Basic Bookkeeping you can not ignore
Having and reviewing a financial statement or budget, that tracks your monthly progress, should be a key part of your bookkeeping process. Sit down with your bookkeeper and have them review the financials with you and make suggestions.
Good bookkeeping shouldn’t be just about knowing the day to day activities, it should be about helping you understand where your business is going.
Most small business owners and entrepreneurs are masters at creating great products and services, building teams and customer satisfaction, but many will ignore the bookkeeping side of their business.
But if you, the business owner, don’t understand the different types of bookkeeping system your accountant implements to organize your finances, measuring the success (or failure) of your efforts will be lost. By not having a clear financial picture of your business, you risk running into cash flow problems.
For Example:
What do your accounts receivable look like and who owe you money?
Are you constantly paying your suppliers late?
I worked for a company who thought sales, sales and more sales and they did not sweat the small stuff like bookkeeping and keeping good records.
Here are 10 most common types of bookkeeping a small business should know.
Cash – Money coming in and money going out, Very simple.
All of your business transactions pass through the bank account, which is so important that often bookkeepers actually use two journals, Cash Receipts (money coming in) and Cash Disbursements (money going out), to track the activity.
Accounts Receivable – If your company sells products or services and does not collect payment immediately, you have outstanding “receivables” and you must track Accounts Receivable. This is money due to the business from customers less payments made from customers, and keeping it up to date is important to be sure, that you send timely and accurate invoices and monthly statements to collect and keep a healthy cashflow.
Inventory – Products you have in stock to sell are like money, because majority of your supplier have been paid, therefore, inventory must be carefully accounted for and tracked. The numbers you have in your books should be periodically tested by doing physical counts of inventory on hand.
Accounts Payable – Having a good handle on cash flow makes sending money out of the business less doubtful. A clear view of everything in your Accounts Payable makes for good bookkeeping and helps assure timely payments and – more importantly – that you don’t pay anyone twice. On the other hand, Paying bills early may also qualify your business for discounts.
Loans Payable – If you have borrowed money to buy items such as equipment, vehicles, furniture or other items for your business, a separate account is setup to tracks what is owed and what is due. Every payment made towards the load a portion is allocated to the principal and a portion is to interest.
Sales – The Sales account is where you track all incoming revenue from what you sell.
This account is all net of taxes. Recording sales in a timely and accurate manner is critical to knowing where your business stands. You can utilize more than one account category if you like to know which item in your inventory sells the most.
Purchases – The Purchases Account is where you track any raw materials or finished goods that you buy for your business. It is a key component of calculating “Cost of Goods Sold” which you subtract from Sales to find your company’s gross profit (the subtotal before overhead expenses and payroll).
Payroll Expenses – This is the biggest cost of all for many businesses. In Canada when you hire workers at $25./hr, it does not end there. By the time your business pays its portion of EI, CPP, vacation and WCB this employee may cost your business $27 to $30./hr.
The payroll account must be kept accurate and up to date for meeting tax and other government reporting and remittance. This is helpful for your business as well as for government audits.
Owners’ Equity – This account tracks owners investment less the amount withdrawn.
Basically, it tracks the amount each owner puts into the business. “Many small businesses are owned by one person or a group of partners, they’re not incorporated, so no stock shares exist to divide up ownership, instead, money put into the business is tracked in Capital accounts, and any money taken out appears in Drawing accounts. In order to be fair to all owners, your books must carefully record all Owners’ Equity transactions.
Retained Earnings – The Retained Earnings account tracks any of your company’s profits that are reinvested in the business and are not paid out to the owners. Retained earnings are cumulative, which means they appear as a running total that has been retained since the company started. Managing this account does not take a lot of time and is important to investors and lenders who want to track how well the company has done over time.
Many business owners think of bookkeeping as the last thing to do. But if you understand and make effective use of the data your bookkeeper collects, bookkeeping can shed light on the health of your business and productive decisions can derive from it.
Running a Business and Income Tax
Running a business and income tax.
If your thinking of starting a business, you should know the different tax liabilities that affects your business. Even if you think you know what needs to be done before starting your business, speaking to an accountant will help relieve stress in the future and save your hard earned money.
Tax liability to the government is not impossible to understand.
Canada Revenue Agency – Federal level
GST number – if your business makes more than $30,000 gross sales per year, than you need to register for GST.
Business number – CRA will issue a business registration number once you register. If you are an incorporation, CRA will issue an incorporation number.
Payroll number – If you have employees CRA will issue your business a payroll number.
Import / Export number – if your business is involved in import and exporting of goods, CRA will issue a registration number for your business.
If your running an incorporation, keep in mind that the business becomes a separate entity from yourself and the company can run it’s own daily financial tasks.
If you are registered as a sole proprietorship, you and your business are one. If an issue arises the government can come after your personal assets.
A corporation can pay 14% corporate tax where the highest tax for sole proprietor is 39%. A huge savings.
It’s great to be able to have time to do your own bookkeeping. But if it’s not your forte, have a qualified bookkeeper look after it for you. You will be more informed as to where your finances are as well as you will be wearing one less hat.
Running a Business and Income tax liability can be a challenge. Consult an accountant or bookkeeper.