This is the time of year where a lot of people are trying to figure out how to structure their business banking and bookkeeping to make tax time easier.
A common question I get is ‘Do I need a separate bank account and credit card for my business?’ If you are incorporated the answer is a clear yes. If you’re a sole proprietor you can choose and the advice I give isn’t the same for everyone. Some pro’s of having separate accounts are
- that it can keep things clear and separate in your mind
- easier to spot missing receipts when they are all going through one account
- you can have a rough gauge on how your business is doing when it’s not mixed with personal income and expenses
- you may be able to put the business name on your bank account which may appear to clients as being more professional
Some con’s to having separate business and personal accounts:
- you will have another set of account fees to pay every month
- business bank fees tend to run much higher than personal bank account fees
- there are more transactions necessary to pay yourself
- if you don’t consistently use business accounts for business transactions and personal accounts for personal transactions it actually is counter-productive in terms of keeping things clear and tidy and creates more bookkeeping transactions (if using software)
- more cards in your wallet
The next big question in terms of setting up easy financial tracking is what bookkeeping system to use. There are a few options and each have their own pro’s and con’s.
- The shoebox – Basically you take all your invoices and receipts and put them in a box (or filing cabinet or email folder.) Then at the end of the year you dump them all out, sort them into piles by category and add them up on the calculator.
Pro’s
- next to no work all year long (read: favorite of procrastinators)
- costs nothing
Con’s
- easy to miss possible expenses
- generally leaves a big scramble at tax time to find missing things
- doesn’t give any real time feedback as to how much the business is actually earning
- people with this bookkeeping system are the most likely to procrastinate doing tax returns and HST returns and therefore spend the most in penalties with CRA.
- if you plan to hand this whole box to your accountant/ tax preparer, it’s going to cost you a lot
2. Spreadsheet – You set up your spreadsheet with a separate column or tab for your income and for each type of expense as you are going through the year. If you’re really keen with excel you can get it to create your income statement and give you real time insight into how the business is doing.
Pro’s
- pretty much free as most people have the software already
- great when there isn’t a huge amount of transactions
- can give you some information about how your business is doing over all with some extra time and formulas
- your accountant/ tax preparer will love that you aren’t giving them a heap of folded up, dirty papers and you will save money on their fee
Con’s
- also easy to miss receipts as you aren’t doing bank account reconciliations
- doesn’t give great, comprehensive feedback on how the business is doing overall.
3. Software – There are many different ones. Some (like sage ) are more geared to accountants. Other’s such as quickbooks, are really user friendly. The costs vary, as do the capabilities. Most now come with the ability to take a picture of a receipt and have it entered that way. Most can link to bank accounts and import transactions to do monthly reconcilliations to make sure nothing is missed. Most have an option to do payroll. They all have the capability of separating HST for easy reporting at year end. If you are incorporated this is the best option for you as there is more information needed to file the tax return.
Pro’s
- they give many options for reporting which can make decision making and information finding much easier
- your accountant can take your file at year end and review/ do any adjustments fairly easily
- payroll remittances and HST remittances can be prepared and even filed from software in most cases
Con’s
- costs more
- takes more time to input all data
- requires more technical skills and accounting knowledge than the others
- not good for procrastinators
Hopefully the pro’s and con’s listed will help you decide which system is better for you and your business. There is no clear right or wrong way. For sole proprietors, CRA will accept any of these as valid. So consider:
- the amount of transactions you have
- the time you want to invest in bookkeeping
- if there’s payroll to keep track of also
- how much real time feedback you want about how things are going
- your level of procrastination
- your level of understanding of (or willingness to learn) new systems
- cost of method
- ease of method
- most importantly is your commitment to stick to the method. Paying for software and then not fully utilizing it doesn’t bring any of the pro’s.
Hope this information helps! There seems to be an idea that if you have a business you need to also have accounting software and separate accounts, but you don’t. The bookkeeping can be as rudimentary or complex as you want and need, and it fully depends on what purposes you want your bookkeeping to fulfill. If it is solely for tax purposes, there’s no HST, no payroll, and few transactions – go with the free options and save yourself the time and money involved in software. If you have a larger business with more going on and more to keep track of – take the time to learn your software and all it can do. It can be a huge asset to managing your business. The extra time and money spent can save you in the long run in terms of making informed decisions, helping you meet your CRA obligations, helping make sure there are no missed expenses, and for the ease of finding what you need. There’s no one size fits all, so choose the best options for you.
Dawn
Tax Wise 