Many business owners in Canada dislike bookkeeping but understand that it is necessary. You might do bookkeeping tasks because you need to file your T2 return with the Canada Revenue Agency
.However, bookkeeping is important for your company for more reasons beyond remaining in compliance with your tax obligations.
Accurate bookkeeping can help you to understand how your company is doing so that you can make any adjustments that might be needed. Here is an explanation of bookkeeping and its importance for your company.
Table OF Content
- Why bookkeeping is important.
- Steps to take for accurate bookkeeping.
- What level of bookkeeping do you need?
- Categorizing your transactions.
- Deductible expenses.
- Full cycle bookkeeping.
- Completing bookkeeping on your own vs. seeking help.
- Bookkeeping cleanup.
- Benefits of partnering with Ensight Cloud CPA for your small business bookkeeping.
Why Bookkeeping Is Important
Bookkeeping is important for businesses for the following reasons:
- Allows you access to useful reports so that you can answer important questions about your business
- Provides benefits to your operations
- Helps you to comply with the CRA
Bookkeeping allows you to see whether your business is profitable and identify where your money is being spent. It also helps you to identify the services or products that you should focus your efforts on and those that you might want to let go of. Bookkeeping gives you insight into your business so that you can make better decisions.
Up-to-date bookkeeping can also help you to identify your accounts receivable and your accounts payable. It can also provide you with information about the PST, GST, and income taxes that your business might owe. Bookkeeping can help you to see how much money your business has on hand and to project the amount of money that it will need over the next quarter or year.
Bookkeeping helps you to stay in compliance with the requirements of the CRA. When your bookkeeping is accurate, you can avoid late penalties and reduce the likelihood that your business will be audited. Finally, up-to-date and accurate bookkeeping can help your business to obtain financing if it is needed.
Steps To Take For Accurate Bookkeeping
To make your bookkeeping accurate, you should start by separating your business and personal finances. You should start by opening a separate bank account for your business and getting a business credit card. You should only use your business credit card and business bank account for business transactions.
This can save substantial time and help you to prevent costly errors from occurring. If you fail to keep your business and personal finances separated, your bookkeeper or accountant will have to spend much more time completing your books. This means that you will end up paying much more for their services.
What Level Of Bookkeeping Do You Need?
The next step you should take is to determine the level of bookkeeping that you need. Your choices include the following:
- Basic bookkeeping aimed at staying compliant with the CRA
- Bookkeeping with reports that you can review each month
- Bookkeeping that allows invoicing
- Bookkeeping that provides other functionality
- Scalable bookkeeping
Our financial professionals can help you to figure out the features and functionality of your bookkeeping services that will work the best for your business. You will need to understand what it is that you want to get from your bookkeeping system.
Categorizing Your Transactions
When you categorize your transactions, you should make it simple. Keeping your categories simple will make your financial reports much easier for you to read. The most common categories that businesses use include the following:
- Sales revenue
- Sales cost
- Advertising costs
- Bank interest and fees
- Licenses and professional dues
- Office expenses
- Entertainment and meals
- Professional service fees
- Rent or lease
- Subcontracted labour
- Software subscriptions
- Utility and telephone costs
- Travel costs
- Vehicle costs
- Wages and benefits
- Equipment and furniture
- Computer equipment
Under the Income Tax Act, you are generally allowed to deduct the reasonable current expenses that you incur to earn income through your business. By contrast, capital expenses are deducted over a period of years since they provide benefits that last for more than one year. Current expenses are expenses that recur after a shorter time. An example of a current expense would be the cost of your telephone bill. The current expenses must also be incurred to help your business to earn income and must be reasonable.
Certain expenses have specific rules and exceptions that apply. For meals and entertainment costs that are incurred for business reasons, they are only deductible at 50%. You should also track the business purpose of this type of expense and who you ate with or entertained.
For vehicles, you are allowed to deduct expenses that you have to operate a motor vehicle that is used to earn income for your business. Personal use of the vehicle cannot be deducted.
If you have a home-based business, you are allowed to deduct the expenses that are related to your home office as long as the room or space is your principal place of business and you only use it to earn income for your business. If your home office qualifies, you can deduct a percentage of your property taxes, utility costs, mortgage interest, and maintenance costs.
Full Cycle Bookkeeping
Business bookkeeping involves keeping records of the company’s daily financial transaction, including tracking purchases, sales, revenue, and expenses that occur within the business. Full cycle bookkeeping involves someone who can complete the entire bookkeeping process for the accounting or bookkeeping cycle.
Bookkeepers deal with daily transactions while accountants take a more overall approach for capturing the financial data. Full cycle bookkeeping might include tracking the inventory, recording the accounts receivable and payable, handling the payroll, and reconciling accounts and transactions. Full cycle bookkeeping involves performing all of these tasks during the full accounting cycle. The full accounting cycle includes the following steps:
- Gathering data and analyzing it from all of the transactions
- Recording transactions
- Posting the transactions to the general ledger
- Preparation of a trial ledger and making any needed adjustments
- Preparation of the financial statements
- Closing the accounts
- Revising the trial ledger balance
Completing Bookkeeping On Your Own
Vs. Seeking Help
Whether you choose to do bookkeeping for your business on your own or to hire a professional, it has to be completed. If you fail to perform bookkeeping, you will be operating your company in the dark and will likely encounter problems when it is time to file your corporate income tax return.
While some business owners choose to perform their bookkeeping themselves, doing so may not be a good idea. Performing your bookkeeping will take a lot of time that you may not have to devote to your books. Outsourcing your bookkeeping allows you to attend to your business operations while helping to ensure that your books are up-to-date and accurate. Outsourcing is also less costly than hiring a dedicated bookkeeper to work in-house at your company.
Outsourcing your company’s small business bookkeeping will cost more than completing it yourself. However, it can free up your time so that you can work to help your business grow. Professional accountants and bookkeepers also have the training and expertise that are needed to ensure the accuracy of your books and financial reports, making it a better option for many businesses.
Hiring a bookkeeper to work as one of your employees will cost the most out of your options. You will need to pay a fair wage. If your bookkeeper will work full time, you will also need to figure in the cost of benefits. An internal bookkeeper might need training. After you have spent money to get the training that your bookkeeper needs, he or she might leave for a different job and cause added costs.
Some business owners that have attempted to complete the bookkeeping on their own may have books that are woefully inaccurate or incomplete.
When this occurs, the businesses need to get help with bookkeeping cleanup. Our financial professionals have the expertise needed to help your company to clean up your books so that they will be accurate and up-to-date.
Benefits Of Partnering With Ensight Cloud CPA For Your Small Business Bookkeeping
Bookkeeping is a headache for many small business owners. When you run a small business, you may have substantial time constraints and simply not have enough time to perform your bookkeeping. You also may not have the training that you need to perform bookkeeping on your own without making mistakes. By partnering with us, you can feel confident that your books will be up-to-date and accurate.
You can also derive benefits from the financial reports that we provide. Contact us today to schedule a consultation so that you can learn more about how our bookkeeping services can help your company.