Bookkeeping Basics for Canadian Small Business Owners

What Does Bookkeeping Actually Mean?

Bookkeeping is the systematic recording of every financial transaction in your business — money in (income) and money out (expenses). The goal is a complete, accurate, and organized record of what happened in your business during the year. From these records, an accountant can prepare financial statements and tax returns.

The CRA requires every business to maintain records for 6 years from the end of the tax year they relate to. If you are ever audited, these records are your proof. Without them, the CRA can disallow deductions and assess taxes, penalties, and interest.

What Records Must You Keep?

• All sales invoices and receipts — Both paper and electronic
• Purchase receipts and invoices from suppliers
• Bank and credit card statements — All accounts used for business
• Payroll records — If you have employees
• HST/GST records — All collected and paid amounts
• Asset purchase records — Computers, vehicles, equipment
• Mileage logs — For any vehicle used for business
• Contracts and agreements with clients and suppliers
• Loan and financing documents

Cash vs Accrual Accounting

Cash accounting records income when received and expenses when paid. Accrual accounting records income when earned and expenses when incurred, regardless of when cash changes hands. Most small businesses use cash accounting for simplicity. However, if your annual revenue exceeds $500,000 or you carry significant inventory, the CRA may require accrual accounting.

The Chart of Accounts

A chart of accounts is a categorized list of all the accounts used to record transactions. Setting it up correctly from the start ensures your reports are meaningful and tax preparation is efficient. Common categories include:

• Assets — Cash, accounts receivable, inventory, equipment
• Liabilities — Accounts payable, HST owing, loans, credit cards
• Equity — Owner's capital and retained earnings
• Revenue — Sales, service income, other income
• Expenses — Rent, payroll, utilities, professional fees, advertising, vehicle

Bank Reconciliation: The Most Important Monthly Task

Every month, compare your bookkeeping records to your actual bank statement. Every transaction should match. Discrepancies could indicate errors, missed entries, or even fraud. Monthly reconciliation is the single best practice to maintain accurate books throughout the year and avoid surprises at tax time.

Software Options for Canadian Small Businesses

• QuickBooks Online — Most popular; integrates with CRA, payroll, and HST filing
• Wave Accounting — Free for basic bookkeeping; good for sole proprietors
• FreshBooks — Best for service businesses that invoice clients
• Sage 50 — Robust for larger small businesses; desktop-based
• Spreadsheets (Excel/Google Sheets) — Workable for very simple operations

When to Hire a Bookkeeper

Consider professional bookkeeping when: you are spending more than 3 hours per week on books; you have employees and payroll to manage; your HST filings are becoming complex; your books are months behind; or you are unsure which expenses are deductible. The cost of a professional bookkeeper is itself a fully deductible business expense.