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.
Many 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.
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.
Using 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.
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.
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