How to Keep Good Records

Posted May 21, 2014

If you read our last blog post, “Common pitfalls when starting a business”, you then know what common mistakes to avoid when starting a business. It’s also important to build a solid foundation with good record keeping. The organization of your finances can be that difference that makes your business grow to great heights.

Why should you keep records in the first place?

It keeps track of the progress of your business. Records are also an asset and resource when determining business strategies
Preparation of accurate financials statements and tax returns are much quicker
You are able to monitor business expenses and budget accordingly
If you don’t have sufficient amount or have lost supporting documents, you may have to pay more tax than required
CRA mandate every business to be audited every 5 years

Simple steps to ensure your records are organized right from the beginning:

Step 1: Collect the right documents

[icon type=”double-angle-right” class=”icon-li accent”]Make sure you keep track of all relevant receipts and documents needed for tax obligations.
This includes: sales, operating expenses, payroll, receivables, payables, invoices, government documents, HST paid and collected, corporate income tax, etc.
[icon type=”double-angle-right” class=”icon-li accent”]There will be times where you will need to make a business expense on your own account. Collect the receipt and file it immediately. In addition, make sure you distinguish the difference between a business and personal expense, as misrepresenting business operations can lead to future complications.
[icon type=”double-angle-right” class=”icon-li accent”]Ask for a receipt for every single relevant purchase and enter the receipts into a database, or file them accordingly.

Step 2: Organize all documents

Keep a daily or monthly summary of cash receipts to maximize effective organization.

[icon type=”double-angle-right” class=”icon-li accent”]Electronically: You can use Excel or other spreadsheet applications to organize and access your documents easily. However, as environmentally friendly electronically recording documents can be, you still need to keep physical documents on hand.
[icon type=”double-angle-right” class=”icon-li accent”]Physically: Your goal is to have easy retrieval of documents. Organize your documents by using the following tactics:
1. First and foremost, clearly label all folders.
2. Organizing records into three separate folders: by month, by calendar year, and by fiscal year:
  - By Month:
  - [icon type=”double-angle-right” class=”icon-li accent”]Sales – monthly or weekly sales data
  - [icon type=”double-angle-right” class=”icon-li accent”]Expenses – includes bank statements, credit card statements, cancelled cheques, and cash receipts. IMPORTANT: make sure you attach all receipts to your bank statements and credit card statements.
  - By Calendar Year:
  - [icon type=”double-angle-right” class=”icon-li accent”]Payroll – wages and salaries
  - [icon type=”double-angle-right” class=”icon-li accent”]Source deduction – federal and provincial taxes, EI, CPP
  - [icon type=”double-angle-right” class=”icon-li accent”]WSIB – WSIB coverage
  - By Fiscal Year:
  - [icon type=”double-angle-right” class=”icon-li accent”]HST (paid and collected) – combination of PST and GST
  - [icon type=”double-angle-right” class=”icon-li accent”]Government documents
  - [icon type=”double-angle-right” class=”icon-li accent”]Receivables -accounts owed to business (assets). Once paid, have it filed by client
  - [icon type=”double-angle-right” class=”icon-li accent”]Payables – accounts the business owes (liabilities). Once paid, have it filed by vendor
  - [icon type=”double-angle-right” class=”icon-li accent”]Inventory – keeping track of monthly inventory
  - [icon type=”double-angle-right” class=”icon-li accent”]Corporate income tax – all corporations must file a T2 every tax year
  - [icon type=”double-angle-right” class=”icon-li accent”]Cash expenses paid by the owner – business expenses taken from personal account
  (This makes information easier to retrieve when preparing year-ends)
3. To increase the level of organization and visual appeal, use coloured folders to divide up each month and each category.
4. Store files in an easy to reach location, such as filing cabinets or on shelves. Label these cabinets or shelves as well!
5. Once your year-end has been completed, store all your records into a standard Banker Box. Clearly label it by date and year. Store these records in a safe place, away from anything that can damage it.
6. Simplicity is key!
Whether you are organizing your documents electronically or physically, it’s essential to make it a routine and habit of recording documents immediately. Keep all records and supporting documents needed for tax obligations for at least six years or for the amount of time you need it for tax purposes.

Keeping good records in an organized manner will reduce future financial complications and ease that tax season stress. It will not only make your business operations easier, but will also allow your accountant to prepare your financial statements quickly and accurately.

Your business situation may find some of these tips helpful or may even require a different organizational system. If you have any questions, please don’t hesitate to contact us at (416) 495-1098 or at info@apbs.ca. We will gladly assist you the best way we can!

Tom Chow