Basic Bookkeeping

Why Keep Records?

• Good records will keep you informed about the past and present financial position of your business.
• Good records will help you stay in control and give you the information needed to make sound business decisions.
• Good records will assist you to meet the following requirements and facilitate correct and timely remittances:
• Canada Revenue Agency (see the document  Tables on Diskette - Payroll Deductions);
• Canada Pension Plan (CPP) (see the document  Canada Pension Plan - Payroll Deductions);
• Employment Insurance (EI) (see the document Employment Insurance - Payroll Deductions);
• Ministry of Finance;
• Goods and Service Tax/Harmonized Sales Tax (see the document GST/HST Returns); and
• Workers' Safety and Insurance Board (see the document  Workplace Safety and Insurance Board - WSIB).
• Good record keeping increases a new business's chances of survival and an established business's chances of staying in business and earning good profits.

What Record Keeping System Should I Use?
A good record keeping system should be simple to use, easy to understand, reliable, accurate, consistent and designed to provide information on a timely basis.

The legal requirements concerning financial records specify only that they be a permanent, accurate and complete record of your daily income and expenses.  There are many kinds of record books and bookkeeping systems available; below are some examples, listed alphabetically.

Commercial Bookkeeping Systems
These are available through stationery outlets and are usually a package system with instructions and forms to use.

Computerized Systems
There are several excellent programs available.  These programs offer speed and the ability to produce daily updated financial statements.  This option is becoming increasingly popular due to its relatively low cost and ease of use.  Care should be taken to ensure that you are not buying expensive software programs or computer equipment that has more capacity than you need.  Most small businesses grow into the need for a computerized system, usually as a means to control larger volumes of inventory or transactions.

Double Entry Bookkeeping
This is the system taught in most high school and college bookkeeping and accounting classes.  Each transaction is recorded twice, one account is credited with the given dollar amount and a second account is debited by an equal dollar amount.  This is an excellent system, but often formal training and practice will be needed to understand and master it.

One-Write Systems
These are copyrighted systems that are set up using carbon-backed cheques.  As you write the information on a cheque, it is transferred to a record system.

Single Entry Bookkeeping
A single entry system means every dollar transaction is recorded only once, either as income or expense, or as an asset or a liability.  All entries are recorded on a one-page synoptic journal or also called a revenue and expense journal.  The system is simple, easily understood, and thus requires little training.  This is the system described in the example that will follow.

Setting Up a Record Keeping System

Steps:

1.  The first step taken by entrepreneurs is often simply to begin the business.  The licenses and registrations required by a business can vary.  Appropriate actions may include: incorporation or registration of the business, obtaining business licenses appropriate to your business type from the local municipality or province, registering for the Goods and Service Tax (GST), Retail Sales Tax (RST) and excise taxes if they apply, and setting up payroll accounts if you will have employees.  Please refer to the document  Forms of Business Organization for information on business types.  For a more detailed description of the start-up procedures of going into business, please see the document  Business Start-Up Info-Guide.

2.  In order to keep business records separate from personal affairs, business owners generally open a separate business account at a financial institution.  Ordering numbered cheques with stubs to record cheque details and obtaining a deposit book may simplify the bookkeeping process.  Your financial institution can mail you a statement along with your cancelled cheques every month so that you can perform bank reconciliation.  You may need to make this arrangement when you are setting up your business bank account.

3.  You can purchase a columnar book at an office supply or stationary store.  These books are available in 1 to 36 or more columns.  The number of columns you need will be determined by the number of expense accounts you choose to use.  We use a twelve columnar paper in our example.  (You do not have to use all the columns.)  You may want to  purchase a generic numbered invoice book and a numbered purchase order book.  You may also consider ordering an ink stamp with your company name and address for use in personalizing your invoices, purchase order books, receipts and even your cheques if they are not printed with your business name on them.  Also helpful is a small record book to track vehicle expenses and business travel expenses.

4.  You can obtain a copy of the Canada Revenue Agency's Business and Professional Income Tax Guide (publication T4002) to assist you in your  calculations.  This guide describes what are eligible business expenses and provides information on depreciation, home-based business expenses, vehicle expenses, etc.  You may also require remittance forms, rates and regulations for GST, income tax, EI, and workers' compensation.

Single Entry Bookkeeping
Each page will record the transactions for the month and the monthly totals from each column will be calculated.  You will use at least one page for every month of the year.  Depending on the number of transactions, you may need several pages for each month. In these cases, calculate the sub-total at the end of the page and carry forward the sub-total to the top of the next page.

Use the first three columns to record the date, particulars of the transaction and the cheque number.  Try to pay all bills with a numbered cheque and make sure you fill in the particulars on the cheque stub (i.e. what was purchased, date, and invoice number).  Also, put your cheque number and date on the paid invoice.  Making this a habit will be helpful if you ever have to trace a transaction.

The next two columns are for revenue and expenses. Each transaction will be entered in one of these columns. Revenue refers to money coming into the business from sales. Expenses represent payments the company is making and, as such, are an outflow of money.

The remaining columns are a breakdown and categorization of the revenue and expense columns.  These will vary from business to business.  Generally, you will need sufficient expense columns to represent the expenses you most often write cheques for.  If a cheque is only needed once a year for a particular expense, it may not warrant setting up an individual column.  Instead, you may want to include a "Miscellaneous" column.  In our simple example, we break down the revenue entries into sales and sales tax columns.  Certain businesses may need a different sales breakdown.  For example, a garage business may categorize sales as fuel, parts, labour, and confections.  The expenses in our example are broken down into inventory, rent, telephone, office supplies, insurance and miscellaneous.  Other common expense columns that you may wish to include are accounting, legal, advertising, business tax and license, repairs, vehicle, utilities and wages.

Example
This example revenue/expense journal shows May entries for the fictional ACME Supply Company (the company that supplies Wyle E Coyote® with equipment).  This example shows the second page for May and therefore starts with the column subtotals from the first page.

The transactions in the example are as follows:

1. Cheque No. 56 for $121.00 dated May 26 to Bob's Stationery to pay for envelopes and letterhead.

2. Cheque No. 57 for $1,536.00 dated May 27 to Parachute Supply for ten parachutes for inventory and resale.

3. Cheque No. 58 for $230.00 dated May 27 to CelTel for cellular phone bill.

4. Cheque No. 59 for $580.00 dated May 28 to All Insurance for yearly liability insurance coverage.

5. Bank deposit May 28 for $2,796.94 for invoices 36, 37, 38 and cash sales for May 26 to 28.

6. Cheque No. 60 for $545.00 dated May 29 to W. Coyote for refund of invoice No. 37 (defective parachute).

7. Cheque No. 61 for $26.10 dated May 26 to Joe Acme to pay owner for small petty cash purchases in May.  (Small cash purchases for postage or parking, etc., which do not warrant a cheque should be paid by the owner and the receipts held until the end of the month or until there is a reasonable total to issue a cheque.)

8. The monthly bank statement was received.  A comparison was made of the cheques and deposits listed on the bank statement, and reconciled with the entries we have entered in the revenue and expense columns.  A transaction of $15.80 was recorded, which is the May bank charges on Acme's business account.

When the columns are totalled at the end of the month, the total under "Expense" should equal the sum of all the expense breakdown columns.  The "Revenue" total should equal the sum of all of the monthly revenue breakdown columns.  This is used to test and balance your books, insuring amounts and entries were made correctly.  The receipts, paid invoices and other statements should be stored in a manner that allows easy retrieval as needed.  One method is to staple all monthly receipts together, put them in an envelope and file them in chronological order.

 

ACME SUPPLY COMPANY
REVENUE AND EXPENSE JOURNAL

Month: May 1997     Page 2
Date	Transaction	Ch No.	Revenue	Expense
	Balance Forward		2,317.18	3,894.00
May 26	Bob's Stationery	56		121.00
May 27	Parachute Supply	57	1,536.00
May 28	CelTel	58		230.00
May 28	All Insurance	59		580.00
May 29	Deposit		2,796.94
	Invoice 36,37,38
	Cash Sales
	PST
May 29	W. Coyote Refund No.37	60	(545.00)
May 29	Joe Acme - Owner	61		26.10
	(Petty Cash)
May 29	Bank Charges			15.80
&Month end Totals			4,569.12	6,402.90

 

Revenue Breakdown			Expense Breakdown
Sales	Sales Tax	Inventory	Rent	Tel.	Office	Insurance	Misc.
2,108.63	208.55	3,300.00	500.00		15.00		79.00
					121.00
		1,536.00
				230.00
						580.00
2,500.00
66.00
	230.94
(500.00)	(45.00)
							Petty Cash
							26.10
							Bank Chgs.
							15.80
4,174.63	394.49	4,836.00	500.00	230.00	136.00	580.00	120.90

Expanding the Single Entry Bookkeeping
Since the above example illustrates transactions that may occur in a simple business, a twelve column chart is adequate.  However, if you find that more columns are needed, up to 36 columns can be used.  For example, you may need to record wages paid out and you may need columns for owner's wages, employee wages, EI, CPP and income tax.  Also you may have capital purchases you wish to record under "Land", "Buildings", "Office Equipment", "Shop Equipment", etc.

The single entry system is very flexible.  If you find that you need more columns than are available, you may elect to use separate journals for "Expense", "Revenue", "Sales on Account", "Payroll", and "Accounts Payable".

Financial Statements
Using the month-end totals, you or your accountant should be able to prepare financial statements, such as a profit and loss statement quite easily.

Maintaining Records
In order to maintain control, business record keeping entries should be completed daily.  One way to ensure the completion of the entries is to set aside a regular daily time for this duty.  In a new business start-up, an entrepreneur often wears many "hats" and sales and customers often take priority over record keeping.  This being the case, it may be wise to train a spouse or part-time employee to handle the bookkeeping for your business.  Ensuring that this task is always done by the same person can increase the accuracy and consistency of your records.

Hiring an accountant during your business start-up may be advantageous as he or she can help answer questions you may have regarding bookkeeping.  Some type of introductory training in accounting is also recommended if you are unfamiliar with accounting processes.

For further information:
see these documents:
Checklist for Profit Watching
Selecting Professional Services 

Publications and Information
There are a vast array of publications for new entrepreneurs.  They can cover various aspects of operation such as marketing, business plans, record keeping, human resources and cash flow management.  When seeking information on starting a small business, you should also check with your local library, chartered banks and your local Chamber of Commerce.

The Ontario Ministry of Enterprise, Opportunity and Innovation has produced a series of self-help publications for small business.  These publications are available through many of the Small Business Enterprise Centres and from Publications Ontario, in person at 880 Bay Street, Toronto, or through telephone order: (416) 326-5300 or 1-800-668-9938.