CHOOSING A BOOKKEEPING SYSTEM

A sole proprietor can keep books in a paper ledger, a spreadsheet or accounting software. The right choice depends on the number of transactions, whether the business is registered for GST/HST, holds inventory or has employees, and how much time the owner wants to spend. This page compares the options, lists the features that matter for a Canadian proprietorship, explains how to set up a system and run a simple weekly and monthly routine, and covers working with an accountant. What records must be kept and for how long is covered on the Record Keeping page.

THE THREE OPTIONS

• Paper ledger: a cash book recording money in and out, with receipts filed by month. Workable only for very small businesses with a handful of transactions a month and no GST/HST registration.

• Spreadsheet: one row per transaction, with columns for date, description, amount, GST/HST and the T2125 category, and a summary tab that totals each category. Low cost and flexible, but every entry is manual and errors are easy to miss.

• Accounting software: cloud products such as QuickBooks Online, Xero, Wave, FreshBooks and Sage connect to bank accounts, produce financial statements and sales tax reports, and keep an audit trail. The usual choice once a business has regular sales, is registered for GST/HST, or has employees.

WHICH OPTION SUITS WHICH BUSINESS

• Side business, few transactions, not registered: a spreadsheet is usually enough.

• Registered for GST/HST: software that tracks tax collected and paid by transaction makes returns and input tax credit claims far easier and more accurate.

• Selling goods: software with inventory tracking, or a point-of-sale system that feeds into the accounting software.

• Employees: software with a payroll module, or a separate payroll service, to calculate source deductions and produce T4 slips.

FEATURES THAT MATTER IN CANADA

• Canadian sales tax: correct GST, HST, PST and, in Quebec, QST rates, with reports that match the lines of the GST/HST return and support for the Quick Method if used.

• Bank and card feeds: automatic import of transactions from Canadian banks and credit cards, with rules to categorize recurring items.

• Receipt capture: photographing receipts with a phone and attaching them to the matching transaction.

• Invoicing: numbered invoices showing the GST/HST registration number, with automatic reminders and online payment links.

• Reports: profit and loss, balance sheet, aging reports and a general ledger, exportable for the accountant.

• Accountant access: a separate login so an accountant can review and adjust the books directly.

• Data export: the ability to export all data in a usable format if the business later changes software.

SETTING UP THE SYSTEM

• Start date: begin at the start of a fiscal year if possible, so the whole year is in one system.

• Chart of accounts: replace the software's default list with accounts mapped to the T2125 lines, as set out on the Chart of Accounts page.

• Opening balances: enter cash, receivables, payables, inventory, equipment and loan balances as at the start date, with the difference going to owner's capital.

• Sales tax settings: enter the GST/HST registration number, reporting frequency and filing method before recording any transactions.

• Bank rules: set up categorization rules for recurring transactions, but review every rule-based entry rather than accepting them all automatically.

A SIMPLE ROUTINE

• Weekly: categorize new bank and card transactions, attach receipts, issue invoices and record payments received.

• Monthly: reconcile each bank and card account, review the aging report, and check the profit and loss for anything unusual.

• Each GST/HST period: run the sales tax report, compare it to the general ledger, and file and pay the return.

• Yearly: work through the year-end close checklist and pass the books to the accountant or tax preparer.

RECORDS AND SECURITY

• Records in Canada: records must generally be kept at the business's place of business or residence in Canada, unless the CRA approves otherwise. Electronic records stored on servers outside Canada are generally acceptable if they can be accessed and produced from Canada.

• Imaged receipts: paper receipts that are scanned or photographed can usually replace the originals if the images are clear, complete and kept for the full retention period.

• Backups and access: use strong passwords and two-factor authentication, and keep a periodic export of the data outside the software.

WORKING WITH AN ACCOUNTANT

• Decide the split: many proprietors do the day-to-day entries themselves and have an accountant review the books and prepare the year-end adjustments and tax return.

• Use the same software: choosing software the accountant already uses reduces the cost of their review.

• Deductible: bookkeeping software subscriptions and accounting fees are deductible business expenses.

KEY POINTS

• Match the system to the business: spreadsheets for small, simple operations; software once there is GST/HST, inventory or payroll.

• Set it up properly: a T2125-based chart of accounts, correct opening balances and correct sales tax settings.

• Keep a routine: weekly entries and monthly reconciliations prevent a year-end backlog.

• Protect the data: secure logins, regular exports and records accessible from Canada.

SOURCES

• Income Tax Act: section 230 (books and records).

• Canada Revenue Agency: Guide RC4409, Keeping Records, and Information Circular IC05-1R1, Electronic Record Keeping.