What is the role of a bookkeeper?
Bookkeeping is the accounting part that deals with financial records organization and collection. It is the job of the bookkeeper to collect, organize, and file all data related to your company’s finances. Compiling is the responsibility of a bookkeeper.
- Payroll records
- Statements on bills
- Statements from banks and credit cards
- Returns and forms for tax
Accounting includes these data-gathering tasks, but this field also involves analyzing numbers and making profit or loss projections. Bookkeeping is a term that doesn’t necessarily involve long-term calculations or analyses. Good bookkeeping will ensure that you have all the data and numbers you need to assist your accountant in making predictions about your company’s future and assessing your financial health.
Bookkeeping is essential for small businesses
You can track your company’s profitability and plan for future improvements. You can track your transactions easily and quickly and see how much you business makes on inventory. These profitability ratios can help you evaluate your company’s efficiency:
- Ratio of gross margin
- Margin of profit
- Ratio of return on assets
- Return on equity
- Return on capital
Maintaining cash flow and improved financial management
You should know the revenue streams of your small business as a bookkeeper or owner. You can track how much income your company is earning and what you spend to make sure you have enough cash to pay your expenses. You can easily analyze your financial situation and identify areas for improvement with the help of financial records.
Preparing for Taxation: Bookkeeping can help
You can save time if you record all transactions as they occur. This will allow you to track important financial information at the end of each fiscal period. You can calculate the amount due in advance by doing good bookkeeping.
As a business owner, you are responsible for reporting vital financial data on your company to potential investors and other stakeholders. Bookkeeping programs that include graphs, charts and other visual aids can make it easier for you to improve data precision and communication with investors.
Your employees are also responsible for communicating with you and allowing them to see the financial status of your company. They should know how the company is doing and what they can do to help it grow. Bookkeeping accounting gives you the information you need to communicate with your team and make them feel part of the company.
Evaluate Performance and Plan for the Future
Accurate bookkeeping allows you to track your company’s financial records and assess its performance. It is possible to look back and see patterns. You can also draw comparisons with past years. You can gain a better understanding of your business’s areas where you can cut costs by bookkeeping.
It is possible to need to re-strategize your business and make adjustments in order to stay ahead of the curve.
Bookkeeping is also a great way to identify areas that need improvement. It’s important to forecast your future and make projections if you own a small business. Bookkeeping accounting allows you to see if your small business requires additional employees or operational changes.
What financial records should you keep?
Small business owners should be obsessed with documentation. These are important to remember:
- Payroll records
- Statements from banks and credit cards
- Statements of investment
- Returns on taxes
Spend the time organizing your records. This could be as simple as buying a filing cabinet, or using the label maker. You can also save your records to the cloud so they are easily accessible from any device. If you ever have to go through an audit, it can be a huge headache to ensure that your records are organized.
You are required to keep tax and financial records for six years from the year they were received by your business. It is a good idea for you to have these records both in paper and digital format for extra security. Professional document shredding companies can securely dispose of records older than six years. QuickBooks can be used to securely delete or condense historical transaction data, which will save you storage space.
Preparing Financial Reports
Bookkeepers spend a lot of their time doing financial reporting. The following elements are usually included in a detailed financial report:
- Balance Sheet
- Income statement
- Cash flow statement
For tax purposes, most business owners will need to prepare a financial report at least once per year. There are many reasons to create monthly or quarterly financial statements. Frequent financial statements are a great way of checking your budget and determining where you can make adjustments.
Manual bookkeeping is the traditional way to prepare and record financial records for your business. This method uses a pen-and paper ledger or an offline program such as Microsoft Excel or Word to record income and expenses. If you prefer a more hands-on approach, the manual method is possible. However, it can be tedious and leaves more room for human error.
Online Bookkeeping Method
Software that automates most calculations and data entry is used for online bookkeeping. For example, a program such as QuickBooks cloud accounting software can help you track your income and expenses faster than with a traditional ledger.
You can also link your cloud accounting software with other financial programs, such as your online banking and mobile payment apps. All your software can be linked to the cloud so that payments you make and receive are automatically recorded to a digital ledger. Software programs can automatically calculate your income and spend, updating it every time you move your money.
QuickBooks cloud accounting software offers options for expense tracking, payroll, and inventory. This program makes it easy to access your records from your smartphone or laptop even when you aren’t in the office.
What’s the difference between single-entry and double-entry bookkeeping?
Single-entry bookkeeping records each transaction as a single entry in the ledger. Double-entry bookkeeping records every transaction twice. In double-entry bookkeeping, for example, $30 could be recorded as an income gain and a deduction from your inventory total.
Single-entry bookkeeping makes it easier because you only need to record each transaction once. For small businesses that have not yet been incorporated, this can be sufficient. If you are a full-time worker but also have a side hustle selling handmade jewelry, single entry bookkeeping will suffice to record your expenses and profits so that you can claim them on your taxes.
The single-entry method is not recommended for businesses that are incorporated or have a sole source of income. Double entry is better for complex books because there’s less room for error. It’s also not as complicated as it sounds. Cloud accounting software can be used to automate small-business bookkeeping.
Remember that single-entry bookkeeping is not designed to conform to GAAP. Small businesses may not be affected by this inability to comply with GAAP’s requirements. They only need to demonstrate a method for meeting reporting requirements for employees and taxes. Double-entry accounting is required for any company that needs to highlight cash flow retained earnings or other financial changes.
Cash Versus Accrual
Both single-entry or double-entry can be used in conjunction with cash, accrual bookkeeping, and.
This is an example of the differences between the two methods. Let’s say you order new parts for your machine from a manufacturer. The manufacturer sent you an invoice in February after you ordered the parts. The fee is not due until you receive the parts.
Cash accounting records transactions only when money actually changes hands. You would record the expense in cash as a cash transaction in February even if you received the invoice in January.
The accrual method would have you record the expense in January on the date you receive the invoice. This is regardless of the date you paid for the parts.
Which of these methods should be used in your bookkeeping? To get the most accurate picture possible of your spending habits, This will depend on how complex your business is.
Cash bookkeeping is undoubtedly simpler. Cash transactions can be recorded when money changes hands. You can then cross-reference bank statements with your bookkeeping records for accuracy. However, cash transactions can be misleading. If you are late with a bill payment, your records could show a large amount for utilities one month and nothing the next month.
This method doesn’t take into account inventory loss. You might have ordered supplies, but not used them. You might not be able to accurately record the total cost of supplies using the cash method.
Accrual is more complicated because your bank statements may not reflect your income. The accrual method is required for large Canadian corporations. It also tends to give you a better picture of your overall finances.
QuickBooks accounting software makes it easy to transition into accrual accounting. It uses information from your payment apps and credit cards to ensure that your records are accurate. This method is essential if you want to grow your business in the future.
The LIFO Accounting Method
What is LIFO accounting? LIFO means Last In, First Out. If you own a retail store, this is one method you can use for determining the current value of your inventory. This accounting method assumes that the most recent (last in), products will be the first (first out) to sell. This bookkeeping method is useful for keeping accurate records if inventory costs fluctuate between last and first items.
Your inventory accounting entries should reflect the completion of goods if you make them. Some inventory might include unfinished products, furniture on the assembly line, or finished furniture if you make wooden furniture. The finished goods inventory in your ledger will show the total number of each type.
After you have finished your items, you can track their cost by adding all direct costs. You can use either the traditional method, or activity-based pricing. Performing a cost assignment for each type of service or product you produce, you can calculate both your direct and indirect costs.
The FIFO Accounting Method
FIFO accounting is a method for valuing inventory. This assumption is used to calculate cost-flow. It states that the first goods purchased are also the first ones sold. This assumption is the closest to an actual product flow, earning it the title of the best valuing method. Think about your local supermarket. The first gallons of milk that the store purchases to sell to customers is the first gallons usually sold. A lot of milk (product), would spoil and cause a loss for the store.
The FIFO method of valuing costs allows for the most accurate representation of the most recent costs. However, the FIFO method of valuation also matches inventory costs against revenue coming in. This means that revenue vs. cost may not be properly reflected and could result in a gross margin potentially higher than actually exists.
Whatever accounting method you use, it doesn’t matter what. The best way to ensure you are crossing your i’s and doing the right thing is to keep your bookkeeping in order. GAAP is a way to do this.
What is GAAP?
GAAP is an acronym for Generally Accepted accounting Principles. These are the best ways to track and manage your company’s financials. Why? These methods are used by the majority of people in accounting. If your bookkeeping is ever challenged, others will accept your methods.
You can use GAAP in a few ways: standardizing the chart of accounts and classifying assets on your company’s balance sheet. Implementing a three-way matching method to make sure you never pay twice for an invoice or pay extra for products that you have not ordered or received.
What is Net Present Value?
The Net Present Value (NPV), of your business, is a calculation that can help you evaluate potential investments or projects that may be worthwhile. The NPV calculation shows how much money you have received and how much you have spent.
This helps you determine whether an investment or project will bring in more money, or if it will result in a loss. It is important to understand how you can calculate Net Present Value for your long-term financial planning.
Bookkeeping should allow you to maintain a detailed record of your business finances. You must consider the historical cost of items in order to do this. The historical cost is simply the price at which you purchased or acquired the item.
This will allow you to accurately value the item and depreciation expenses. Lump-sum purchases may be affected by historical cost.
Accounts Receivable and Accounts Payable
Invoice the purchaser after you have sold or rendered a service. After the invoice is presented, you are liable for the entire amount. This money is due to you, so it’s placed in your general ledger under Accounts Receivable. You can track purchasers that have paid and those that haven’t to illustrate your company’s account receivable turnover ratio.
Accounts payable are the account that holds any money you owe suppliers or agencies for services or goods provided. Accounts Payable allows you to see how much money you owe your creditors. Rent, business insurance, or software subscriptions are expenses that you have to pay before you receive the service. These expenses are pre-paid expenses.
Your account deferred expenses will show the month that you actually benefit from the expense, rather than the month when you paid it. As you can best account prepaid expenses by using either accrual or cash accounting.
Payroll is a common expense for small businesses. Payroll will differ if your business has both brick-and-mortar and online sales. Separate in-person sales and online sales to determine which sales generate the greatest profit for your business.
Your net income is the sum of Accounts Receivable and Accounts Payable. To calculate your profit margin, divide this amount by the net sales amount. A low ratio of income to debt means that you have a narrow profit margin. You can reduce costs and improve your narrow profit margin. You can track your gross profit weekly or biweekly based on sales.
101 Tax Return
Everyone hopes to see a large tax return in spring. Solid bookkeeping is essential for small-business owners to get the most from their tax returns. You can save time and money by providing your accountant with detailed financial records. This will allow the accountant to complete your taxes faster.
There are many categories of expenses that can be claimed in Canada as business expenses.
- Insurance fees
- Property tax
- Entertainment and meals
- Accounting fees
It can be hard to keep track of all these items. However, if you keep detailed records, you will have a complete record of your spending. You can then compare that record with the deductible expenses list from Canada Revenue Agency and determine what amount you can or cannot claim.
Take a look at your list of deductible expenses to determine where you are most likely spending money. You might consider creating a folder with a label for each expense category. You can save time by storing your receipts in the appropriate expense category when you make purchases.
It’s also easier to estimate the amount of tax you will owe by keeping track of your bookkeeping over a period of time. If your profits and loss are stable over time, you can estimate how much tax you will need each year. You can also calculate how much GST or HST you should charge your customers.
Canada’s provinces have different thresholds for when business owners are required to pay taxes in quarterly instalments instead of one lump sum at the beginning of each year.
- Quebec’s annual threshold for net tax owings is $1,800
- All other provinces or territories have a $3,000 annual threshold in net tax owings
Your business must exceed the threshold for tax for at least two years in all cases. Imagine that you own a business in Ontario and owe $3,500 in taxes last year. Your financial records show that your business is slower than usual this year. Therefore, your estimated net tax owed this year will be only $2,900. If this is the case, your taxes can still be paid in a lump sum at year’s end. If your business is stable and you owe more than $3,000 again, you will need to begin paying quarterly instalments.
Monthly and quarterly financial reports are great for those who pay their taxes in installments. It’s easy to determine how much tax you should pay for a three-month period if you have a clear picture of your income.
Find a bookkeeper
You should now have an idea of what the intricacies of small-business bookkeeping are. Canada has many skilled, experienced bookkeepers and accountants that can help you develop a financial record-keeping system. Quickbooks is a good place to begin your search for a bookkeeper. ProAdvisors can help you with small-business bookkeeping, as well as installing and learning how to use cloud accounting software.
Another great resource for finding a bookkeeper is the CPA Canada directory of Charted Professional Accountants. This website is different for each province or territory. It can help you locate a CPA who lives in your area, as well as point you to courses that will improve your skills.
Reporting and accounting standards for business vary from one province to the next. It’s therefore important that you hire a bookkeeper who is based in the same area as your business.
You should also look for an accounting firm or bookkeeper who has experience in your industry. The reporting standards can vary from one region to another, but they will also differ by industry. Talk to other business owners to find out what methods they use and how they hired their bookkeepers.
Although there are many things to do, good bookkeeping does not have to be difficult. These steps will help you get started in small business bookkeeping.
- All receipts and records should be saved and organized
- Decide which bookkeeping method you prefer (single-entry, double-entry, cash, accrual etc.). works best for you
- Cloud accounting software for high quality
- Create a detailed financial statement by practicing
- A professional bookkeeper can show you the ropes