Accounting is undoubtedly complicated, but every business should handle it perfectly, especially small businesses. Even the smallest errors can cause lots of headaches, while something bigger might significantly harm you.
Bookkeeping might appear tedious at times, but it’s a necessary evil. Regardless of your industry, mistakes can lead to terrible consequences, otherwise avoidable. Let’s see how you can prevent it all and keep your financial health at an optimum level.
First things first — you must keep accurate and detailed records. Even though it’s easy to miss a comma or omit smaller expenses, the consequences you might suffer are immense in comparison. Since countless problems can arise from improper record-keeping, many are impossible to predict.
If you manage to keep proper daily and monthly records, you’ll eliminate potential problems down the line, including paying additional taxes after a CRA audit.
Incorrect bookkeeping can easily be prevented by paying attention to details, developing good record-keeping habits, and using proper accounting software.
Every business needs a sound accounting system to record and report finances. Without it, it’s too hard to run your company properly. Moreover, delegating accounting duties to outside professionals becomes a hurdle as they cannot help you without that data.
The best solution is a good system, preferably accounting software with automated functions. Such a solution can store necessary information and automatically populate financial statements that your accountant can easily handle.
If you don’t have an accountant, software will make the job easier as the best solutions are made for both cases.
Entrepreneurs, especially newbies, tend to use their personal accounts for business needs and their business accounts for personal needs. Even though this doesn’t seem like an issue, it opens you up to many liabilities.
We need to clarify one thing — personal and business finances, and thus records, are not the same and should never be placed in the same category.
If you have to handle a firm-related cost, always use your business credit card and record this as a business expense. Even if you’re tempted to pay for a meeting with your personal credit card, don’t do it. You’ll be relieved later when you have to deal with tax-related records. Stick to this simple solution to stay out of trouble.
If possible, open a separate company bank account. This will also help with bank reconciliation as you won’t have to distinguish business from personal expenses during an audit.
Many entrepreneurs don’t understand how business taxes work, which is to be expected. However, this can contribute to unrest, consequently leading to mistakes.
That’s why you must start learning about business taxes, tax returns, and how the whole system works in Canada. Learn about your responsibilities by using guides and enquiring about every problem with a trusted tax advisor or some other professional.
The more you ask and read, the more you’ll learn. Consequently, you’ll know how to prepare, keep proper records, what you need to pay and when to pay them, and more.
Planning ahead for business-related taxes is a good accounting practice, even for a layperson.
You might run into problems when the taxes come due by not saving up in time. This could lead to insufficient tax funds, which can open you up to other liabilities, like interest and penalties, and potentially CRA audits.
So, be prepared. Calculate your yearly taxes and put aside enough money before the tax season or pay your taxes by installments, especially if it is required. It’s also advisable to have a separate bank account for paying taxes, if you are not the best at budgeting expenses.
Many entrepreneurs tend to make guesses or assumptions in accounting. For instance, they:
These, and many other misconceptions, can lead to problems, especially with the CRA.
To avoid them, whenever you’re unsure of something, ask a professional or read up on it online. If you rely on the latter, make sure you research using proper sources, leading us to our next accounting mistake.
Some business owners tend to ask people on social media or rely on online sources from non-professionals when looking for bookkeeping advice. This is often a big mistake. You would not believe how many questions our clients ask that start with “I was talking to my plumber…l my barber…. My neighbour…”, anyways, I think you get the point.
Even honest and helpful advice can be problematic. Some of it might be outdated or downright wrong due to the complexity of accounting, or the specifics of their situation versus yours.
That’s why entrepreneurs must seek advice from trusted sources and accounting professionals. Even if that costs money, it’s far less than the potential financial cost of an accounting mistake.
Even if you record all expenses from your receipts, it’s still best to keep them stored and organized, as you won’t have proof to back the deductions on your tax returns in case of an audit.
It’s thus best to keep all receipts, even if you think you’re safe to throw some away. You can also keep their digital records on Google Drive or Dropbox to make things easier. Taking photos of them and uploading that to your accounting software is also a possibility. Studies show that the use of Accounting Software like QBO or Xero, combined with document capture software, like Hubdoc or Dext, will capture on average about $1,400 more expenses per year. At a 40% marginal tax rate, that equates to a savings of $560 of taxes per year.
To stay safe, keep all receipts at hand, either physically or digitally, for seven years so if and when a CRA audit comes, you’ll have the proof needed to back your deductions.
These are some of the most common accounting and bookkeeping mistakes entrepreneurs and small business owners can make. Naturally, other mistakes might also arise, but you’ll avoid most of the possible issues as long as you address the ones we covered.
Even if you have to work a lot on avoiding them, the potential issues in terms of money and time spent are much bigger and more problematic. It’s thus best to work proactively and to reach out to professionals whenever you need help. Moreover, building a good relationship with a trusted accountant and bookkeeper can prevent most oversights and let you focus on growing your business.
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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.
GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of over 30, provides Audits and Reviews of financial statements, and Compilations of financial information, as well as corporate tax returns. We provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.
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