ERTaxBytes: Accounting and Keeping Records

Each time you engaged yourself in a business, either in a proprietorship, partnership or in a separate incorporated company, you are responsible to keep your business records, separate from your personal ones. In order to do this, you have to create an accounting system that is suited for the size and complexity of your business. Taking account of your business operation gives you a good picture of your financial position either you are making profit or not. In addition, Canada Revenue Agency (CRA) requires individual and business taxpayers to keep records for their annual filing of tax returns requirement.

Now you are wondering where to start? If you are operating as a proprietor or a partnership, and you are comfortable of these items recorded and listed in these CRA business guide and Business and Professional Statement, you might be able to do your bookkeeping on your own, and won’t need to hire a bookkeeper or an accountant to do your books. However if you want to learn a simple bookkeeping on your own, I recommend that you follow these steps:

1. Make a list of possible accounts

Making a list of possible accounts that would apply to the type of company you have will make it easier to do your bookkeeping. Start with accounts that will be included in your two main financial statements, the Income Statement and the Balance Sheet. Income Statement is the one that accounts of your day-to-day operating activities. This is where you account for all your related income and expenses.

The Balance Sheet accounts show your financial position of your business. Balance Sheet keeps records of what you have, like your assets, records of what you owe, like your liabilities, and also your company’s net worth, through owner’s equity section.

2. Recording of each business related transactions

Each business related transactions should be recorded in a systemized manner. You can start by journalizing them, using the “debit and credit” equation. Debit is what you received and credit is what you have given in return. The debit and credit equation works both for your Income Statement and Balance Sheet accounts.

If you are using a computerized accounting system, once you entered these amounts, they will automatically update your related financial statements. However, if you are using a manual accounting system, once you finished journalizing each transaction, they will be grouped and placed into the general ledger. The general ledger groups each related transaction and provides the total balance amount for your Income Statement and Balance Sheet presentation.

Before placing each account to your Income Statement and Balance Sheet, you have to do an adjusting Trial Balance. Any accounts that required adjustment such as fixed assets depreciation and depletion accumulated during the year, any prepaid assets used and accrued expenses payable during the operating period have to be accounted. Also, adjusting trial balance is a good way of correcting recorded errors that occurred during the year.

Once you are done with the adjusting trial balance, it is time to transfer these amounts to your Income Statement and Balance Sheet. For the Income Statement, transfer all the total balance of each account to get to your net income for the year. This net income will be transferred to your Balance Sheet and placed to an account called, Retained Earnings. Retained Earnings keep records of all the net income accumulated in the prior and current year, and will be included in your Owner’s Equity of your Balance Sheet. Any prior period adjustment to your income and expenses will be adjusted to your beginning balance of your current year’s Statement of Retained Earning.

3. Presentation of Financial Statements to Intended Recipients

Intended recipients are decision-makers who use financial statements to see the true picture of the business operation and the financial position of the company. Also, these financial statements are used as basis and information in filing your individual income tax returns for proprietorship and partnership organization, and for a corporate tax return if the company is a separate entity.

Bookkeeping is a very important part of doing business. Keeping proper records will not only make your company see the true picture of your business operation, but you can use these records to prospective investors and creditors should you require additional financing or capital for your business to grow. Also, by law, CRA requires that you keep your individual and business records for a certain length of time should they decide to check on the validity and accuracy of your tax returns filed. In addition, good bookkeeping is not only good for keeping records but also using as a good strategy in maximizing your benefits during tax time. Knowing proper accounting and good income tax return preparation will likely save you from unnecessary taxes payable. If your business is a little complex, hire a good bookkeeper to do your books. Also, if you must, get the help of an accountant before filing your tax return to CRA, you’ll be surprised how much you saved, even after paying them, since you have the advantage of maximizing the tax benefits you received allowable by law.