Businesses need to keep track of various daily financial transactions including sales, taxes collected, inventory expenses, utility expenses, payroll and more. Bookkeeping is the part of accounting that deals with the collection, organization and tracking of financial paperwork.
Bookkeeping starts with an efficient record keeping system that is reliable, simple to operate and designed to consistently provide accurate information as needed.
The legal requirement concerning financial information is that you should be keeping records of all transactions to support your income and expenses. They must be permanent, accurate and complete, and there are many types of record books and bookkeeping systems available.
Comprehensive records will satisfy Canada Revenue Agency, Canada Pension Plan, Employment Insurance, Department of Finance, Goods and Service Tax, Workers’ Compensation, etc. and facilitate correct and timely remittances.
Accurate record keeping will keep you informed about the past and present financial position of your business and provide you, your financial advisors and accountants the information needed to make appropriate business decisions. Proper financial systems increase a new business’ chance of survival and an established business’ chance of staying in business and earning a profit.
Day-to-day business activities produce confirmation that a transaction has occurred. Retaining bank deposit slips, invoices and receipts will provide accurate details of those transactions.
Historically, bookkeeping has been accomplished using journals, multi-column books and other paper documentation. Currently, bookkeeping can be completed using specialized computer software, as long as the data is backed up. Throughout this guide, we will use language such as journals and books, and this can mean either paper forms or digital spreadsheets and recording documents.
If you have the knowledge to set up your bookkeeping system, you can use this guide and other self-supporting resources. Accountants can also assist with setting up your system properly and sustainably. If you choose to set your system up, consider asking an accountant to review its integrity and comprehensiveness.
Journals and Daybooks
Daily transactions are recorded in a Daybook, also called a Book of Original Entry. Daybook entries, also known as journals, should be descriptive and chronological.
Types of Daybooks can include:
- General daybook, for all journals
- Sales daybook, for recording all sales invoices
- Credit daybook, for recording all sales completed on credit
- Purchases daybook, for recording all invoices
- Cash daybook, also known as the cash book, for recording all money received and paid
Each entry is a debit or a credit. Debits and credits in accounting are different than personal finances. In accounting, the total debits must equal the total credits and all transactions have a source account (credit) and a destination (debit). For example, if you sell inventory, your sales revenue account increases (debit) and inventory decreases (credit). If you deposit cash, your cash-on-hand account (credit) decreases and your bank balance increases (debit). Not every bookkeeping method uses credits and debits, but it is common.
Chart of Accounts and Ledgers
In order to classify transactions, bookkeepers use a chart of accounts to group similar transactions together. An account refers to the five main types below, each represented as a ledger or Book of Final Entry. The entries in the ledger are referred to as postings and the chart is used. Accounts are typically coded using a number identifier or a caption. Most countries let businesses design their chart of accounts, but it does help to use standard accounting language.
Accounts that represent what the company owns as resources. Can be tangible or intangible, as long as it has a dollar value.
e.g. cash on hand, cash in bank, property and land, inventory, pre-paid expenses and accounts receivable
Accounts that represent what the company owes to other businesses.
e.g. upcoming or past expenses, accounts payable, bank loans
Equity represents the residual value of the business after liabilities are paid. This belongs to the owners/shareholders and can be a negative dollar value.
e.g. capital contributions, retained earnings
Primarily refers to the sale of goods and services, but can also represent other sources of earned income.
e.g. Sale of goods, interest, warranty and after sale service
Primarily refers to costs for operation that are upcoming or have not been prepaid. Not all payments are expenses.
e.g. utility payments, payroll, maintenance, supplies, inventory and equipment purchases
Single Entry Bookkeeping:
This is the simplest method and records the minimum. It is based on recording profits and losses and is best used for new micro businesses with uncomplicated sales and low volume in transactions. Every transaction is recorded only once, either as revenue or an expense. All entries are recorded on a one-page journal summary, also called a revenue and expense journal.
While the Single Entry Booking method is simple, limited information is recorded which can make producing financial statements, reporting and analyzing difficult. Liabilities are partially tracked and not as comprehensive figures. Assets are not tracked at all and theft is harder to detect. Furthermore, mathematical errors are very common because this type of method is not self-balancing.
In the example below, the first three columns record the Date, Description of the Transaction and a Reference Number (invoice or receipt). The next two columns are Revenue and Expenses. Each transaction will be entered in one of these columns. Revenue refers to money coming into the business from the sale of goods and/or services, and expenses represent payments the company is rendering, as such, creating an outflow of money. The remaining columns can indicate what account each transaction belongs to and the method of payment.
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.
|April 8||Transaction Fees||345||(75.00)||1910.00|
|April 10||Sale: M. Knight||74||500||2410.00|
|April 17||Sale: L. Cooper||75||500||2910.00|
|April 29||Sale: D. Brand||76||500||2660.00|
$2660 is the balance carried forward to May.
Double Entry Bookkeeping:
This is a commonly used method and is based on the principle that every transaction effects at least two accounts, one belonging to either side of this equation: ASSETS = LIABILITIES + EQUITY. Transactions are recorded by debiting and crediting accounts and depending on the accounts, changes in debit and credits can be represented in several ways.
|Income / Revenue||Decrease||Increase|
|Equity / Capital||Decrease||Increase|
Remember, debits and credits in accounting are different than personal finances. In accounting, debits and credits record changes in value and have a source account (credit) and a destination (debit). For example, if you sell inventory, your sales (income) account increases (debit) and inventory (an asset) decreases (credit). If you deposit cash (an asset), your cash-on-hand account (credit) decreases and your bank balance increases (debit).
Error detection is a benefit of this system because of the use of the formula. If the sides of this formula do not balance, an error has occurred. This formula also helps decide what accounts are affected and 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.
Even though using the ASSETS = EQUITY + LIABILITIES formula can help with error detection, it is not a guarantee that a mistake has not been made. A transaction may have been recorded under the wrong asset account, or an equity transaction may have been mistaken as a liability.
Setting up a double entry bookkeeping system needs to be done correctly and by someone who has efficient knowledge of this format. If you do not possess the knowledge to set your own double entry bookkeeping system up, hire an accountant to set it up and teach you how to use it.
These copyrighted systems are set up using carbon-backed cheques. As you write the information on a cheque, it also transfers the data to a record system.
These programs offer speed and versatility, and typically have the ability to produce daily updated financial statements. Many of these systems are scalable, so you can add on as your business expands.
Commercial Bookkeeping Systems:
These are available through stationery outlets and are usually a package system with instructions and forms to use.
If necessary, you or your accountant should be able to prepare financial statements using the month end totals. Types of financial statements include income statements, profit and loss statements, balance sheets and cash flow statements.
You can learn more about bookkeeping with the help of online tools, books, business services and software. Introductory training in accounting can also be helpful if you are unfamiliar with accounting processes. Many local business service centres or colleges offer basic training in those areas as well. In order to maintain control, business record keeping entries should be completed daily and to ensure completion, regular time should be set aside for them. In a new business start-up, an entrepreneur often wears many hats, and focusing on sales and customer service often takes precedence over record keeping. Therefore, remember to prioritize tracking expenses and revenues daily.