How to do bookkeeping for a small business in Canada

Bookkeeping is writing down every dollar that comes into the business and every dollar that goes out, putting each one in the right category, and being able to prove it. That's the whole job. The rest is doing it regularly enough that it never piles up.

Plenty of Canadian owners do their own books. It's very doable if you have one or two bank accounts, a few hundred transactions a month and an accountant who looks it over at year-end. Here is how to set it up and what the routine looks like.

What the CRA actually requires

The CRA doesn't hand you a method. Its guide for the self-employed says plainly that it does not "issue record books nor suggest any type of book or set of books". What it does require is that you keep records of all your transactions so you can support your income and expenses, and that those records are:

• reliable and complete, with what you need to work out your tax and your credits
• supported by documents: invoices, receipts, bank statements, contracts
• kept in English or French, or a mix of the two

Those last three come from the CRA's page on record-keeping responsibilities. You generally keep it all for six years from the end of the last tax year it relates to. There's more detail in how long to keep business records.

Step 1: Separate the business money

Open a business chequing account and a card you only use for the business. The CRA doesn't require this for a sole proprietor, but it's the most useful thing you can do for your books. When personal and business spending share an account, every grocery run has to be picked out by hand, and in an audit every one of them is a question.

If you already mix them, start separating them now. Don't wait for the new year.

Step 2: Pick your categories

A chart of accounts is your list of categories. Keep it short and match it to the form your return uses:

• Sole proprietors report on Form T2125, which has its own expense lines: advertising, meals and entertainment, insurance, interest and bank charges, office expenses, professional fees, rent, utilities, motor vehicle expenses and so on. If your categories match those lines, year-end is copying, not sorting. Bookkeeping for sole proprietors goes line by line.
• Corporations file a T2, and the CRA says all corporations (except insurers) should prepare their financial statement information using the General Index of Financial Information (GIFI) codes. Your accountant maps your categories to those codes, and fewer, cleaner categories make that faster.

You'll also need a few accounts that aren't income or expenses: your bank and card accounts, GST/HST collected, GST/HST paid, loans, and owner's draws or contributions.

Step 3: Keep the paper behind each entry

Each line in your books should have a document behind it. For expenses, the CRA's guide says your receipts need to show the date, the seller's name and address, the buyer's name and address, a full description, and the seller's GST/HST number if they're registered and the purchase is $100 or more before tax. If a till slip has no description, write what it was on the slip.

If you're registered for GST/HST and claiming input tax credits, the information required steps up at $100 and again at $500. A full invoice covers you either way.

A photo of a receipt is fine as long as it's a faithful copy. The CRA accepts electronic images of paper documents that are accurate and legible. If you image to the national standard, you can then throw the paper away.

Step 4: Deal with GST/HST from the start

You have to register once you're no longer a small supplier. For most businesses that means going over $30,000 in taxable revenue in a single calendar quarter, or over four consecutive calendar quarters. After you register, every sale and every purchase needs its tax split out:

• A $1,130 sale in Ontario is $1,000 of revenue and $130 of HST you owe the CRA. It isn't $1,130 of income.
• A $565 purchase of supplies in Ontario is $500 of expense and $65 of HST you can usually claim back as an input tax credit.

If you book the gross amounts, your income is overstated and your GST/HST return is a guess. Split the tax as you record each transaction, not at filing time. When the return is due, the figures are already there: how to file a GST/HST return walks through the lines. If your expenses are light, the quick method may leave more of the tax with you.

Step 5: The monthly routine

Once a month, about an hour once you're set up:

1. Download your statements for every business bank account and card.
2. Record or import every transaction and give each one a category.
3. Match receipts to the expenses they belong to. Chase anything missing while you still remember what it was.
4. Record sales you invoiced but haven't been paid for yet, and bills you owe but haven't paid. For most businesses income counts when you earn it, not when the money lands. More on that in cash vs accrual accounting.
5. Reconcile each account, so your books and the bank statement agree to the cent. How to reconcile a bank account shows the steps.
6. Look at the numbers. Revenue, the biggest expenses, the GST/HST you're holding, and what's in the bank against what's due in the next few weeks.

Monthly is a good rhythm because a statement is fresh. Leave it for a year and it becomes a weekend of trying to remember what a $212 charge in March was for.

Step 6: Year-end

At the end of your fiscal year, check that every account reconciles, list who owes you and who you owe, count inventory if you carry it, and pull together any large purchases (equipment, vehicles, computers). Those are claimed through capital cost allowance, not as an ordinary expense. Then hand your accountant a trial balance and the supporting documents, or prepare the T2125 yourself if you're a sole proprietor with a simple year.

A worked month

A one-person renovation business in Ottawa, registered for HST, has this in October:

• Three customer payments totalling $16,950: $15,000 of revenue and $1,950 of HST collected
• Materials from two suppliers, $5,650: $5,000 of expense and $650 of HST paid
• Truck fuel, $339: $300 of expense and $39 of HST paid
• Insurance, $180, with no HST because insurance is exempt
• A $2,000 transfer to the owner's personal account, which is a draw, not an expense

Profit for the month before tax is $15,000 − $5,000 − $300 − $180 = $9,520. The HST position is $1,950 − $650 − $39 = $1,261 owing for the period. The $2,000 draw doesn't change either figure. The common mistake is to record the draw as wages, or the $16,950 as revenue. Either one gives you the wrong profit.

When to get help

Doing your own books makes sense while they're simple. It stops making sense when you have employees and payroll, inventory you need to count and value, several entities, or you're behind by more than a quarter. An accountant should still look at your year-end either way, and a bookkeeper costs less than the hours you'd spend. Bookkeeping vs accounting explains who does what.

If you're weighing tools, free bookkeeping software for Canadian businesses compares the options, and a spreadsheet or software? covers when a spreadsheet is enough.

Spark Books

Spark Books does most of this for free. You upload your bank and card statements (CSV, OFX or PDF from the major Canadian banks), and it sorts each transaction into a Canadian chart of accounts with the GST/HST split out. When it isn't sure, it asks you, and it remembers your answer next time. It matches receipts to transactions, works out your GST/HST return figures with the due date, and puts together a year-end package mapped to T2125 or GIFI for you or your accountant to file. It's free with no card. If you'd rather hand it off, a bookkeeper plan is $350 a month.