Generating financial statements
- Backing up records
The records you need to maintain vary somewhat by industry, but every business needs to include:
- Invoices
- Receipts
- Payroll records
- Bill statements
- Bank and credit card statements
- Tax forms and returns
Prepare financial reports.
Comprehensive financial reporting is essential to the success of your small business, and proper preparation of these financial reports is key. Financial reporting best practices for small businesses include:
- Analyzing financial data
- Generating statements, such as income statements and balance sheets
- Reconciling accounts
- Categorizing transactions
- Providing insights to aid decision-making
- Maintaining regulatory compliance
Understand types of financial reports.
Although there are dozens of different financial reports, most small businesses will focus on a few standard reports that provide the information needed to track revenue, measure the health of the business, maintain compliance with tax and government regulations, and monitor payments into and out of the company.
Here is a brief overview of some of the most common financial reports small businesses use. We discuss many of them in more detail in a later section.
1. Profit and Loss Statement/Income Statement
The profit and loss statement, also known as an income statement, provides a summary of the business’s revenues, costs, and expenses for a specific time period.
This report shows whether or not the business is making a profit, so it is essential for assessing the company’s operational efficiency and overall financial performance.
Frequency of reporting: Monthly and annually
2. Cash Flow Statement
The cash flow statement tracks cash activity into and out of the company, including operating, investing, and finance expenses and income.
This report provides insight into the company’s liquidity and its ability to meet its
short-term obligations.
Frequency of reporting: Monthly and annually
3. Balance Sheet Summary
The balance sheet summary lists the company’s assets, liabilities, and equity, providing a point-in-time reference for the business’s financial position and net worth.
Frequency of reporting: Monthly and annually
4. Sales Tax Report
The sales tax report tracks how much sales tax was collected on sales transactions that are subject to sales tax.
This report ensures your business reports and remits the correct amount of sales tax in
compliance with tax regulations.
Frequency of reporting: Annually and quarterly (for estimated tax payments)
5. Accounts Receivable Report
The accounts receivable report tracks outstanding payments, enabling the business
to identify overdue invoices and collect past-due payments from customers.
Frequency of reporting: Monthly
6. Invoicing Report
The invoicing report summarizes invoice details, including the quantity and type of products sold or services provided, as well as the price and payment terms.
This report helps accounts receivable monitor and manage billing.
Frequency of reporting: Monthly
7. Payroll Summary Report
The payroll summary report provides details for wages, taxes, payroll deductions, and other employee compensation considerations.
This information is used to maintain compliance with labor and tax laws and track payroll expenses over a defined time period.
Frequency of reporting: Biweekly or monthly
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Essential Bookkeeping Tips for Small Businesses
Whether you’ve been keeping your business’s books for years or you’re just getting started, the bookkeeping process can often feel daunting. These tips will help you create good habits that keep your business’s financial records accurate, accessible, and up to date.
Separate business accounts from personal accounts.
Using the same account for your personal and business finances may sound like a good way to simplify, but it’s more efficient—and safer—to keep these accounts separate.
For example, tracking your business cash flow is easier when the transactions aren’t mixed in with your personal banking activities on your monthly statement.
Keeping your personal and business accounts separate will protect your personal assets, including your home and car, if your business fails or is sued.
It’s also important to remember that your personal income and your business income are taxed differently. Maintaining separate accounts will help you track business expenses and keep accurate records, which will streamline tax preparation and help you stay in compliance.
Maintain your books throughout the year.
Running a small business requires a lot of time and effort, which makes it easy to put off bookkeeping tasks that don’t have an immediate deadline.
However, dedicating time to keeping your books current throughout the year will pay off by providing visibility into the current health of your business, helping you identify and resolve bookkeeping issues early and streamlining your year-end financial reporting and tax filing.
Categorize transactions accurately.
Miscategorizing financial transactions in your books can have expensive consequences because it makes it difficult to measure performance, monitor revenue, and track cash flow.
Ensuring all of the money coming into and going out of the business is categorized
accurately allows you to track how the business is performing and identify discrepancies that could impact analytics, budgeting, and tax planning and preparation.
Reconcile your accounts regularly.
Mistakes happen, but catching them early will help minimize the negative—and potentially expensive—consequences.
Regularly reconciling your financial transaction records against your business account bank statements will help you catch discrepancies, including errors, fraud, or missing transactions, quickly.
Keep track of payment due dates and tax deadlines.
Late payments and missed tax deadlines can result in expensive late fees, tax penalties, and damage to your business relationships.
Meeting your tax deadlines, including estimated tax and annual filing dates, and submitting vendor payments on time not only helps you maintain compliance with tax rules and stay on good terms with your suppliers, but it also makes it easier to plan and budget your finances more accurately because you know how much money you have available.
Save your receipts.
Receipts are a critical element in small business bookkeeping; they serve as evidence of
business expenses, which must be accurately tracked to take advantage of tax deductions.
Maintaining organized records of receipts helps ensure that all deductible expenses are accounted for during tax time or in the event of an audit.
Backing up your receipts—and other financial documents and records—to the cloud makes your financial information easily retrievable and adds an extra layer of protection against data loss due to a hardware failure, theft, or security event.
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Methods and Principles of Bookkeeping
When you’re running a small business, keeping accurate financial records is essential to the success of your company. In this section, we will dive deeper into bookkeeping by exploring different bookkeeping methods, the standards and regulations that guide bookkeeping in Canada, and a popular analytics tool that will help you determine the likely financial outcome of business investments.
How to Do Bookkeeping: The Different Methods
Every business operates with its own set of circumstances, budget constraints, regulations, goals, and financial intricacies. Simpler may be better for some businesses, while others might require a broader view of their finances.
Understanding the range of bookkeeping options available will help small businesses select the method that fits their unique business requirements and desired outcomes.
Single entry vs. double entry
The choice between single-entry and double-entry bookkeeping is often determined by
the complexity of the business’s financial transactions and reporting needs.
Single Entry
Single entry is popular with small businesses because it’s easy—each financial transaction is recorded once as either revenue or an expense.
The single-entry approach is often sufficient for businesses with few transactions and
straightforward accounting needs. It’s simple, less time-consuming, and requires
less bookkeeping knowledge than other approaches. However, it’s prone to error,
lacks the accuracy checks businesses get from double-entry bookkeeping, and may not
provide the full picture of a more complex organization’s financial health.
Double Entry
The double-entry system of bookkeeping requires entering each financial transaction
twice: once as a debit and once as a credit. In other words, each entry has an equal and
opposite entry to balance the equation: assets = liabilities + equity.
Double-entry accounting is more accurate than single entry because it provides built-in
checks and balances, but it also requires more bookkeeping expertise and may be overkill for small businesses with less complex finances.
Manual vs. online
Despite the abundance of online bookkeeping solutions, some small businesses opt to manage their books manually instead of digitally if they have few transactions to process and the risk of error is low.
Manual
This approach is a cost-effective option for cash-strapped startups and very small businesses because there are no up-front costs to purchase computers or software; financial transactions are simply entered by hand into a ledger.
Manual bookkeeping is simple, straightforward, and requires no special tools or technology. However, this method is susceptible to human error and becomes less efficient as the business grows, reducing productivity and increasing workload.
Additionally, manual bookkeeping lacks the analytics and reporting capabilities businesses need to track financial health and make informed decisions.
Online
Software streamlines the bookkeeping process by automating tasks and reducing the time it takes to record and manage financial transactions, enter data, and reconcile accounts.
Online bookkeeping is flexible, scalable, and accurate. Automation, real-time reporting, and cloud-based access allow businesses to manage, track, and analyze the company financials from anywhere at any time.
Although online bookkeeping is more efficient and less error-prone than manual bookkeeping, the startup and maintenance costs of the software and technology can be prohibitive. Online systems also raise security concerns because you are putting sensitive financial information online, which increases your risk of a data breach.
Cash vs. accrual
The size and complexity of your business play a large role in whether cash or accrual bookkeeping is the best option. Smaller businesses can benefit from the simplicity of cash bookkeeping, while larger businesses with extensive reporting requirements will see more value from the accrual approach.
Cash
Cash bookkeeping is a straightforward method of tracking the money going in and out of your business. Financial transactions are recorded only when cash is actually received or paid, and credit transactions aren’t factored in until the cash payment occurs.
Cash bookkeeping keeps records simple for small businesses with straightforward financial transactions and provides a clear picture of the company’s cash on hand. However, this approach doesn’t provide the full picture of the business’s profitability because it doesn’t take into account noncash transactions.
Accrual
Accrual bookkeeping uses the double-entry method to record all cash and credit revenue and expense transactions as they occur rather than waiting until cash is exchanged. This approach provides deeper insights and better analytics to measure the financial health of a complex business.
Accrual bookkeeping creates a more transparent view of profitability by providing more in-depth financial statements and more meaningful analytics. The accrual method also aligns with generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), which are discussed in detail in a later section. This is particularly important for businesses with stringent external reporting requirements.
Because accrual bookkeeping records transactions before cash is exchanged, it’s more difficult to determine actual cash on hand, and there may be some tax implications for income recognized before cash is received.
FIFO vs. LIFO
First in, first out (FIFO) and last in, first out (LIFO) are inventory valuation methods used in bookkeeping to determine the cost of goods sold (COGS) and the value of ending inventory.
FIFO
The FIFO method assumes that the first items added to the inventory are the first to be sold. When calculating the COGS and the value of the ending inventory, the lower costs of the older items are applied to the COGS and the more recent (higher) purchase or production costs are assigned to the ending inventory.
LIFO
The LIFO method assumes that the newest (last) items added to the inventory are the first to be sold. Unlike FIFO, LIFO applies the higher costs of the newer inventory to the COGS and the lower costs of the older items to the ending inventory.
What does that mean for small business owners?
FIFO is a popular valuation method because it provides a simple, straightforward approach to determining the cost of inventory items. FIFO also aligns with the flow of goods in industries that produce and distribute perishable goods or items with limited shelf life.
During periods of high inflation, FIFO can result in a higher reported gross profit, which creates a positive financial picture of the business that is appealing to investors and lenders.
During inflationary periods, LIFO offers tax advantages by lowering reported profits, which in turn lowers taxable income. However, LIFO may not align with the physical flow of goods in certain industries, and LIFO valuation isn’t permitted under IFRS, which limits the method’s use in international financial reporting.
Note: Small businesses need to understand the implications of using FIFO and LIFO with regard to CRA tax regulations and GAAP and IFRS financial reporting requirements. We recommend you speak with tax and accounting professionals before making any decisions regarding inventory valuation methods in bookkeeping.
How do you decide which method to use?
There is no one-size-fits-all approach to bookkeeping. Every business has its own financial needs, access to resources, and industry-specific regulations it must follow.
The most efficient approach to selecting the right bookkeeping method for your business is to start with the end in mind—that is, know your “why.”
Understanding why you want to implement a new or different method will help guide your decision. Consider the following questions:
- Are you only trying to stay compliant? The simplicity of a single-entry approach might be the best fit.
- Do you want to generate and analyze reports? Double-entry bookkeeping and online tools will give the best results.
- Do you need to integrate your bookkeeping with other business systems or applications? Many online bookkeeping tools integrate seamlessly with other business systems, which will help streamline your processes and connect all of your financial data.
- Do you want to plan now for future growth? The accrual method provides deep insights and accurate analytics that will help you make informed decisions about growth.
- What is your budget? If you are working with a limited budget, manual bookkeeping will be the most economical. However, when you factor in the human hours, potential for error, and lack of automation and reporting, you might find that investing in a basic bookkeeping software solution saves you money in the long term.
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Grasping GAAP
GAAP is a set of accounting guidelines that businesses apply to financial reporting to ensure financials are managed accurately and consistently.
These principles provide a framework 32 for financial reporting in Canada and are supplemented by specific accounting standards issued by the Accounting Standards Board of the Canadian Institute of Chartered Accountants.
12 principles of Canadian GAAP
While there isn’t an official list of principles, Canadian GAAP generally includes the following guidelines:
1. Relevance and Reliability
Financial information should be relevant and reliable, meaning it is accurate and can be trusted for decision-making.
2. Fair Presentation
Financial statements should present a true and fair view of the business’s financial position, performance, and cash flows.
3. Accrual Basis
Transactions should be recorded in the general ledger when they occur, regardless of when cash is received or paid.
4. Materiality
Financial statements should disclose any information that could influence the decisions of stakeholders.
5. Consistency
Accounting policies and methodologies should be consistently applied from one period to another to allow for meaningful comparisons of financial information over time.
6. Going Concern
Financial statements are prepared based on the assumption that the business will continue to operate in the foreseeable future; otherwise, appropriate disclosures are required.
7. Comparability
Financial statements should be comparable with those of other businesses, enabling users to evaluate similarities and differences between organizations.
8. Cost Principle
Assets are initially recorded at their historical cost, which includes all costs necessary to acquire the asset and prepare it for its intended use.
9. Conservatism
When there are uncertainties in accounting estimates, conservatism dictates that losses should be recognized sooner rather than later, while gains should only be recognized when realized.
10. Full Disclosure
All information relevant to understanding the financial position and performance of the business should be disclosed in the financial statements.
11. Substance over Form
Transactions should be recorded based on their economic substance rather than solely their legal form.
12. Hierarchy of Accounting Standards
When multiple accounting standards apply to a transaction or event, businesses should define a hierarchy to determine which standard takes precedence.
Demystifying Net Present Value
Net present value (NPV) is used in small business bookkeeping to predict whether a project or business is a good long-term investment.
NPV analysis looks at the return you expect from the investment and the money you expect to spend, and makes adjustments to account for time value of money (i.e., money received today is worth more than the same amount of money received in the future because you have to factor in inflation, interest rates, and opportunity costs).
Your NPV analysis will yield one of three results that can be used to drive decisions about the investment.
1. Positive NPV
Positive NPV indicates that the investment is expected to make more money than it costs. Verdict: INVEST
2. Negative NPV
Negative NPV indicates that the investment isn’t expected to make enough money to cover the costs. Verdict: DON’T INVEST
3. Zero NPV
If the NPV is zero, the investment is expected to break even, with the money you make being just enough to cover the costs. Verdict: BASE YOUR DECISION ON MORE THAN NPV
NPV analysis is a valuable tool for small business budgeting. Understanding the financial risks before investing in a new project or business venture can help prevent wasted money and effort.
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Fundamental Components of Bookkeeping
Accurate records are the backbone of small business bookkeeping. In this section, we will explore how the general ledger, historical costs, accounts payable, and accounts receivable are interconnected and support your business’s financial health by accurately recording, tracking, and reporting your financial transactions.
How to Create and Maintain a General Ledger in Bookkeeping
A general ledger is a bookkeeping tool that provides a central repository for all of your business’s financial transactions, broken down by account and type of transaction.
Small business bookkeepers use the general ledger to organize, record, and track financial activities, which provides a comprehensive overview of the company’s financial health.
What are the components of a general ledger?
General ledgers comprise four parts: the chart of accounts, financial transactions, account balances, and accounting periods.
Chart of Accounts
A chart of accounts provides a complete listing of every account in the general ledger broken out by category—for example, cash, accounts receivable, accounts payable, revenue, and expenses.
Financial Transactions
Every time money, goods, or services are exchanged, the transaction is recorded in the general ledger as a journal entry.
Account Balances
The general ledger follows the double-entry accounting method, which means every transaction includes a debit and a credit, ensuring that the accounting equation (assets = liabilities + equity) always balances.
Accounting Periods
Accounting periods are specific time intervals—normally months, quarters, and years—that are used for reporting financial information. Financial transactions and account balances are organized according to these periods, which simplifies financial reporting for each period.
How do small business bookkeepers use the general ledger?
The general ledger is the foundation of a small business’s financial recordkeeping. Bookkeepers use the general ledger for a variety of purposes, all of which contribute to the official record of your business’s financial transactions.
Record Transactions
Bookkeepers enter transactions into the general ledger through journal entries, creating a record of financial activities, including sales, purchases, payments, and receipts.
Organize Accounts
The general ledger is structured with a chart of accounts that categorizes each account, allowing bookkeepers to organize these accounts to reflect specific business functions.
Track Financial Performance
Bookkeepers use the data stored in the general ledger to monitor the business’s financial performance and analyze revenue trends, expense patterns, and overall profitability over time.
Prepare Financial Statements
The data housed in the general ledger is used to compile financial statements, including the income statement, balance sheet, and cash flow statement, that provide a comprehensive overview of the business’s financial health.
Ensure Accuracy
Regular review and reconciliation of the general ledger enables bookkeepers to identify errors, discrepancies, or missing entries quickly, which helps ensure the accuracy of financial data used for reporting and analytics.
Budgeting and Forecasting
Bookkeepers use the historical data in the general ledger to understand past financial performance, which helps the business set realistic financial goals and make informed predictions for the future.
Facilitate Audits
In the event of an audit, the general ledger provides a detailed record of all financial transactions, providing transparency into business practices and demonstrating compliance with accounting standards.
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Why Historical Cost Matters in Small Business Bookkeeping
Historical cost is a bookkeeping principle that requires most assets and liabilities to be recorded on the balance sheet at their original cost—even if that cost has changed over time.
For example, if your business is located in a building that you purchased 20 years ago for $200,000, and the value of the property has risen to $750,000, the asset will be recorded at a value of $200,000.
How does the historical cost principle benefit bookkeepers?
The historical cost principle provides several benefits that help small business bookkeepers manage the company’s assets and asset management and simplify financial reporting.
Reliability and Objectivity
Historical cost provides a verifiable basis for recording transactions since the original cost is typically supported by invoices, receipts, or other tangible evidence.
Consistent Reporting
Historical cost ensures consistency in financial reporting because it allows businesses to compare financial statements over time, analyze trends, and make decisions based on real data.
Simplicity and Practicality
Historical cost helps small businesses make the most of their limited resources because it eliminates the need to constantly revalue assets to their current market
values.
Compliance with Accounting Standards
Many accounting standards, including GAAP, require businesses to use historical cost as the initial measurement basis for assets and liabilities.
Predictable Financial Statements
Historical cost provides predictability in financial statements because the valuation of assets and liabilities remains consistent, making it easier to interpret and analyze the data.
Simplified Recordkeeping
Recording transactions at historical cost requires less effort to track and adjust values, making the process more manageable for businesses with limited accounting resources.
What’s the caveat of historical cost?
Over time, the value of assets and liabilities may change due to factors such as inflation, technological advancements, or market conditions. As a result, historical cost may not always reflect the true economic value of an asset.
Navigating the Accounts Payable and Accounts Receivable Processes
How well you manage accounts payable and accounts receivable can have a major impact on your company’s cash flow, which in turn will influence the overall health of your business.
Understanding how these processes work will help ensure your business maintains a healthy cash flow.
How does the accounts payable process work?
Accounts payable (AP) is the process by which businesses manage and record outstanding bills and invoices for payments due to vendors or suppliers.
AP is a fundamental part of a business’s overall financial management strategy because it ensures that a company pays its debts accurately and on time.
Here’s an overview of how the accounts payable process typically functions:
Receive Invoice
Vendors and suppliers send invoices to the business for goods or services provided. These invoices outline the details of the transaction, including the amount owed, payment terms, and due date.
Approve Invoice
The invoice is reviewed to verify that the invoiced goods or services were received and that the charges are accurate. Invoice approval may involve multiple departments or individuals, depending on how the company is structured.
Record Invoice
Approved invoices are recorded in the accounts payable ledger as a journal entry detailing information such as the invoice number, vendor details, date, and amount.
Review Payment Terms
Payment terms specify when payments are due. For example, “Net 30” means payment is due within 30 days of the invoice date. Adhering to the payment terms helps your business manage cash flow and stay on good terms with your vendors.
Authorize Payment
When invoices are due, the company’s designated accounts payable personnel review the accounts payable ledger to verify that the invoices are accurate, match the purchase orders or contracts, and are within the approved payment terms.
Process Payment
Payments can be submitted manually with a physical check or through an automated system that disburses funds via electronic funds transfers or a check.
Update the Ledger
After payments are submitted, the accounts payable ledger is updated to reflect the transactions, marking invoice entries as paid and recording payment details.
Reconcile Accounts
Regularly reconciling accounts payable with vendor statements helps ensure that all payments are accounted for and that any discrepancies are addressed quickly.
Report and Analyze
The data generated by the accounts payable process provides insights into the company’s spending patterns, liabilities, and relationships with vendors, which is useful for financial reporting and analysis.
How does the accounts receivable process work?
Accounts receivable (AR) is the money that a business expects to receive from its customers for goods or services it has provided.
The AR process directs the company’s cash flow, so it’s important to collect customer payments on time and initiate a follow-up workflow to secure outstanding debt.
Here is an overview of how the AR process typically progresses:
Generate and Send an Invoice
After providing goods or services to a customer, accounts receivable personnel generate an invoice detailing what was provided, the quantity, how much it cost, and the payment terms, including due date and payment method. The invoice is then sent to the customer, either electronically or through the mail.
Record the Transaction
The transaction is recorded as accounts receivable in the general ledger to create a record of the amount the customer owes.
Follow Up on Due and Delinquent Payments
As payment due dates approach (or pass), sending reminders to customers with outstanding balances helps ensure prompt payment and helps maintain a healthy cash flow.
Receive Payments
When payment is received, the transaction is recorded in the general ledger as a credit to accounts receivable and a debit to whichever payment method is used.
Reconcile Accounts
Regularly reconciling the accounts receivable ledger helps ensure payments are accurate
and any errors or discrepancies are addressed quickly.
Manage Overdue Payments
If a customer fails to submit a payment on time, accounts receivable personnel may opt to follow up with past-due reminders, late fee assessments, interest charges, or collection notices.
Write Off Bad Debts
After a designated amount of time and due diligence, outstanding balances can be written off as a bad debt and removed from the accounts receivable ledger.
Report and Analyze
Accounts receivable data provides insight into the effectiveness of your credit policies, identifies trends, and helps decision makers make necessary adjustments to the accounts receivable process.
What are some other AP/AR considerations?
Proper management of accounts payable and accounts receivable is essential to the health of your business’s cash flow. Small businesses should aim to pay their bills on time to avoid late fees, maintain positive vendor relationships, and keep track of aging accounts and unpaid invoices to increase cash flow.
Additionally, implementing internal controls, approval processes, and periodic audits will help ensure your books are accurate and that your business stays in compliance with industry and government regulations.
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Mastering Financial Reports
Financial reporting is a critical component of small business bookkeeping. These reports help ensure that decision makers have the intelligence and insights they need to to drive strategic planning and monitor the health and performance of the business.
In this section, we explore financial reports every small business needs and how to prepare them.
How to Prepare a Trial Balance
A trial balance isn’t a financial statement in and of itself; however, all of the information you will need to prepare the balance sheet, income statement, and cash flow statement comes from your trial balance.
A trial balance is essentially a listing of all the general ledger accounts and their balances at a specific point in time. The purpose is to ensure that debits and credits are equal and the accounting equation (assets = liabilities + equity) is balanced.
The steps to prepare a trial balance are as follows:
1. Gather general ledger balances. Collect the ending balances of all general ledger accounts, including assets, liabilities, equity, revenues, and expenses.
2. Organize accounts. List the accounts in a systematic order: assets and liabilities first, then equity, revenues, and expenses.
3. Total debits and credits. Calculate the total debits and credits, ensuring that the total debits equal the total credits (i.e., that the trial balance is balanced).
4. Investigate discrepancies and make adjustments. If the trial balance doesn’t balance, look for discrepancies, including transposition errors, posting mistakes, or unrecorded transactions, and make any necessary adjustments.
5. Finalize the trial balance. Once it balances, call the trial balance “final,” and use it as the basis for preparing other financial statements.
How to Prepare a Balance Sheet
A balance sheet is a financial statement used to report a company’s assets, liabilities, and shareholder equity. In other words, it provides a snapshot of what the company owns and what it owes at a specific point in time. This information is important for assessing a company’s ability to meet near-term and future financial obligations.
The steps to prepare a balance sheet are as follows:
1. Start with the data from the trial balance. The ending balances of assets, liabilities, and equity accounts from your trial balance can be used to form the basis for the balance sheet.
2. Gather additional financial data. Collect other necessary financial information from the general ledger, such as ending balances of relevant accounts.
3. Identify assets. List all of the business’s assets, then categorize them into current assets (cash, accounts receivable, inventory, prepaid expenses) and noncurrent or long-term assets (property, equipment, intangible assets).
4. Determine liabilities. List all the business’s liabilities, categorizing them into current liabilities (accounts payable, short-term loans, accrued liabilities) and noncurrent, long-term liabilities (long-term loans, deferred tax liabilities).
5. Calculate equity. Determine the business’s equity by subtracting total liabilities from total assets.
6. Organize assets and liabilities. Assets are generally listed first in the balance sheet in order of liquidity, or how quickly they can be converted to cash, followed by liabilities.
7. Check against the accounting equation. Verify that the balance sheet adheres to the accounting equation: (assets = liabilities + equity).
8. Compare it with previous periods. Do a side-by-side comparison of the current balance sheet with previous periods to identify trends and track changes over time.
9. Distribute and analyze. Share the balance sheet with relevant stakeholders, including company leadership, investors, and lenders, so they can analyze the data and use the results to make informed business decisions.
10. Ensure compliance. Confirm that the income statement complies with the accounting standards and regulations applicable to your business.
How to Prepare an Income Statement
The income statement, also known as the profit and loss statement, summarizes the revenue, expenses, gains, and losses a company reports during a particular reporting period. This statement provides valuable insights into a company’s operations, the efficiency of its management, underperforming business lines, and its performance compared to competing businesses.
The steps to prepare an income statement are as follows:
1. Gather financial data. Collect information on revenues and expenses for the specified period and ensure all relevant financial transactions are recorded in the general ledger.
2. Identify revenue sources. Compile a list of all revenue sources, including sales of goods or services, interest income, and any other income streams.
3. Determine the cost of goods sold (if applicable). The cost of goods sold (COGS) is the direct cost associated with producing your business’s goods or services.
4. Calculate gross profit. Subtract COGS from total revenue to calculate gross profit.
5. List operating expenses. Compile a list of operating expenses, including rent, utilities, salaries, marketing expenses, and any other costs required to run a business.
6. Organize expenses by category. Group operating expenses into logical categories, such as administrative expenses, marketing expenses, or research and development expenses.
7. Calculate operating income. Subtract operating expenses from gross profit to
determine operating income.
8. List other income and expenses. If your business has other sources of income or nonoperating expenses, include them in the income statement.
9. Calculate net income. Subtract other income and expenses from operating income to calculate net income.
10. Review and confirm accuracy. Double-check all calculations to ensure that the income statement is accurate.
11. Compare it with previous periods. Compare the current income statement with previous periods to identify trends and assess the business’s financial performance over time.
12. Distribute and analyze. Share the income statement with relevant stakeholders, including company leadership, investors, and lenders, so they can analyze the data and use the results to make informed business decisions.
13. Ensure compliance. Confirm that the income statement complies with the accounting standards and regulations applicable to your business.
How to Prepare a Cash Flow Statement
A cash flow statement monitors the flow of cash into and out of a business over a specific period of time. This financial report measures a company’s ability to generate the cash needed to pay its debts and fund its operations.
The steps to prepare a cash flow statement are as follows:
1. Gather financial data. Collect financial information from the general ledger, bank statements, and other relevant records.
2. Identify cash inflows. Create a list of all cash received from operating, investing, and financing activities.
3. Identify cash outflows. Create a list of all cash payments made for operating, investing, and financing activities.
4. Calculate net cash flow. Determine the net cash flow from operating, investing, and financing activities by subtracting cash outflows from cash inflows.
5. Calculate total cash flow. Add up the net cash flows from operating, investing, and financing activities to calculate the overall change in cash for the period.
6. Reconcile change in cash with the balance sheet. Confirm that the total net cash flow matches the change in cash recorded on the balance sheet for the same time period.
7. Compare it with previous periods. Compare the current cash flow statement with those from previous periods to identify trends and assess changes in the business’s cash flow over time.
8. Distribute and analyze. Share the cash flow statement with relevant stakeholders, including company leadership, investors, and lenders, so they can analyze the data and use the results to make informed business decisions.
9. Ensure compliance. Confirm that the cash flow statement complies with the accounting standards and regulations applicable to your business.
Note: The cash flow statement is typically presented in a standardized format divided into operating, investing, and financing activities sections. Each of the steps above will be repeated with applicable data for each of these sections.
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![Small Business Tax Preparation [Free Checklists]](https://fbc.ca/wp-content/uploads/2023/10/Small-Business-Tax-Preparation-Free-Checklists.png "Small Business Tax Preparation [Free Checklists]")
Planning and Steps to Success
Mastering the fundamentals of bookkeeping and financial reporting is part of a successful small business financial management strategy, but you will need to take steps to ensure you have a sustainable plan in place for maintaining your books over the long term.
In this section, we will explore why accurate bookkeeping is essential to annual tax planning and preparation, tips for staying up to date with your bookkeeping, and how a professional bookkeeping service can be a smart investment for your business.
Tax Planning and Filing
Bookkeepers play a critical role in tax planning and filing because their efforts throughout the year help ensure all of the financials and reporting the CRA requires are accurate and accounted for.
Here’s a closer look at why those efforts matter at tax time.
Why bookkeeping is important for tax filing
Structured, complete recordkeeping helps ensure that your business complies with Canadian tax laws and regulations governing financial records and reporting and that your business receives all of the tax incentives it is entitled to.
In this high-level overview, we explain where bookkeeping fits in with tax preparation and planning for your business.
Reporting Income
Bookkeeping provides a clear record of your business’s income, including sales, services rendered, and other sources of revenue that must be reported as income on tax returns.
Tracking Expenses
An effective bookkeeping strategy makes it easier to track and categorize expenses, including operating costs, purchases, and other deductible expenses, so you can maximize allowable deductions and reduce taxable income.
Reporting Sales Tax
For businesses that are required to register for the goods and services tax or the harmonized sales tax, accurate bookkeeping is essential for reporting and remitting the correct amount of tax to the CRA.
Maintaining a Record of Business Transactions
Organized and complete financial records provide all of the details of your business’s financial transactions, which are required to verify financial data if you are selected for a tax audit.
Tracking Asset Depreciation
Proper bookkeeping ensures that the depreciation of applicable assets is accurately recorded so you can claim it on your business’s tax returns.
Identifying Tax Credits and Deductions
Accurate bookkeeping can reduce your business’s tax liability by identifying deductions for business expenses, eligible tax credits, and other incentives.
Meeting Tax Deadlines
Proper bookkeeping techniques help ensure you meet tax deadlines and avoid penalties and interest charges.
Reducing Errors and Discrepancies
Accurate bookkeeping reduces the likelihood of errors in tax filings that can lead to delays in processing returns or trigger audits.
Preparing for Audits
The CRA may conduct audits to ensure compliance with tax laws. Well-maintained books provide transparency, which will make the audit process smoother and help reduce the risk of penalties or fines.
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Catching Up on Backlogged Bookkeeping
When you’re running a small business, there never seems to be enough time to do it all, which makes it easy to get behind on even important tasks, such as bookkeeping. Not keeping up with your books can negatively impact the health and success of your business.
What if I’m behind on bookkeeping for my small business?
If you find yourself falling behind in bookkeeping for your small business, it’s important to take proactive steps to catch up and maintain accurate financial records.
Having a working knowledge of bookkeeping basics will empower you to manage your company’s books more effectively; however, you may want to consider using accounting software to take advantage of automation tools and features that can streamline repetitive tasks and reduce the likelihood of errors.
Here are a few tips to help you get your books back on track quickly.
Assess the Situation and Prioritize Tasks
Review the backlog and identify which months or reporting periods are most in need of attention. Prioritize the most critical tasks—for example, delinquent tax obligations—then focus on the most recent transactions and work your way back.
Gather Documents
Collect all relevant financial documents, such as receipts, invoices, bank statements, and other records, to streamline the process.
Reconcile Bank Statements
Review your bank statements to ensure that your financial records match your actual bank transactions and address any discrepancies.
Record Transactions
Systematically record any missed transactions, entering income, expenses, and other financial transactions in chronological order. Using accounting software or spreadsheets will make this process more efficient.
Create a System
Establish—and adhere to—processes for recording transactions, categorizing expenses, and reconciling accounts regularly to avoid falling behind again.
Seek Professional Help
If the backlog feels like more than you can resolve alone, consider seeking help from a professional bookkeeper or accountant. These specialists can help you catch up and provide guidance to help you stay on track.
Once you’re caught up, commit to keeping your books up to date. Add time to your calendar weekly and monthly to review and update your financial records. Establishing good bookkeeping habits will help you maintain accurate records, monitor the financial health of your business, and identify and resolve errors and issues early.
Assessing the Value of Certified Bookkeeping Professionals
As a small business owner, you know firsthand how hard it is to find the time to do it all. Fortunately, you don’t have to.
Bookkeeping is a business function that can be handed off to a trusted professional, freeing up your time for more strategic endeavours and providing peace of mind that your books are accurate and well maintained.
In this section, we break down the benefits of outsourcing your bookkeeping to a third-party service and how this decision can positively impact your company’s bottom line.
Is a certified professional bookkeeper worth it for a small business?
Although it’s tempting to try to do it all, hiring a certified professional bookkeeper for your small business offers many benefits.
Expertise and Knowledge
Certified professional bookkeepers have undergone specific training and education to earn their credentials. They possess deep knowledge of accounting principles, financial regulations, and best practices, ensuring your business’s books are accurate and compliant.
Accurate Financial Records
Professional bookkeepers are trained to maintain precise financial records, which reduces the risk of errors, ensures compliance with tax regulations, and provides a reliable source of data for decision-making.
Time Savings
Hiring a bookkeeping service lets small business owners and management wear one less hat and frees up time to focus on strategic business activities.
Regulatory Compliance
Certified bookkeepers are required to stay current with tax laws, financial reporting requirements, and other regulations applicable to small businesses. This knowledge helps ensure that your business remains compliant and avoids potential legal issues.
Financial Analysis and Reporting
Professional bookkeepers are skilled at providing insightful financial analysis and reporting that help small business owners understand their financial position and make data-backed decisions.
Cost Savings
While there is a cost associated with hiring a certified professional bookkeeper, the time savings, error reduction, and overall increase in accuracy and efficiency often outweigh the expenses and result in long-term cost savings.
Scalability and Growth
As your small business grows, the complexity of financial transactions and reporting may increase. Professional bookkeepers are equipped to handle this growth, ensuring that your financial systems scale appropriately.
Confidentiality and Security
Certified bookkeepers are entrusted with your business’s sensitive financial data. To ensure this information is secure, bookkeepers are held to high professional standards, including for confidentiality and data security.
Strategic Financial Planning
An experienced bookkeeper can help your business meet its financial goals by contributing to strategic financial planning with insights into cash flow management, budgeting, and forecasting.
Audit Preparation
In the event of an audit, a professional bookkeeper will ensure that your business’s financial records are organized, accurate, and in compliance with auditing standards.
Business Advisory Services
Some bookkeeping services also offer business advisory services, providing guidance on financial strategies, cost-saving measures, and opportunities for growth.
Industry Insight
Certified bookkeepers often belong to professional organizations and networks that help them stay current with the latest changes in industry regulations and best practices.
When you invest in a bookkeeping service, you have peace of mind knowing that your financial records are being managed by professionals. This allows you to do what you do best: Focus on running and growing your business.
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Choosing the Right Bookkeeping Service
When you’re running a small business, time and resources are valuable commodities. Hiring the right bookkeeping service to manage the financial side of things will free you up to stay focused on growing the business and help ensure you have accurate business data to drive decision-making.
What to consider when looking for a bookkeeping service
Bookkeeping isn’t a one-size-fits-all service, so it’s important to do your due diligence when you are researching providers.
Here are some factors to consider that will help you find the right-fit bookkeeping service for your small business.
Qualifications and Certifications
Industry-specific certifications, such as Certified Professional Bookkeeper or Certified Public Bookkeeper, help ensure that the bookkeeper you hire has a high level of knowledge and expertise.
Industry Experience
Partnering with a bookkeeping service with experience in your industry provides an extra layer of confidence that they understand the specific challenges, regulations, and requirements of your business’s finances.
Services Offered
First, create a list of the services you want to outsource—accounts payable and receivable, bank reconciliation, payroll processing, financial reporting, tax preparation—then find a bookkeeping service that does those things well.
Security Policies
Ask about the bookkeeping service’s data security and confidentiality policies to ensure that they have a strategy in place to protect your business and customers’ sensitive financial information.
References and Reviews
Always ask for references from other clients or look online for independent reviews and testimonials. This insight will help you gauge how well the service supports businesses that are similar to yours.
Scalability and Growth Support
Your bookkeeping service should be able to meet your business’s needs today and also scale to accommodate future increases in transactions and financial complexity.
Cost and Pricing Structure
Be sure you fully understand the bookkeeping service’s pricing structure, including what services the fees cover, whether services are billed hourly or monthly, and whether there are additional fees for certain services.
Flexibility and Customization
Find out whether the bookkeeping service can customize its services to meet your business’s specific requirements or if it takes a one-sizefits-all approach.
Availability During Tax Season
Tax season can be stressful for small business owners. Make sure the bookkeeping service you select will have the capacity to help you file your business taxes during the peak season.
Insurance Coverage
Ask about professional liability insurance in the event the bookkeeping service makes an error or omission that results in legal or compliance penalties or loss of revenue.
Trial Period or Demo
Some bookkeeping services offer a trial period or a demo of their services. Take advantage of this to assess their efficiency, responsiveness, and compatibility with your business.
The factors above all contribute to a successful partnership between you and your bookkeeping service. However, trust is another crucial component of the relationship, so be sure to select a service that you trust with the keys to your business’s finances.
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Better Bookkeeping Builds Strong Businesses
Being a small business owner comes with its own unique challenges, but managing your finances doesn’t have to be one of them. Keeping accurate records of your income and expenses helps set your business up for success—with customers and with the CRA.
Find out how FBC can help you create a bookkeeping strategy that allows you to take control of your tax obligations, make data-backed business decisions, save time and money, and grow your business with confidence.
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