Running a small business in Canada involves not merely passion or hard efforts. Another life skill to have is also financial management skill. Even a small business needs a basic knowledge of accounting to be able to succeed in the financial aspect.
It provides you with the financial stability of your business, it assists you in the decision-making process, and it allows you to observe tax management. So, in this comprehensive guide we’ll discuss the basics of bookkeeping for small businesses in Canada.
Understanding bookkeeping
Bookkeeping is the correct and equal recording of all of the business’s financial transactions. This involves keeping an honest ledger of what you own or what you owe, your income and your expenditure. Whilst business owners might tend to focus on their capital, they can still view their cash flow, compare their profits with expenses, make financial statements, and calculate their taxes among other things.
Importance of bookkeeping for small companies
1. Financial management
Having the right accounting records will give you a clear picture of the financial performance of your business, which will tell you where it is strong and where it is weak.
2. Decision making
Accuracy of your financial records is the foundation of planning of budgeting, pricing and investments and also a source for further operating growth.
3. Tax compliance
As you keep good records, you will ensure that you do your taxes correctly. This means that your filing will be accurate and above all you will get the highest deductions you deserve.
4. Business growth
The core of your success in getting loans, seeking investors, and expanding your business is your financial records.
Basic bookkeeping principles
1. Separate business and personal finances
In order to finish the tasks fruitfully and have uncomplicated book-keeping, keep a business account open for every business transaction.
2. Keep bills and receipts
Make spare copies of every bill, receipt or contract that takes place in your business. The documents depict what happened and are very valuable for tax deductions and refunds.
3. Record every transaction
Whichever method you have chosen — paper ledgers or accounting software — make sure you record every financial activity every time they occur and in the right way. The different types of deals conducted for making all the sales, running all the operations and payments include sales, purchases, costs, payments, receipts, creation of assets, etc are all examples.
4. Maintain organized records
Organize your financial records in a way that is logical, in other words, by type (for example, wages, bank statements, and so on). g. sales, expenses, assets, inter alia, etc. ). Thus, this will be a key factor for the smoother and more conducive collection of the data and as well as formulation of conclusions.
Bookkeeping Methods
1. Single-entry bookkeeping
Such bookkeeping is suitable for small businesses with simple finances as it only records activities once, either as income or expense.
2. Double-entry bookkeeping
This technique ensures this balance between assets, liabilities, and equity which is employed by all sorts of businesses. Every transaction is recorded in two different books, a debit and a credit.
Essential bookkeeping records
1. Sales journal
It is a record of all sales, including the amounts, dates, order numbers, and information about the customer.
2. Purchase journal
This records all the bills, invoices, the seller’s information, and how a business pays.
3. Cash book
It records all cash activities, for instance, deposits, refunds, and receipts of cash.
4. General ledger
The general ledger is a list of all the financial activities of a business and categorizes them into different accounts such as assets, liabilities, equity, income, and expenses.
5. Accounts payable and receivable
Enables to maintain information about how much money must be paid to suppliers (payable) and how much money should be paid by customers (receivable).
Accounting software for small businesses
1. QuickBooks
QuickBooks is widely used by small businesses because it is easy to use and has tools for billing, managing expenses, payroll, and financial reporting.
2. FreshBooks
FreshBooks is an advanced tool for small personal businesses that can be used for tracking time, making invoices, handling expenses and making reports.
3. Wave
Wave is a free accounting solution designed to meet the needs of small business owners and freelancers. It can be applied to billing, budgeting, payroll, and receipt scanning.
Tax considerations for small businesses in Canada
1. Business registration
To get a business number and pay your taxes you need to register your business with the appropriate government department, e. g. the Canada Revenue Agency (CRA).
2. HST/GST registration
Once you have established your sales for the whole year, find out if your business must register for the Harmonized Sales Tax (HST) or Goods and Services Tax (GST).
3. Tax deductions
Find out about the tax deductions that small businesses can have, for example, rent, utilities, salaries, professional services, and supplies and tools.
4. Income tax filing
Make it a point to properly report your business’s income, costs, and deductions in your annual income tax return in order to keep clear of penalties and audits.
5. Payroll taxes
As a business with employees, you are mandated to withhold and remit to the CRA the payroll taxes which consist of income tax, contributions to the Canada Pension Plan (CPP) as well as the CPP contributions for the Employment Insurance (EI).
Conclusion
Small businesses in Canada should be able to do the basic accounting just to stay in business and make money. Small businessmen will be able to have effective financial management, make wise choices, and facilitate the growth of their business by mastering the basics of bookkeeping, using the best techniques and methods, and complying with tax legislation.Putting bookkeeping at the top of your to-do list will help your small business stay open and prosperous in the years ahead regardless of whether you use software, recording by hand, or hire outside help. Accurate and timely financial record-keeping, whether done in-house or by renowned Airdrie business accounting, is essential for local business growth.
