Small Business Guide: How to Do Your Own Bookkeeping

Small Business Guide: How to Do Your Own Bookkeeping

If you recently started a small business or are looking to improve your business’s financial management, the next step is developing a comprehensive bookkeeping system.

That can seem like a daunting prospect, especially if you don’t have the knowledge or experience to record financial transactions and translate them into usable records and reports, but with a good understanding of the basics, it doesn’t have to be.

Let’s take a closer look at what every Canadian small business owner needs to know about bookkeeping to ensure sustainable business growth.

Table of Contents

What is Bookkeeping?

Bookkeeping is a process that involves the systematic recording of financial transactions that occur between your business and other parties on a day-to-day basis. Even though bookkeeping occurs within the spectrum of business accounting, there are several differences between these two processes.

In essence, bookkeeping involves identifying, measuring, and recording all financial transactions, while accounting involves interpreting and analyzing financial data to make critical business decisions.

The bookkeeping process also doesn’t include drawing up financial reports, such as an income statement or balance sheet. The preparation of financial reports is one of the steps in the accounting cycle. However, in some cases, experienced bookkeepers may generate financial reports as part of their activities.

The most common bookkeeping tasks include:

  • Making deposits
  • Issuing invoices
  • Paying accounts
  • Recording journal entries for all payments and receipts
  • Filing a source document for every journal entry
  • Posting the journal entries to the general ledger
  • Drawing up trial balances and cash flow statements
  • Carrying out bank reconciliations
  • Compiling payroll records
  • Filing tax returns

 

Bookkeeping may involve the making of profit or loss projections. However, when it comes to long-term analyses, you need the services of a qualified accountant.

The Importance of Bookkeeping

Thorough and accurate bookkeeping is critical to the survival of any business, including yours.

Accurate Financial Data Tracking

Maintaining a Healthy Cash Flow

Thorough Financial Data Reporting

Evaluate Your Business Performance

Building a Chart of Accounts for Your Small Business

A chart of accounts is a framework for organizing all your business’s financial data and keeping it ready for when you draw up financial statements. In other words, your chart of accounts is an index you use to identify transactions as you post them to your general ledger. Setting your business’s chart of accounts should also be the first step in developing your business’s bookkeeping system.

The accounts on your chart depend on your business activities. For example, an online service business typically doesn’t have a shipping or inventory account. However, you should include accounts that your business doesn’t have now but may add in the future, such as salaries and wages.

Ideally, your chart of accounts should have a numbering system with a code for each account category. Account categories include:

  • Assets
  • Liabilities
  • Positive owner’s equity (income)
  • Negative owner’s equity (expenses)

 

Below, we take an in-depth look at each of these categories.

Assets

Liabilities

Owner’s Equity

Income

Expenses

Single-Entry vs. Double-Entry Bookkeeping

After developing your business’s chart of accounts, the next step is to decide whether you will implement the single-entry or double-entry bookkeeping system.

Single-Entry Bookkeeping

Double-Entry Bookkeeping

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The Difference Between the Cash and Accrual Accounting

The difference between the cash and accrual accounting methods is significant in bookkeeping and involves the timing of recording income and expenses in your accounts.

Cash-based accounting only recognizes a transaction when there is an exchange of cash. You only report revenue in your income statement if your business received the cash in your bank account. Similarly, you only record expenses if the cash leaves your bank account.

The cash method is straightforward, as it doesn’t take the time you delivered the service, sent the invoice, or signed the contract into account. Small business owners often select this accounting method to ensure they stay on top of their cash flow management. Cash-based accounting is also acceptable for tax purposes, provided that your business remains below the prescribed revenue threshold.

With accrual accounting, you record the transaction when it takes place and not when there is a cash exchange. In other words, with this method, you report revenue when your business earns it, and you report expenses when your business incurs it.

For example, if you sell goods to a customer on credit in July and your customer pays the account in September, you will report the income in July.

Many business owners prefer the accrual system, as it clarifies the relationship between revenue and expenses, providing you with insights into your business’s profitability.

The Bookkeeping Process

Once you’ve developed your chart of accounts, decided on an entry system, and selected an accounting system that fits your business’s financial situation, you can start implementing the bookkeeping process.

The bookkeeping cycle consists of the following steps:

  • Identifying and recording transactions in a journal
  • Posting the transaction to the relevant accounts in the general ledger
  • Calculating the trial balance at the end of the accounting period
  • Creating a worksheet to ensure the equal entries of debits and credits
  • Making necessary adjustments through journal entries

 

Depending on your business’s financial situation, the bookkeeping process may also include drawing up financial statements, such as the income statement, balance sheet, statement of changes in equity, and cash flow statement.

Take the Stress Out of Tax Season

One of the most significant benefits of a responsive bookkeeping system is that it makes tax compliance more manageable. When the time comes to report your business’s income and expenses to the CRA, you don’t have to pull all-nighters to find source documents or go through six months’ bank statements.

A complete bookkeeping system will also ensure that you don’t miss tax-deductible expenses, which means you minimize your tax obligation.

Bookkeeping Methods

Suppose you have a service-based business and use a single-entry bookkeeping system with the cash-based method. In that case, you can record your business transactions manually using a simple Excel spreadsheet. Some businesses still use pen-and-paper journals and ledgers to record their transactions.

However, cloud accounting software will provide you with a more comprehensive and flexible bookkeeping solution for inventory, payroll, and expense tracking. Using accounting software is also best if you use the accrual method.

Financial programs automate various processes to save you time, and you can customize your process to fit your business’s unique financial situation and transaction recording needs.

Reduce Your Overhead with GroupEnroll

While there are more advanced aspects of financial management, we hope we’ve provided you with a better understanding of bookkeeping basics for small business owners in Canada. At GroupEnroll, we always aim to help business owners find the optimal solutions to grow their businesses.

We can also help you find the best group insurance coverage for your employees at the best possible price to reduce your overhead. To learn more, send us an email at hello@groupenroll.ca, or complete our quick quote form. We’re located at 10 Great Gulf Drive, Unit 5, Vaughan, ON, L4K 5W1.