You may have decided to go into business for yourself because you have a passion for the products or services you sell. That passion may or may not extend to the business part of your operations, especially the bookkeeping side of things. Love it or hate it, bookkeeping is an essential function for every business and just has to be done. Bookkeeping is the basic function of recording your business’s income and expenses and calculating how much you need to pay in taxes. Accounting is taking a more detailed look into your income and expenses and can give you insights into ways to improve and grow your business. The more advanced accounting you do, the more information those insights can give you. If you’re just starting your business however and need to know the basics of managing your finances, we cover some of those basics in this post.
What kind of business are you?
Depending on whether your business is registered as a sole proprietorship, limited liability partnership or a corporation, you have different rules when it comes to handling your finances and reporting to the CRA. This Government of Canada website is a good starting point for the information you will need. Follow this link if you’re a sole proprietorship or partnership and this link if your business is set up as a corporation.
Keep your finances separate
Financeit puts it this way in their post “Small business finances: A 10-step guide for business owners”:
“If you register your business as an LLC or a corporation, you’re legally obligated to have a dedicated business bank account. While you don’t need to open one for a sole proprietorship, it’s a good practice to adopt.”
What this means in practical terms is that you have separate accounts for your business and personal finances (bank accounts, credit cards, etc.) and that you never use one for the other. Not only does this help keep you out of trouble with the CRA, but it also makes bookkeeping and accounting a lot easier and less time-consuming, which is also important if you decide to hire a professional later on.
Know what expenses you can deduct
Some of those expenses include:
- Bad debt
- Startup costs
- Transportation costs
- Office supplies
- Interest and bank fees
- Some meals, entertainment and travel
For the list of allowable expenses, visit this CRA page.
Choose an accounting method and bookkeeping system
There are two ways to record your business’s revenues and expenses, the cash method and the accrual method. With the cash method you record your revenues and expenses when they are received or paid, respectively.
With the accrual method you record revenues and expenses when invoices are sent and received, respectively. In Canada you are required to use the accrual method for tax purposes unless you are a farmer, fisher, or a self-employed commission agent. If you find it easier to use the cash method, you can do so until the end of the year and then go back and make adjustments.
A bookkeeping system refers to how you record your business’s finances, how much information you record and the tools you use for bookkeeping.
There are two basic methods of bookkeeping, single-entry and double-entry. An example is when you record a sale in the single-entry method, you just add it to your income. With the double-entry method, you also subtract that value from your inventory.
If your business is simple, using the single-entry method is fine but as you scale up or if your business is more complex, you will need to rely on the double-entry method to have a more accurate picture of your business’s finances.
Depending on your business, you may choose to use a simple spreadsheet for your bookkeeping, bookkeeping or accounting software that also allows you to perform other functions like invoicing and creating reports and/or hiring or consulting a professional.
Keep your financial records
Not only is this good practice, but you’re also required to keep your financial records for at least six years after the year they were used in your income tax returns. Those records can include:
- Payroll records
- Bank and credit card statements
- Investment statements
- Tax returns
Have someone check your work
The last thing you want is to have inaccurate records, and not just for fear of getting audited. Without accurate records, you won’t know where your business actually stands and how to improve it. Having a professional go over your books once a year is a good idea to make sure you’re paying the right amount in taxes and to help you put your finances into perspective.