While accountants are responsible for analyzing the data provided in the records of a company, the bookkeeper must collect and organize this data. This makes their job equally important because poor record management can lead to inaccuracies in the accountant’s reports.
By utilizing the company records (invoices, billing, payroll, taxes, receipts, etc.), a company can forecast their future revenues, profits, and expected costs.
On top of this, the company will be able to provide more advanced reports to their stakeholders and have a stronger understanding of future performance.
The importance of bookkeeping
By organizing your records properly, you can easily claim tax deductions on eligible expenses and back them up with proper documentation. Additionally, you can find errors and fix them early. For example, finding partial payments on invoices or errors in a transaction.
One understated benefit of bookkeeping is the ability to predict your future financial and operational situation, which in turn allows you to seek business financing.
For example, you can determine how much money you owe and how much is owed to you.
Determining your bookkeeping needs
A number of options can be recommended based on company size and level of bookkeeping.
For someone who is simply looking to manage their records and comply with CRA, a simple Google sheet / Microsoft Excel document will suffice.
A company may dispose of their financial records six years after the tax year they were received*. In the meantime, it is best to keep them safe and labeled in a cabinet or alternatively, in a secure cloud or database online.
How does bookkeeping work?
The traditional method of bookkeeping is to take a pen and paper on a ledger note or use Microsoft Excel / Google Sheet to do the same thing.
However, many businesses opt to use online cloud-based solutions to quickly track and update their financial records. With integrations to online banking, records can be automatically entered into your digital ledger.
In double entry bookkeeping (recommended), you track every transaction twice in the form of a debit and credit.
Here’s how Account Types track debits and credits:
In order to organize your books, you will want to keep things minimal, without getting too broad or too specific. For example, when categorizing a sale, do you offer multiple types of products and services at your business? When looking at advertising, do you plan to use digital and print ads? More times than not, there won’t be a need to separate the two types of ads. They can all go under advertising expenses. Depending on your business, you may want to separate the products from the services.
When it comes to deducting eligible expenses, you must look at reasonableness and usage of an expense. Do you need this expense in order to earn income? Which part of this expense is used personally and which part for business? For example, using one vehicle for both personal and business use.
Cash vs Accrual
In cash bookkeeping, you record the transaction on the date that the money changed hands. In accrual bookkeeping, you record the transaction on the date of the invoice.
The decision of which type to pick for your business depends on factors like business size and complexity. In general, the accrual method is more accurate and is the chosen method for large corporations in Canada.
FIFO vs LIFO
To determine your cost of goods sold, there are two methods called FIFO and LIFO. FIFO, short for "First in, First out" means the oldest products will be sold first. Whereas, LIFO, short for "Last in, First out" assumes the opposite. FIFO is best exemplified by a grocery store where older stock usually gets sold first so that the produce does not get spoiled. It is important to note these are not methods for actual tracking of inventory.
The FIFO method is much better in practice since it is more typical of a business’ natural inventory flow. This will usually lead to less chances for mistakes when it comes to bookkeeping. However, by using the LIFO method, the profits will usually be understated and lead to less tax.
Both methods are valid under the GAAP (Generally Accepted Accounting Principles).
Net Present Value (NPV)
Bookkeepers will also calculate the NPV of any given project to determine its worth in pursuing.
Accounts Receivable is the money owed to you after a service or sale. This money is set to be received by you. By tracking those who owe you and have paid versus those who have not, you can determine accounts receivable turnover ratio.
Accounts Payable is the money you owe to suppliers. AP is an expense account. There are also prepaid expenses such as rent or subscription services which are paid and placed in the AP before the benefit is received. By using an accrual method of bookkeeping, you can better account for prepaid expenses.
By balancing AP and AR, you will get a net income result. To determine your profit margin, divide the net income by net sales. A narrow profit margin means a small ratio income to debt.
When hiring your first employee, you will have to set up a payroll schedule and learn how and which taxes to withhold. Be sure to track how much you are paying them whether they are employees or contractors. For more information, check out this Shopify Article on Payroll.
One way to ensure maximized return is to determine categories of expenses and make a labeled folder for each of these categories. By managing this way, you can easily file your expense invoices/receipts and save time for expense calculations.
Separate your business transactions from your personal spending. A simple way to do this is to register for a business bank account and credit card. By using this newly created account only for business transactions, you can have a much easier time bookkeeping.
Don’t place 100% trust in one person when it comes to financials. It is important to have security checks in places. Be sure that the one who handles the cash does not also record the transaction.
One of the best kept secrets in the small business community are Health Spending Accounts. They turn after-tax personal medical expenses into a before-tax business expense. To learn more, download one of the guides below based on your business setup: