Small Business Bookkeeping Guide
Bookkeeping doesn’t have to be difficult. This step-by-step guide will give you all of the information you need to make bookkeeping easy for your Canadian business.
We will dive into the following topics:
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.
Bookkeeping done well will allow you to view useful financial reports for your business. It can help you to answer the questions:
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:
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:
Now that we’ve identified why bookkeeping is important, let’s learn how to make bookkeeping easier and to do it well.
If you take one piece of advice from this article, let it be this one: get a separate business bank account and credit card.
Keeping your business transactions separate from your personal ones is the first step to 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.
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 at Avalon 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.
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:
We generally see startups and small business owners fall into one of three categories:
Regardless of which group you find yourself in, there are good options available. Read on for our recommendations based on each category.
If you are only looking to stay compliant (i.e. keep things organized for tax purposes), our free Google Sheet template is likely all you need.
Just export the transactions from your online banking to an Excel file and paste them in the Google sheet. Then categorize them via the drop-down menu and you are pretty much done. See below for more info on how to categorize transactions.
The video instructions below will help you use it
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.
If you are looking to upgrade and get a longer-term solution for a growing business, Xero 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.
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, send us a message and we’ll help point you in the right direction.
Another common question we 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.
We also like to tell people to keep it simple. We often see that people use 50-60 expense accounts which can make financial statements pretty difficult to read.
A common example is vehicle expenses that look like this:
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, people costs, 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.
We start with a basic chart of accounts for new businesses and then add accounts as needed. For a copy of our basic chart of accounts template that you can import into Xero, click this link. Download the CSV file and import the chart of accounts in Xero.
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 (see the next section on tax deductions).
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. See our article on whether your workers are contractors or employees for more info.
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. You’ll learn about the difference between assets and expenses in the next section.
Computer Equipment - Computers, monitors, computer peripherals that last longer than one year go into this asset account.
Suspense - Don’t use a suspense account. We often see this account and bookkeepers just end up throwing things in suspense that they aren’t sure how to categorize. Don’t use suspense. Pick one of the other categories and move on.
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.
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.
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:
Here are some examples to help you apply the criteria:
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.
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.
We know it's not always as straightforward as in the examples, so don't hesitate to reach out if you have questions.
We’ve created a bookkeeping template in Google Sheets 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.
Check out this short video for instructions on how to use the bookkeeping template.
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. More info here.
We’ve added a home office tab to the bookkeeping sheet so you can record your home office expenses.
If you’ve broken out the GST/HST amounts when doing your bookkeeping, the sheet will calculate GST/HST collected and paid. See the orange GST/HST tab for figures that you can use to help you prepare your return.
If you have any trouble with the bookkeeping template, please let us know. We’re happy to 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:
Let's take a few minutes to understand the different options in terms of cost, pros, cons and who it might be best for.
You’ll be learning how to do your own bookkeeping and taking some time in the evenings and weekends to do your books.
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.
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 befriending a professional bookkeeper that you can ask questions to if you get stuck.
Seek out a professional bookkeeping firm and hire a professional 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.
You can see some of our pricing examples for costs based on a few different scenarios.
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.
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 $15/hour to $25/hour depending on qualifications. If it’s a full time position that comes out to $30,000 - 50,000 per year plus payroll taxes and benefits (add about 10%).
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.
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 reach out. We will happily chat through any questions that you have to see if Avalon is a good fit for you. Wherever you are on the Entrepreneur’s Roadmap, we’ve got your finances covered.
We’ve tried to put together a guide that will answer your small business bookkeeping questions and point you in the right direction. However, we can’t cover everything in one article, so here are some other useful resources.
Bookkeeping and Accounting
Taxes and Deductions