Starting a business has many pre-requisites, even if you are a sole proprietor. Initially, you may not even realize how much you are spending on the business, versus the income you’re generating. The reason most people choose to create a business is to earn a profit, and it is possible to reduce the time from inception to profit by working efficiently and keeping track of the money coming in and the money going out. The key to this information is through comprehensive bookkeeping; keeping track of a business’s past, present and estimated future earnings and costs.
In this article, we will discuss the primary considerations any small business should take into account in their bookkeeping practices.
What is Bookkeeping and Why Do You Need it?
Bookkeeping is an age-old technique of financial record keeping. A bookkeeper collects all the documents related to a business financial transaction and enters them in the books of account under the suitable category. Every transaction, from paying a bill to receiving payments, is recorded.
Bookkeeping organizes your transactions and lays the stepping stones for preparing quarterly and annual financial statements. It keeps you up-to-date on the upcoming expenses and revenue, and also helps when it comes time. to file taxes and take advantage of the various benefits the Canada Revenue Agency (CRA) offers small businesses. It also tells you where you are losing money to help you make informed business decisions.
Bookkeeping becomes even more necessary as your business grows and transactions become more complex with respect to assets, loans, and investments.
Five Things Every Small Business Should Consider When Bookkeeping
Bookkeeping may seem tedious, and it can be. For this reason, many small business owners choose to use a reputable accounting firm to manage the bookkeeping for them. Whether you are overseeing your own bookkeeping or placing the task in the hands of a professional, every business owner should consider the following to help ensure their business’s bookkeeping practices are efficient and accurate.
1. Keep Personal Accounts and Business Accounts Separate
When people start a business, they tend to do all transactions through their personal bank account, at least initially. While it may not seem important to keep personal and business finances separate, especially at the start of a new venture, the sooner you separate your accounts, the better. By keeping them entwined, it can make accounting and tax filing cumbersome and lead to overspending. Bookkeeping is a much more simple exercise when business income and expenses are easily identified.
You can talk to your bank and find out the procedure to open a business bank account. Some documents you might need can include an employer identification number, a business license, and documents such as Articles of Incorporation, for registered corporations.
2. Which Financial Records Should You Keep?
Once you have a separate bank account, it is time to start managing transactions. Every business transaction needs to be documented, in the event of future Canada Revenue Agency audits, tax filings, and the preparation of financial statements. Hence, you should file or store all necessary documents like invoices, receipts, paid bills, payroll records, bank statements, credit card statements, and tax forms and returns.
The CRA requires you to keep all financial and tax records for at least six years. You can store them in both physical form and/or digitally, and dispose of records older than six years in a shredding machine.
3. Which Accounting System Should You Use?
Now you have to decide which accounting system you need:
- Cash accounting – where transactions are recorded at the time of financial exchange.
- Accrual accounting – where transactions are recorded at the time they occur, irrespective of the financial exchange.
For instance, you sold 10 computers to a client and sent an invoice of $8,000 in March. But the computers were delivered and installed in April, and the client made the payment on delivery.
In cash accounting, the transaction would be recorded in April, in sync with the business’s bank statement. This method is suitable if you are a one-person business and don’t offer credit to clients. But it may give a misleading picture since a significant transaction occurred in the first quarter of the year, but wasn’t recorded until the second quarter. This can be misleading to business owners looking to forecast future earnings or make business decisions. The owner may view the statement and assume first-quarter sales are weak, when in fact at least one large transaction occurred.
In accrual accounting, the transaction would be recorded in March, in sync with the invoice date. This method is suitable if you offer credit to your customers and have a large setup. Because the transaction is recorded when it happens, you can build a more accurate estimate of your sales and expenses. But it can also present challenges, as the transaction recordings will not necessarily align with the business’s bank statement.
Take a look at the nature of your business transactions. You can start your bookkeeping with cash accounting, which may be more straightforward. Later as your business grows, you can switch to accrual accounting with the help of a professional.
4. Which Bookkeeping System Should You Use?
The next step is to decide on the best bookkeeping system for your organization:
- Single-entry bookkeeping – where you record a transaction only once.
- Double-entry bookkeeping – where you record a transaction twice, as a debit and a credit, in order to balance your accounts.
Let’s go back to the previous example of the sale of 10 computers. In the single-entry system, you would record the $8,000 transaction as a gain in the income ledger. This method is suitable when you are a one-person business with fewer business transactions, and your business is not incorporated.
In the double-entry system, you would record the $8,000 transaction as a gain in the income ledger and as a deduction in inventory. This method is useful for larger companies or the ones with high-volume transactions as it can help track transactions in their entirety (both give and take). This method is slightly more complex, but it reduces the error rate when accounts are tallied at the end of a financial period.
5. What Means of Bookkeeping Should You Adopt?
The final step to get started with bookkeeping is to choose what means do you want to use to maintain your books:
- Manual recording (spreadsheet or physical journal)
- Accounting software
- Hiring a professional bookkeeper
You can use the first two means if you are a smaller business, especially at the outset, and you are maintaining books only to keep track of your transactions or for compliance. But if you want to leverage your records to grow the business by making informed decisions, hiring a professional is advisable.
A professional will handle every aspect from bookkeeping to filing taxes, allowing you to put all your energy into growing your business. A professional accountant can also reconcile your accounts, and advise of any red flags or potential areas for growth. When hiring an accountant, look for someone in your province specializing in your industry as business accounting and reporting standards vary by province and industry.
Contact Sloan Partners LLP in Toronto for Small Business Bookkeeping Services
At Sloan Partners LLP, we offer a team of skilled and exceptionally experienced Chartered Professional Accountants who provide our small business clients with customizable bookkeeping services. No matter your company’s specific needs, we can help. Let us shoulder the day-to-day so you can focus on the big picture.
We are conveniently located in North York, close to three major highways. To schedule a consultation with one of our exceptionally knowledgeable accounting professionals, please reach out to us online or call us at 416-665-7735.