Many people have an outdated view of bookkeeping. Most imagine a scene out of A Christmas Carol or Gringotts’s Bank where a goblin is bent over an enormous ledger making minute entries. When I took accounting in high school, we were still taught the ledger method. Luckily, technology has replaced paper and eliminated a lot of the drudgery. If you’re wanting to know where to start bookkeeping for your small business, here’s what we would recommend.
First, an explanation of the terms
Bookkeeping is the process of recording and organizing your business transactions. It is a critical component of accounting; without it companies would be not able to produce meaningful records for owners and compliance.
The simplest businesses can use a spreadsheet such as excel to summarize their data. We have several templates available for download which can help you summarize your expenses. We would caution that this is only be used for a sole proprietor and not adequate for businesses with employees or incorporated businesses.
Most businesses will choose to employ an accounting system such as QuickBooks, Xero or Sage to keep track of their accounts. These smart apps can be linked to feeds from your bank eliminating painful data entry tasks and automating repeating tasks. Using the same software to print cheques, run payroll and collect credit card payments eliminates double entries.
What can a bookkeeper do?
Your bookkeeper’s duties can include the full cycle from data entry, bank reconciliations, payroll, accounts payable, accounts receivable, sales tax compliance, tax installments and monthly reporting. Your bookkeeper can also be responsible for administrative tasks such as filing and records retention.
What is included in data entry?
Data entry is the process of recording transactions usually from a bank or credit card statement, feed or from physical receipts. The payee, amounts, method of payment, date and sales taxes must be recorded accurately in order to provide accurate records and a valid audit trail for future enquiries.
What is compliance?
Compliance is the work to satisfy government and regulatory requirements. Reporting requirements differ for most businesses but we recommend quarterly reporting for HST to match the government requirement for installment payments. Payroll taxes withheld are due the following month in most cases. Interest on delayed or late installments as well as penalties are non deductible – this is a needless double tax and an easy way to save money.
What are accounts receivable?
Accounts receivable is the process of sending invoices, monitoring payment terms, receiving payments and recording same. Customers are going to try to use your accounts receivable to increase their cash flow by holding your payment until the last minute. We regularly see construction projects where the subcontractors are floating a big percentage of the project. A good bookkeeping practice is to regularly review your receivables, remind customers when a payment deadline is coming up and quickly follow up with them if payments are late.
What are accounts payable?
Accounts payable – getting your bills paid on time while maintaining an adequate cushion is critical to weathering unexpected events. Accounts payable will maintain your own records of amounts owing and ensure that what you’ve been billed for matches any outstanding balances. If you’re not watching, who is? If a vendor gives a discount for a quick payment, it’s usually best to pay by their early deadline.
What is bank reconciliation?
A bank reconciliation is a procedure to agree the balance in your accounting ledger matches the balance in your bank statements. Cheques that have been issued but not cashed, bank fees and unrecorded transactions may cause differences between the balances and need to be recognized. Bank reconciliations are critical to ensure accuracy and completeness of amounts in your bank and credit cards. Most banks give you only 60 days to dispute transactions so its very important to keep on top of these.
As you can see, bookkeeping is much more than dusty ledgers and accounts. Bookkeeping is a critical component of your operations. A good bookkeeper is an investment in the long-term success of your business.
Next, a few considerations before you start
Some things to think about before your start…
- First you have to decide how hands-on you want to be with your bookkeeping.
Do you want to handle your own accounts payable & receivables? Your own expenses & deposits? Transfers between accounts? - What kind of software do you want to use? If you have a small business with low to medium activity simply summarizing your transactions in a spreadsheet may be enough but for higher activity businesses or corporations you need to start thinking about what kind of accounting software is best for your business.
- Update your books regularly. Consider how often you want your books up-to-date. Monthly, quarterly or annually. The more active your business is the more beneficial it is to keep it up-to-date.
Finally, some bookkeeping best practices
- Have a condensed chart of accounts. Having less accounts makes the reports easier to read. It may not be necessary for you to break down your Cost of Goods Sold into five or more subcategories. Consider what YOU want to see when you look at your balance sheet. Less is more.
- Keep ALL of your receipts and invoices. Whether physical or digital make sure you keep backups of everything. If the CRA ever wants to review any figures on your tax filings you need to have the itemized backups.
- Put vendor names on all transactions. This makes it easier for your accountant to catch any errors. For example; if Home Depot is always job materials… if there is a Home Depot transaction under office supplies it’s a flag for your accountant to follow up on.
- No unreconciled transactions. If a transaction isn’t reconciled by the end of the month address it ASAP before it snowballs into a bigger issue.
- Avoid payments from personal accounts or cash if possible. Instead, consider transferring funds into the business. This makes transactions much easier to record and keep track of. If you pay a vendor with cash or a personal bank account you shouldn’t record that as paid from a business bank account or credit card. A simple rule of thumb would be that all transactions for your business should be made from a business account.
- No uncategorized transactions. Avoid using miscellaneous accounts to record transactions. If you’re not sure how you should classify an item, reach out to your accountant.
- Furniture, equipment & other assets. Any large purchase such as computers, laptops, vehicles or large mechanical equipment need to be classified differently on your books along with any loans to obtain them. Ensure you keep all loan/lease agreements and receipts for any large purchases and provide them to your accountant to ensure they make it on the books properly.