Small Business Bookkeeping Guide
This step-by-step guide will give you the information you need to make bookkeeping easy for your business regardless which option you choose, DIY, outsource or in-house. We will dive into the following topics:
- Why is bookkeeping important?
- Separate your business transactions from your personal ones.
- Which bookkeeping system should you use?
- How to categorize transactions
- What expenses can you deduct?
- How to use our free bookkeeping template (it’s easy)
- Should you do it yourself or get help?
Why Is Bookkeeping Important?
For most business owners, bookkeeping is a necessary evil. You do it because you have to file an income tax return with the CRA. Compliance with the CRA is just one of the reasons you need to do bookkeeping for your business. There are a number of other reasons why bookkeeping is important.
USEFUL FINANCIAL REPORTING
Bookkeeping done well will allow you to view useful financial reports for your business. It can help you to answer the questions:
- Is your business profitable?
- Where does the cash go each month?
- Which products or services should you focus on?
- Is your business growing, staying the same size, or shrinking?
- Should you keep doing what you’re doing or make some changes?
Bookkeeping allows you to see the information to guide your business decisions. Don’t run your business blindfolded.
If your bookkeeping is up-to-date, you will gain some operational benefits. Up-to-date bookkeeping helps you understand:
- Who owes you money?
- Who do you owe money to?
- How much sales tax and income tax will you owe?
- How much cash does the business have access to?
- How much cash will the business need over the next month, quarter, and year?
This will help you to you avoid penalties and interest on late payments. This especially is important when it’s the CRA that you owe money to.
It also will help you take advantage of upcoming opportunities. Managing your cash flow will allow you to take early payment discounts or stock up when your supplier has a sale.
Yes, compliance is also important for your business. Keep the CRA happy by filing and paying taxes on-time.
Good bookkeeping will also help you to avoid costly and time-consuming audits. It’s far more cost effective and less stressful to get the bookkeeping right the first time around.
Here are a few other reasons why bookkeeping is important:
- Claim every deduction – Proper bookkeeping will make sure that every transaction is recorded accurately. Legitimately claim all tax deductions and back them up with proper supporting documents.
- Catch and correct errors – Keeping the books up-to-date will allow you to catch errors quickly. Bank errors will pop out when doing monthly reconciliations. Customers short-paying invoices will also be caught quickly so you can collect every dollar.
- Obtain business financing – If you need financing for your business, well-kept books will help obtain a business loan. You’ll be able to accurately show your business’ performance and create a forecast to show the bank that the loan will be repaid.
Now that we’ve identified why bookkeeping is important, let’s learn how to make bookkeeping easier and to do it well.
Separate Business Transactions from Personal
We strongly suggest to get a separate business bank account and credit card.
Keeping your business transactions separate from your personal ones is not only to make your book clean but also it will make making bookkeeping easier. If your business transactions are lumped in with your personal ones, you’ll spend hours sorting through them when doing your books.
If business and personal are not separated, the time it takes a bookkeeper or accountant to do your books will sky-rocket. This means you’ll get a much larger bill at the end of it.
HOW TO SEPARATE YOUR ACCOUNTS
It doesn’t have to be complicated. You can simply open a separate bank account within your current bank or credit union and use it strictly for business.
For your credit card, either say yes to one of the many new credit card offers you receive monthly, or just assign one of your existing cards to the business. For example, Joe has a black credit card and a silver credit card. Black is business, silver is personal.
Treat your business finances as a separate entity from your personal finances. Not only will this help make bookkeeping easier, it will help keep you out of trouble with the CRA. They don’t like it when personal items get mixed up in your business.
Which Bookkeeping System Should You Use?
When deciding what system to use for bookkeeping and accounting, it’s good to start with the end in mind. Here is a list of things to think about and questions you might ask yourself:
- Just the Basics – Are you only trying to stay compliant (i.e. just file all of your taxes on time)?
- Reporting – Do you want to review reports and compare them each month?
- Invoicing – Do you plan to use the system to do invoicing?
- Other Functionality – Do you have specific applications you would like to connect to your system (inventory, e-commerce, etc)?
- Growth – Do you need a system that can scale up along with your business?
- Cost – What is your budget for your system? Do you mind spending a bit of cash up front for a system that lasts longer?
We generally see startups and small business owners fall into one of three categories:
- Simple Compliance – Want the simplest and cheapest solution to stay compliant. Keep it easy and keep it cheap (or free).
- A Few Bells and Whistles – Want a little more functionality, such as invoicing and reports, but don’t need many bells and whistles.
- Long-term Solution – Want a system that has robust reporting and app connectivity; a system that will grow with your business.
Regardless of which group you find yourself in, there are good options available. Read on for our recommendations based on each category.
SIMPLE EXCEL SHEET
If you are owner/managed business with no employees and only looking to stay compliant (i.e. keep things organized for tax purposes), our free EXCEL Sheet template is likely all you need.
Just export the transactions from your online banking to the Excel file. Then categorize them via the drop-down menu and you are pretty much done. See below for more info on how to categorize transactions.
- Simple to use
- Difficult to produce a report
- No invoicing available
- No automation
A FEW BELLS AND WHISTLES: WAVE
For a little more automation, reporting and invoicing capability at a still-free cost, you could sign up for Wave.
You can link up your bank feeds so that transactions are automatically imported. Then simply choose the category to record them in.
We recommend going through their training to get started as it can get unwieldy if not set up well. Automation is great, but it can also create a mess if not used properly.
You will get some more reporting options (comparing revenue, expenses, etc.) and you can send nice-looking invoices and collect payment through their app as well. It can also track things like GST, which is a nice part of any system.
- It’s a cloud-based bookkeeping system so you can access it from anywhere there is internet.
- Basic bookkeeping, invoicing and reporting is free.
- Financial reporting to help you understand how your business is doing.
- Invoicing is integrated so you can send invoices and mark them as paid.
- Payment of your invoices can be accepted within Wave (for a fee).
- More initial time-commitment for training and setup.
- It can get ugly if not set up and managed properly (I mean ugly, we have done some big clean up jobs).
- Although the basic system is free, there are costs related with the payroll module as well as with accepting payments (pricing).
- Software integrations and reporting options are limited compared to other systems.
LONG-TERM SOLUTION: QUICKBOOKS AND SAGE
If you are looking to upgrade and get a longer-term solution for a growing business, Quickbooks is a great option. This is our go-to solution for businesses that have any plans for growth.
You get all of the benefits of Wave, plus it’s a more stable platform and allows for more reporting options and links to other apps. The automation is also better, making bookkeeping faster and easier.
It does need to be set up properly to be useful, which we always suggest is done by someone who knows what they are doing. We also recommend going through their training modules; they have a robust section with videos and how-to articles.
- Comprehensive reporting which is easy to use and allows for great level of customization
- More automation allows for more efficient and accurate bookkeeping.
- Able to scale along with growing businesses.
- Qucikbooks is a mature platform from an organization that aims to be the best in class.
- There is a monthly subscription fee (pricing). We do have coupon codes, though. Reach out if you’re interested in signing up.
- It is still easy to make a mess if not set up well or if you’re not familiar with how the software works.
WHICH SHOULD YOU CHOOSE?
In the end, it pays to spend some time understanding what you hope to get from any bookkeeping system.
It’s also helpful to be honest with yourself. A business needs to have a bookkeeping system so be sure you are able to use it, or that you are willing to learn how to use it. There is no judgment here – we all have our strengths and being honest with yourself can save your business.
Ask yourself the questions above to help determine which system is right for you. If you still aren’t sure, contact us and we’ll help point you in the right direction.
How to Categorize Transactions
Another common question we often get is “how should I record _____?”. More often than not, the answer is to put it in a category that makes sense to you.
Generally, you want to glance at your financial statements and understand where your money is coming from and where it is going. There are also specific tax deduction rules, but we’ll talk about those in the next section.
KEEP IT SIMPLE
We also like to tell our clients to keep it simple. We often see that people use 50-60 expense accounts, and many of these accounts contains only one or two transactions. This can make financial statements pretty difficult to read.
A common example is vehicle expenses that look like this:
- Vehicle – Fuel
- Vehicle – Insurance
- Vehicle – Parking
- Vehicle – Repairs
- Vehicle – Registration
If it truly is helpful for you to understand vehicle costs in this much detail, then do it. Otherwise, just stick with one vehicle expense account. This applies to insurance, office expenses, cost of labour, advertising, etc.
If you’re creating a new account to record a transaction, make sure you know why you want to break it out separately.
TRANSACTION CATEGORIES EXPLAINED
For this tutorial we’re going to stick with the most common categories that you’ll use when completing your bookkeeping.
Sales – Revenue that you earn from selling products or services. If it’s helpful to track different categories of sales, create multiple accounts (sales – services, sales – products, etc.).
Cost of Sales – Direct costs involved in making sales. This could include costs of products sold, costs of shipping products or costs incurred directly while providing services (eg. contract labour costs of a construction company).
Advertising – Costs incurred to promote your business. This could include various types of costs: print ads, online ads, marketing consultants, trade shows, etc.
Bank Charges and Interest – Bank fees and interest incurred on borrowed funds. Sometimes it’s helpful to break out interest on bank loans as a separate category to better understand how much debt is costing your business.
Insurance – Insurance purchased to run your business. This could include general liability, professional liability, errors and omissions, property insurance etc. You could include vehicle insurance in here as well, but we like to lump that in with vehicle costs.
Licenses and Dues – Fees that the business pays related to licensing or professional dues go here. For example, Avalon Accounting pays licensing fees to CPABC; we would include those in here.
Meals and Entertainment – Meals and entertainment costs related to your business activities. For example, taking clients out for drinks or treating your staff to lunch. This category should be separate from others as it is treated differently for tax purposes.
Office Expenses – Small supplies and office related expenses. Some examples include pens and paper, printer ink, and stamps. These items are generally consumable in nature and don’t last longer than one year.
Professional Fees – Include costs paid relating to professional services. Some common examples include fees paid to your accountant or lawyer.
Rent – Costs incurred to rent an office space, storage or other facility used by your business. If your business rents equipment, you could also include it here or break it out as a separate line item.
Subcontractors – If your business hires subcontract labour, include these costs here.
Software Subscriptions – Include monthly software subscription costs here. Monthly web hosting, email accounts, accounting software, CRM costs, etc.
Telephone and Utilities – Include utility costs incurred to run your business. Some examples include: phone plans, internet services, electricity, heat and natural gas.
Travel – Travel and accommodation costs go here. Flights, hotels, car rentals, parking, taxis and ride sharing are all examples of travel expenses.
Vehicle Expenses – Operating costs for vehicles used in the business. Some examples include fuel, licensing costs, vehicle insurance, and repairs.
Wages and Benefits – Costs related to paying employees go here. Unless you want to see them broken out separately, include: salaries, wages, CPP expense, EI expense, worksafe and employee benefits.
Inventory – Any items that you purchase or manufacture for resale. A fitness centre that sells whey protein would include purchases of protein powder as inventory.
Furniture and Equipment – Office equipment and furniture that will last longer than one year should go into this asset category.
Computer Equipment – Computers, monitors, computer peripherals that last longer than one year go into this asset account.
Suspense – We often see this account and bookkeepers just end up throwing things in suspense that they aren’t sure how to categorize. The more you and your bookkeeper record transactions in this account, the more you need a professional help.
Categorizing transactions doesn’t need to be complicated. I know I’m repeating myself, but the idea is to record transactions so that your financial statements make sense to you.
Save time and make your financials relevant by keeping it simple.
What Expenses Can You Deduct?
Now that we’ve looked at how to categorize transactions, we’ll add another layer by explaining what expenses are deductible for tax purposes.
This could be a ten page article in itself, but we’ll keep it to the basics which should be enough for 95% of the expenses you’ll come across. For more detail, the CRA has a good resource which you can find here. It’s actually pretty user-friendly!
According to the Canadian Income Tax Act: in general, you can deduct any reasonable current expense incurred to earn business income.
OK, so we need to know what a current expense is and how to determine if it was incurred to earn business income.
As with most accounting and tax issues, there are exceptions so we’ll also look at some of those.
CURRENT VS. CAPITAL EXPENDITURE
The idea here is that current expenses are generally deductible in the current year (right away) whereas capital expenses are deducted over the useful life of the purchase (over a few years).
Some criteria to differentiate between current and capital expenses are:
- Lasting benefit – Capital expenses provide a benefit lasting longer than one year. Current expenses reoccur after a short period of time.
- Maintenance vs. improvement – Capital expenses improve property from its original state, whereas current expenses restore property only up to its original condition.
- New assets vs. repair of already owned assets – Capital expenses are generally new property or equipment whereas current expenses generally repair part of an existing piece of equipment or property.
Here are some examples to help you apply the criteria:
- Purchasing a computer is a new asset and has a lasting benefit so could be considered a capital expenditure.
- Replacing wooden stairs with concrete stairs would likely increase the life of the stairs so could be considered a capital expense.
- Purchase of a new telephone is also a capital expenditure as it has a lasting benefit and is a new piece of equipment.
- Repairing an old computer to allow it to function again would be a current expense as it’s maintenance and not an improvement.
- Replacing wooden stairs with wooden stairs would bring the stairs back to original condition so could be considered current.
- Paying your monthly bill for phone usage would be a current expense as it reoccurs after a short period of time.
INCURRED TO EARN BUSINESS INCOME
The next issue to consider is whether the expense is reasonable and is incurred for the purpose of earning business income.
Reasonable – For example, it would usually be reasonable for a software developer to claim internet costs, but it might not be reasonable for a contract construction worker to do the same. The issue is whether the expense is actually used in the business to earn income or grow the business.
Incurred for Business – There also may be expenses that can be attributed to the business, but for which there could be a personal component. The personal component isn’t eligible to deduct. For example, if you use the same cell phone for both business and personal reasons, then it is reasonable to claim only the costs that relate to business use.
You may have to estimate this, keeping in mind whether the estimated business use is reasonable or not.
Using the same thought process, personal expenses that cannot be linked to earning business income (personal travel, meals, clothing etc.) wouldn’t be eligible business expenses.
EXCEPTIONS AND SPECIFIC RULES
We often see questions about these specific rules and exceptions.
Meals and Entertainment – When meals and entertainment expenses are incurred for business purposes, they are still only 50% deductible for tax purposes. It is important to keep track of the business reason for the M&E expense and who it was with.
If you pay for a meal because you’ve forgotten your lunch for the day, it most likely isn’t deductible.
Vehicle Related Expenses – You can deduct expenses you incur to run a motor vehicle that you use to earn business income. Again, personal related use is not eligible, so costs may need to be prorated based on personal vs. business use.
Personal use includes travel to and from your regular place of work.
Home Office Expenses – You can deduct home office expenses as long as the space is either your principal place of business, or you use it only to earn business income and regularly meet clients, customers or patients there.
You can deduct a portion of your utilities costs, maintenance costs, property taxes, and mortgage interest.
To calculate the part you can deduct, use a reasonable basis such as the area of the work space divided by the total area of your home.
Gym and Golf Memberships – In most cases, you cannot deduct club membership dues if the main purpose of the club is dining, recreation, or sporting activities.
- Business Expense Discussion – A general discussion and additional detail about various types of business expenses on the Government of Canada website.
- Motor Vehicle Expenses – A thorough discussion on claiming motor vehicle expenses including useful information on keeping a logbook to claim these costs.
- Business Use of Home – Further detail on claiming home office expenses.
We know it’s not always as straightforward as in the examples, so don’t hesitate to reach out if you have questions.
How to Use Our Bookkeeping Template
We’ve created a bookkeeping template in Excel that you can use for your small business. It’s simple and quick to use, and best of all, it’s free.
If you’re a sole proprietor or your business is fairly simple, this should be all you need to do your bookkeeping.
- Excel Sheet – Download our bookkeeping template here.
- Make a Copy – Make a copy of the Google Sheet: Click “File” and “Save as” and save it to your computer.
- Front Page – Enter your name and the year.
- Your Information – Answer the home office question. If you need to record home office expenses, you’ll fill out the “Home Office” tab of the sheet (more on that later).
- Download Your Transactions – Download a CSV file of your transactions from your online bank and credit card accounts.
- Paste Transactions In the Sheet – Paste your transactions into the “Bank” section of the sheet. Enter the gross amount of your transactions first and make sure that the amounts are all positive numbers.
- Categorize Your Transactions – Use the drop-down menu in column “F” to categorize each transaction.
- If you’re registered for GST/HST, you may break out the GST/HST amounts when doing your bookkeeping. The sheet will calculate net amount of the transaction, so input tax credit can be tracked.
HOME OFFICE INSTRUCTIONS
If you run your business out of your home, you may be able to deduct a portion of your rent, utilities and other home expenses. Your home office must be used exclusively for business or must be the principal place that you conduct your business.
We’ve added a “home office” tab to the bookkeeping sheet so you can record your home office expenses.
- Home Office Tab – Go to the green home office tab at the bottom of the sheet.
- Home Office Info – Enter the total size of your home and the total size of your home office. This will then be used to calculate the portion of home expenses that are eligible to claim as home office expenses.
- Home Expenses – Enter the full amount of your annual home expenses into the categories.
- Eligible Home Office Amount – The sheet will then calculate the eligible amount of these expenses and enter it into the income statement as an expense.
If you have any trouble with the bookkeeping template, please let us know. We’re happy to help!
Should You Do It Yourself or Get Help?
It’s Gotta Get Done No doubt about it, if you are running a small business, you need to have your books done.
There are a few different ways you can go here. Here’s a breakdown of the options that a small business owner has, the cost associated with each, the pros and cons and a summary of who might be a fit for each type.
Essentially, you have three different options when deciding who will complete your bookkeeping:
- Do It Yourself – Roll up your sleeves and dive in.
- Outsource It – Hire an external bookkeeper or accountant.
- Insource It – Hire a dedicated employee to look after your bookkeeping.
Let’s take a few minutes to understand the different options in terms of cost, pros, cons and who it might be best for.
DO IT YOURSELF BOOKKEEPING
You’ll be learning how to do your own bookkeeping and taking some time in the evenings and weekends to do your books when you have extra free time without the need to consider to grow your business.
Cost – Your time and energy. This can be a good option early in your entrepreneurship journey as you will have some energy to work your weekends and evenings.
- Low Cost – You can keep your costs low (it will just cost you time and energy).
- Learning – You can learn a new, valuable skill.
- Insight – You will be recording all of your transactions so you’ll be aware of where your money is coming from and going.
- Focus – Early in the growth sage, you may have a lot of energy, but is there something else you could be focusing on that would move your business ahead?
- Procrastination – There’s a temptation to put off these types of tasks until they are urgent (or past due) and this can cause a lot of stress (or worse).
- Context Switching – When you move from one type of task to another, it costs a lot of energy and produces a lot of resistance.
- Mistakes – When you are doing it yourself, it’s more likely you will make mistakes.
- Learning Curve – This may take a lot of time at first (but will get faster as you get better).
Training – If you’re going the DIY route, get some training on how to do your bookkeeping. It doesn’t have to be complicated, but having someone point you in the right direction can be a great start.
Know Yourself – Can you keep a rhythm up and do the work on a regular basis? If you think you will fall behind or you are not interested in doing the work, it might be good to hire someone to look after it for you.
Support – Have someone to reach out to if you get stuck. DIY bookkeeping is generally not complicated, but there will be times when a quick answer to your question will save a lot of trouble.
Who It’s For – DIY is a good option for businesses that are starting out and have an organized and financially savvy owner. It’s a good idea to mitigate any downsides by be friending a professional bookkeeper that you can ask questions to if you get stuck.
Seek out a professional bookkeeping/accounting firm and hire a professional bookkeeper to look after your books.
Cost – There is a wide range of cost depending on your needs and the qualifications of the bookkeeper. Costs range between $100 to – $2,000+ per month or you could look at hourly rates which range from $25/hour to $80/hour depending on qualifications.
- Continuity – If you decide to go with a company that offers these services, it’s less likely you will have to recruit, retain and manage this role.
- Privacy – You won’t have someone on your team that knows the ins and outs of your financial state.
- Focus – By outsourcing this function, you and your employees are free to do what you do best (sell and deliver your product or service).
- Accuracy – A full service bookkeeping company will have a review process for the work to make sure there are no errors.
- Back-up – Bookkeeping companies have staff to cover vacations or employee absences, so filings are not missed and reports are up to date.
- Industry Knowledge – In certain industries (like retail or manufacturing), it is helpful to have an “on the ground” person that knows the day-to-day. They can apply this knowledge to the books and prevent costly back-and-forth.
- Cost – The cost can be high with this option. You will (hopefully) be paying for expert service.
- Quality – Unfortunately, there are a lot of poor quality providers out there. When interviewing a bookkeeping company, make sure to ask questions to meet your expectations
Who It’s For – Outsourcing is a good option for businesses that have a solid idea of what they are selling and can make use of the time savings that outsourcing gives them. It can also be a good option for business owners that know they won’t do the bookkeeping themselves.
Outsourcing your bookkeeping is more costly than doing it yourself, but can free you up to focus on what you do best, therefore allowing your business to grow. A good bookkeeper will give you relevant information and peace of mind. Finding a trusted accounting or bookkeeping firm is the key to success in building an outsourced relationship.
HIRE A BOOKKEEPER INTERNALLY
Hire an internal bookkeeper that will be part of your regular staff.
Cost – You could expect to pay an internal bookkeeper a wage ranging from $20/hour to $35/hour depending on qualifications. If it’s a full time position that comes out to $40,000 – 65,000 per year plus payroll taxes and benefits (add about 10%).
- Dedicated – You will have someone dedicated on your team that has their feet on the ground of your business so will know the comings and goings. This can reduce back-and-forth communication with you, the business owner.
- Flexibility – You can use any spare time they may have for other projects or administrative work.
- Complexity – A qualified person can handle complexity and project work better than other options because they are working in the business every day.
- Capacity – You may not have enough work for a full-time person, leaving them with little to do.
- Training – If you are going for a low-cost employee they may need training.
- Turnover – If you cannot provide full time work or are hiring entry-level workers, you will likely face turnover, which is an administrative burden.
- Managing – Employees need management. They need to know what to do and how to do it. They also go on vacation and leaves of absence. They have children, get married and get sick.
- Expertise – There is a tendency for small businesses to use their admin person to complete the bookkeeping, which can cause stress on that person. They were likely hired for their friendly and outgoing nature, not their bookkeeping skills.
Who It’s For – Insourcing is a good option for companies that have complex operations such as manufacturing, retail and restaurant groups. It can also be a good option if you have administrative staff with some capacity and willingness to learn bookkeeping. It’s also a good option for companies that have reached a size that they can afford a full-time qualified professional to do the work.
WHICH SHOULD YOU CHOOSE?
There is no one-size-fits-all answer to small business bookkeeping. Understanding the pros and cons of each type of bookkeeping should help you decide on which option is for you.
We’re always here to answer questions and give you a fair assessment of whether outsourced or another option is best for you.
If you think that outsourced bookkeeping is a good option for you, please contact us. We will happily chat through any questions that you have to see if the bookkeeping service at TAO LI CPA is a good fit for you. Wherever you are, we’ve got your finances covered. Fill out the form and we’ll send you the pricing on our comprehensive bookkeeping solutions.