7 Steps to Keeping Good Records

Colorful-Folders

Most of us consider record management to be boring, tedious and sometimes even frustrating.  We tend to give it low priority.  However, good record keeping will not only make your business life easier, but it will be a real stress reliever at tax time.  Remember these tips to make your record management easier:

1.  Keep your business and personal expenses separate.

This is where most people will make the biggest mistake.  If you take a potential client out for a round of golf, for instance, is that a personal expense or a business expense? (The answer is personal, because green fees are not a deductible business expense.)  Vehicles you use for both personal and business purposes are another area that often cause confusion.  You need to know what qualifies as legitimate business expenses and what doesn’t.  Your business record management needs to reflect this accurately.

2.  Get sufficient documentation for all business expenses.

walmart-666-receiptMany business people make the mistake of thinking that “lists” are good enough for record management purposes.  They may think that the list of purchases on their credit card statement is good enough to claim those purchases as business expenses.

Unfortunately, the CRA (Canada Revenue Agency) is more demanding than that.  They will not accept credit card statements or cancelled cheques as sufficient documentation for expenses when an invoice or receipt would normally be issued.

So, for the purpose of good record management remember these two things:

  • Always get a receipt – get in the habit of asking for a receipt whenever you make a purchases – no matter how small.  Little expenses add up, too, and you need the document for your business records.
  • Label your receipts, if necessary.  There are still businesses around that hand out receipts that don’t have anything on them except the date and cost of the item purchased.  This isn’t very helpful when you are staring at a receipt trying to figure out what the item was and which business category it fits into.  When you get a receipt, look at it and write the missing or relevant information on it, such as what it was for and the expense category.  This is especially important for meal receipts.  You must label every meal receipt with who you dined, their business name and what was discussed.

3.  Get a separate bank account for your business – and use it!

I know the fees for business accounts can be very high, but shop around to find the best rate and get yourself a business account!  A separate bank account is absolutely necessary for good business record management.  It will help you keep your business and personal expenses separate.  You will deposit all your business revenue into the business account and withdraw any business related expenses or payments from the business account only.

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This will help keep CRA from scrutinizing every transaction in your personal account to determine personal vs. business transactions.

What kind of account should you get?  I recommend a chequing account that will deliver monthly statements to you.  Business cheques help make your record management easy because you can use the memo line on each cheque to document the purpose of the expense.  I recommend that whenever possible, use a cheque, credit card or debit card rather than cash for business expenses.  It will make your record management much easier.

4.  Have a separate credit card for your business expenses.

Credit Card / Gold & PlatinumUsing your personal credit card for business purposes will swiftly drop you into a record management quagmire.  A business credit card greatly simplifies your business record management by keeping your personal and business expenses separate.  It also helps your business look more professional.

5.  Keep a mileage log of your business travel.

year-end-mileage-log

If you use any of your vehicles for business purposes, a mileage log is necessary for your record management.  Record the kilometer reading on the odometer at the beginning of the year the enter the kilometerage by date each time you use the vehicle for a business purpose.  Keep your log in the console or glove box of your vehicle and get in the habit of recording each business trip.

If you use more than one vehicle that you use for business, keep a log in each.  CRA will most definitely ask to see your log in the event of an audit.  Even if the vehicle is owned by the business, a log is still necessary to determine how many kilometers were used for business vs. personal.

6.  Keep all your business records for a particular tax year together and in one place.

files

Having your business records scattered all over the place is a real time-waster when it comes to accounting or preparing your taxes.  I recommend keeping a plastic file box for each fiscal year.  Label it well with the appropriate dates.  This will make it much easier to find records should you need to go back in time to locate information.

7.  Keep your business records for the correct length of time.

There is often confusion about how long you need to keep your business record.  For tax purposes, CRA states “keep your records for a minimum of six years after the end of the taxation year to which they relate”.  This 6-year period of time starts from the last time you used the business records (usually the date of tax filing), not from the time the last transaction occured.

The CRA also has rules about the destruction of business records.  See the CRA website for more information regarding these rules.  See How long do I have to keep my business records.

These 7 things you can do to make your record management easier are not difficult.  Like a lot of the administrative business related to your business , they just require establishing good habits and persistence.  But if you apply these rules of good record management now and follow through, you’ll see a huge difference next tax time and your accounting will be easier all year long.

Resource:  Susan Ward, About.com Guide

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Bookkeeper vs. Accountant – What is the difference?

Have you ever wondered what the difference is between a bookkeeper and an accountant?

Well, here is my best explanation:

bookkeeper

 Bookkeepers:

  • Control and organize source documents (receipts, invoices, statements etc)
  • Accurately classify and record transactions in the general ledger through data entry
  • Perform bank and credit card statement reconciliations
  • Record and track accounts payable, accounts receivable
  • Report and reconcile GST returns
  • Prepare WCB returns
  • Provide payroll services including T4 and ROE preparation
  • Reconcile Corporate tax payments
  • Review and analyze the General Ledger along with the business owner for accuracy
  • Provide useful and customized reports for the business owner including internal financial statements
  • Ensures the business books are ready for review or audit by an accountant for year end procedures and corporate tax preparation
  • Have an understanding of the “big picture” and are familiar with the Generally Accepted Accounting Principles (GAAP)

accountant1Accountants:

  • determine the best set-up and internal controls for a business owner’s  bookkeeping system
  • Monitor the system and interprets the results
  • Monitor budgets and cash flows
  • Offer strategic planning and tax planning
  • Review bookkeeping and perform year end procedures in preparation for filing yearly taxes
  • Prepare and files business tax return
  • Monitor acquisitions and disposals of capital assets
  • Perform depreciation calculations on capital assets
  • Provide final year ending financial statements
  • Prepare any necessary resolutions needed for the Corporation”s Minute Book
  • have an in-depth knowledge of GAAP and the Income Tax Act

Now, that is all in a nutshell and both of these services will provide more to business owners than just what is listed here…but you get the idea.

It is important that your bookkeeper and your accountant have a good working relationship and communication between them in order to provide the best overall financial picture you and your business are facing.

 

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Preparing for the next GST deadline…

to doWe are busy in the office this month finishing all the bookkeeping for our regular clients and preparing their GST returns before the October 31st deadline.  If you are a quarterly filer and your quarter falls on July 1 – Sept 30, you also have your return and remittance due by October 31st.

GST returns are fairly simple to complete if you have been keeping up with your bookkeeping records.  It is VERY important to be sure you have every transaction in the past quarter recorded to ensure you are reporting all GST activity.

The GST return is submitted to the Canada Revenue Agency to report the GST you collected on sales and to claim the Input Tax Credits (ITCs) you acquired during this quarter.  ITCs are simply the GST amounts you paid out in expenses during this period.GST return

To calculate your GST:

1.     determine the total sales your business received.  Do not include the GST you added to this number – simply determine the sales before GST.  Record this amount on line 102 of the GST return.

2.     determine the amount of GST you collected on those sales and record that on line 105

3.     Determine the amount of GST you paid out with your expenses.  You will not need to total all of your expenses, but rather just the GST you paid.

4.   Subtract:   line 105 – line 108.  If your answer is negative then you will be receiving a refund and that amount is to be recorded in the “refund claimed” box.  However, if your answer is positive, then that is the amount you owe to CRA and that amount is recorded in the “amount owing” box.  If you file your return online, the website will compute the refund/payable for you.

5.   If you owe, use the remittance form that came in your GST return envelope to pay your remittance at the bank.

If you have any questions, please feel free to contact me and I will do my best to give you a hand 🙂  Good luck!

 

 

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What type of business are you?

According to the Canada Revenue Agency (CRA) “For income tax purposes, a business is an activity that you intend to carry on for profit and there is evidence to support that intention.”

threeHow you report that profit and how you pay tax on it, depends on the type of business structure you are.  There are 3 common types of business structures:

1.  Sole Proprietorship – this business is unincorporated and is owned by one person.  That person is the only person that makes decisions, claims any profit made as their own but can also claim any loss the business may have as well.  In this business structure the owner also carries all legal liabilities which can even extend to the personal property and assets.

A sole proprietor will pay income tax on all profits generated by the business activities by reporting income (or loss) on their personal tax return.

2.  Partnership – this business is comprised of two or more people, corporations or trusts that workpartner together to carry on business.  Each partner contributes to the partnership in some form or another – money, labour, property or skills.  A partnership should have a partnership agreement to determine what share of the profit (or loss) each partner is entitled to.

At tax time each partner includes a share of the partnership income (or loss) on their personal, corporate or trust income tax return depending on the type of partnership the business is.  

3. Corporatbusinession – this type of business is a separate legal entity.  It can own property in its own name separately from the owners.  Owners of the corporation are called shareholders.  They transfer money, property or services to the corporation in the start up phase in exchange for shares. 

Since a corporation has a separate legal existence from the owner, the company must file an income tax return of its own to report and pay tax on the the profit made.  This tax return must be filed within 6 months of the end of each fiscal tax year (not necessarily Dec 31 as with sole proprietors and partnerships).   Complete financial statements must be prepared along with a T2 tax return.  Usually, a corporation will pay taxes in instalments on a quarterly or sometimes even monthly basis.

As a shareholder, the owner of the company has only limited liability (rather than full liability as with the first two business structures).  However that protection is only limited.  A bank may ask for the shareholders personal guarantee that a loan will be paid back.  This also applies to any taxes owing.  If a corporation owes taxes and CRA chooses to intercept any loans or credit lines on account of the tax arrears and if the shareholder has given the bank a personal guarantee, then the shareholder will be jointly liable as well.

Shareholders may also be liable to pay amounts owed by the corporation for any payroll deductions that the corporation may have failed to remit.

Information taken from:  Canada Revenue Website

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Opening a whole new world….

ImageSo here I go…I am entering the world of blogging!  I have used Facebook for awhile now –  both in a personal and business format.  I often find myself posting short bits  of information to my business page and wishing I could elaborate just a little bit more,  give a bit more information,  explain myself a bit further and make everything just a bit clearer.  So…welcome to “Bookkeeping Bits…”  

My intent is to help small business owners with general bookkeeping questions ranging from “How do I organize my records?” to eligible business expenses for tax purposes.  I welcome any comments or requests for information and I will do my best to help!

 

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