Small Business Bookkeeping: The Definitive Guide for Business Owners

For a person without an accounting or bookkeeping background, it may be difficult to understand the difference between accounting and bookkeeping.

Bookkeeping is a process of recording all your transactions in bookkeeping software, saving business-related receipts and preparing the data for the accountant. It is a process of organizing expenses in the correct category and matching them with receipts, making sure you have invoices for each payment and making sure your business expenses do not have any personal-related transactions.

Accounting is the next step, where all the data created by the bookkeeper are used to generate reports, such as Profit & Loss reports, file corporate taxes or HST taxes and provide summarized information to the business owners. Accounting is the next step, but it can only happen with proper bookkeeping; that is why it is important to hire a professional bookkeeper who has enough experience to prepare your books correctly.

Suppose you have to choose based on price. In that case, accounting usually costs more than bookkeeping because bookkeeping usually does not require formal education and can be done by a business owner with proper training. Accounting, however, requires experience and education; in addition, special software certified by CRA is mandatory; purchasing such software does not make sense for small business owners because it is costly, around $3000 per year, and pretty complex.

• DIY Bookkeeping with Software using software like QuickBooks, Xero, FreshBooks, or Wave. The tools automate many parts of bookkeeping, such as tracking expenses, invoicing, and generating financial reports. They are usually optimized for regular users without a degree in accounting and are easy to use.
• Hiring a full-time Bookkeeper to avoid handling bookkeeping themselves or as the business grows. Hiring a professional bookkeeper can be a good choice. A bookkeeper can manage daily financial records, ensure accuracy, and prepare reports. This option is usually more costly than DIY but saves time and guarantees quality results.
• Using a Part-Time or Freelance Bookkeeper can be a cost-effective solution. Make sure you ask your accountant for a recommendation first. Many accounting firms provide bookkeeping services or work with freelance bookkeepers that they can recommend.
• Engaging an Accounting Firm: Some small businesses may opt to engage an accounting firm for their bookkeeping needs. This option can be more expensive, but it offers the advantage of comprehensive expertise and often contains accounting and taxation services in addition to bookkeeping. At Taxory, we offer free corporate tax preparation and filing with any of our bookkeeping packages.
• Cloud-Based Bookkeeping Services offer a middle ground between DIY software and hiring a professional. However, the cost saving is not enough compared to hiring a bookkeeper there, but the quality of work may be much lower, so we usually do not suggest this option.
• Spreadsheet Bookkeeping using spreadsheets like Microsoft Excel or Google Sheets can be a starting point. This option is the most manual and requires more knowledge about bookkeeping principles, but usually, that is the default option for many business owners.
• Combination Approach, for example, you may use bookkeeping software for daily transactions and hire a professional for more complex tasks like year-end reporting or tax preparation. At Taxory, we offer hourly bookkeeping services, where our small business accountants organize your books and make sure everything is in order before we work on your taxes. Let us know if that is something you are looking for.

The choice of bookkeeping method depends on various factors such as the size of the business, the number of transactions, the budget, and the owner’s familiarity with bookkeeping principles. Small business owners need to choose an option that fits their current needs and can scale with their business.

In Canada, you do not need education to do your bookkeeping if you’re running a small business. Some of our clients manage their bookkeeping themselves or use the help of their family members who do not have any education in accounting or bookkeeping. Nevertheless, they receive training from our company to minimize the number of mistakes, and we do not need to re-do their work.

However, if you have some level of education or training in these areas, it can significantly benefit the accuracy and efficiency of your bookkeeping processes. We highly recommend taking a couple of courses in bookkeeping at a local college.

Here are a few points to consider when looking into some education in bookkeeping for small businesses:

• Basic Bookkeeping Knowledge: Understanding the fundamentals of bookkeeping, such as how to record transactions, manage accounts receivable and payable, reconcile bank statements, and prepare basic financial statements, is the most important part of DIY bookkeeping.
• Accounting Software Proficiency with bookkeeping software like QuickBooks, Xero, or FreshBooks can be a great way to start. Many software providers offer free tutorials or paid training courses. Our clients primarily use QuickBooks Online (QBO), so we suggest looking into the QuickBooks Online option if you have not chosen any software yet.
• Understanding Canadian Tax Laws, including GST/HST, payroll taxes, and income taxes, is important for ensuring compliance and accurately reporting your business finances. We can explain some basics related to bookkeeping and HST filings, but that normally works only in simple cases if you have a single source of income and a small number of expenses. A good example is an independent IT Consultant, who usually has a fixed number of clients and expenses.
• Educational Resources: Consider taking advantage of free or low-cost online courses, webinars, or workshops on bookkeeping and small business accounting. Websites like Coursera offer courses tailored to small business bookkeeping, and Intuit provides a lot of tutorials on QuickBooks. Also, Intuit (the company that created QuickBooks) usually provides free webinars for QuickBooks, which we strongly suggest attending; you can find more information on the Intuit website. In addition, you can visit our YouTube channel, where we post short videos with the most popular questions from our clients.
• Business-Specific Requirements: Depending on your industry, there may be specific bookkeeping practices you need to know. For instance, understanding how to track and account for inventory is important if you have a retail store.
• Continuous Learning: Tax laws and accounting standards can change, so staying informed is a requirement. Following business news, subscribing to relevant newsletters, or joining small business associations can take a lot of time, but you have to stay on top of the latest news.

Remember, effective bookkeeping is not just about collecting receipts and entering them into a bookkeeping software; it’s also about clearly understanding your business’s financial health, which is critical for making informed business decisions. Therefore, we suggest hiring a professional, but if you can’t, investing time in learning the basics of bookkeeping can be precious for the success of your small business. 

When choosing bookkeeping software, small businesses should consider costs, ease of use, specific features needed, and the level of customer support offered. The right choice depends on the business’s size, industry, and detailed financial management needs.
Small businesses have several software options for bookkeeping, each with unique features suited to different needs. Here are some popular choices:

• QuickBooks
• Wave
• Xero
• ZohoBooks
• FreshBooks

Our top recommendation is QuickBooks, but if you want to see a full review of various software for bookkeeping, we already have a detailed blog post about the Top 7 Bookkeeping Software for Small Businesses.

In bookkeeping and accounting, several critical financial statements are important for understanding a company’s financial health and performance. Here are some of the most important ones, with brief explanations:

• Profit and Loss Statement shows the business’s revenues and expenses for a predefined period, typically a month, quarter, or year. It highlights how the revenues are transformed into the net income or net profit (revenues minus expenses). For example, an income statement for a retail store would list sales income, cost of goods sold (CGS), and operating expenditures like rent, utilities, and payroll, culminating in the net profit or loss for the period.
• Balance Sheet shows a company’s financial situation at a specific time. It records the company’s assets, liabilities, and owner’s equity. Assets include cash, inventory, and property, while liabilities may include loans and accounts payable. The owner’s equity represents the owner’s ownership in the company. For example, a balance sheet for a small consulting business might show assets such as cash in bank accounts and office equipment, liabilities like a small business loan, and the owner’s capital contributions.
• Cash Flow Statement shows the flows of cash within the business, categorized into operating, investing, and financing activities. It’s important for understanding the business’s liquidity and overall financial health. For a service-based business, the cash flow statement details cash received from clients, money paid to suppliers and employees, and cash flows from financing or investment activities.
• Statement of Retained Earnings outlines the changes in retained earnings over a specified period. For small companies, this statement would show the retained earnings at the start of the year with the net income for the year and then subtracting any dividends paid to shareholders.

These statements are closely related and provide a full view of a business’s financial status and performance. They are critical for making educated business decisions, getting bank loans, and for tax and regulatory reporting purposes.

The primary accounting standard in Canada is GAAP. GAAP stands for Generally Accepted Accounting Principles and refers to a common set of accounting principles, methods, and standards businesses must follow when compiling their financial statements.

GAAP means following International Financial Reporting Standards (IFRS), which applies to public corporations. However, private corporations in Canada can choose between following the ASPE(Accounting Standards for Private Enterprises) or IFRS.
GAAP aims to ensure accurate, transparent, and consistent financial reporting, which is important for several reasons:

• Consistency: GAAP provides a standardized framework for financial reporting, which means that it ensures consistency in the financial statements of different companies. This makes it easier for CRA to analyze financial statements in case of audit.
• Reliability and Accuracy: Following GAAP makes businesses more likely to produce financial statements that accurately reflect their financial position and performance, which is essential for building trust with investors, creditors, and other stakeholders.
• Transparency: GAAP encourages transparency in financial reporting, which helps reduce the risk of financial misrepresentation and fraud.
• Comparability: Because GAAP requires consistency across businesses in the same industry, it allows for more meaningful comparisons between companies, which is valuable for investment and lending decisions.

Record-keeping is very important in bookkeeping. Record-keeping is a systematic process of recording, maintaining, and organizing all financial transactions and related documents for a business. The documents include invoices, receipts, payroll records, bank statements, and other documents showing income and expenses. Effective record-keeping is critical for accurate financial reporting, tax compliance, and business management.
In Canada, the Canada Revenue Agency (CRA) requires businesses to keep all records and supporting documents for at least six years from the end of the last tax year they relate to. The tax year is the fiscal period for corporations and the calendar year for most other businesses, such as sole proprietorships.
It’s important to know that if you file your return late, the six-year period starts from the date you filed, not the end of the tax year.

Example 1:
For example, if your corporation’s fiscal year ends on September 30, 2024, and you filed your corporate taxes on November 25, 2024, in that case, you have to keep your bookkeeping records until September 30, 2030 (six years from the fiscal year-end).

Example 2:
However, if your corporation’s fiscal year ends September 30, 2024, and you filed your corporate taxes on April 25, 2025 (missed the six-month deadline filing), in that case, you have to keep your bookkeeping records until April 25, 2031 (six years from the date of filing).

In addition, if the records and supporting documents are related to long-term acquisitions like property, buildings, or equipment, you must keep the records for six years after the year of the asset’s transaction, as they are relevant for capital gains calculations.

In some cases, the CRA may request to keep records longer, for example, in case of an ongoing audit. It’s also a good business practice to keep records for a longer duration for internal purposes, such as analyzing trends, managing budgets, and making strategic decisions. However, as per Canadian tax laws, the minimum requirement is six years.

In bookkeeping for small businesses, certain accounts are commonly used to categorize and manage financial transactions. These accounts form the foundation of the business’s chart of accounts and are essential for accurate financial reporting. The most common accounts include:

• Cash tracks all business transactions involving cash, including cash receipts and cash disbursements. In addition, that account includes all cash available on your bank accounts.
• Accounts Receivable records the money customers owe for goods or services delivered but not yet paid to the business.
• Inventory: If the business sells physical products, this account tracks the cost of goods held for sale.

• Accounts Payable records the business’s commitments to pay off short-term debts to its suppliers or creditors.
• Taxes Payable tracking taxes the business owes to the government, for example, HST/GST or corporate income tax.
• Loans Payable: If the business has taken out loans, this account tracks what is owed on those loans. If the loan term is more than 12 months, that goes to the balance sheet’s long-term liability section.

• Owner’s Equity represents the owner’s stake in the business. It includes the owner’s initial investment plus any retained earnings or losses. Owner’s Equity is the company’s “net worth” and is calculated as Assets - Liabilities = Owners Equity.
• Retained Earnings track the cumulative profits retained in the business (not distributed to owners) since its inception.
• Sales tracks all revenue from selling goods or services. It’s one of the most important accounts for understanding how much money a business makes.
• Cost of Goods Sold records the cost of materials or products the business purchases to sell to its customers, which is a direct expense related to sales.
• Payroll Expenses: For businesses with employees, this account tracks all payroll expenses, including wages, salaries, bonuses, and payroll taxes.
• Utilities and Rent track ongoing operational expenses like utility bills, rent, or lease payments for business premises. However, we suggest having separate accounts for utilities and different ones for rent; do not mix them.
• Marketing and Advertising records expenses related to promoting the business, it may be Google Ads, gifts to your clients, printing materials, such as business cards.
• Insurance records premiums paid for any business insurance policies.

Each business may have unique accounts based on its industry, size, and specific financial activities, but these common accounts are typically a starting point for most small businesses. Proper categorization of transactions into these accounts is vital to accurate financial record-keeping and reporting.

Bookkeeping categories, often structured as accounts in a chart of accounts, help organize and classify financial transactions for your business. The categories you choose should reflect the nature of your business and its financial activities. Here are some common bookkeeping categories that many small businesses find helpful:

Assets:

• Cash and Bank Accounts
• Accounts Receivable (money owed to you)
• Inventory
• Prepaid Expenses
• Fixed Assets (like equipment, furniture, and vehicles)
• Investments

Liabilities:

• Accounts Payable (money you owe)
• Credit Card Liabilities
• Loans Payable
• Payroll Liabilities
• Taxes Payable
• Accrued Expenses payable

Equity:

• Owner’s Equity
• Retained Earnings

Income or Revenue:

• Sales Revenue
• Service Income
• Interest Income
• Rental Income
• Other Income (miscellaneous sources)

Cost of Goods Sold (COGS):

• Purchase of Goods for Resale
• Direct Labor Costs (if directly tied to production)
• Materials and Supplies
• Factory Overhead (for manufacturing businesses)

Expenses:

• Advertising and Marketing
• Rent or Lease Payments
• Utility Bills
• Insurance Premiums
• Payroll Expenses
• Office Supplies and Expenses
• Travel and Entertainment
• Professional Fees (legal, accounting, etc.)
• Depreciation and Amortization
• Interest Expense
• Vehicle Expenses
• Repair and Maintenance
• Taxes (Income taxes, property taxes, sales taxes)

Other Income and Expenses:

• Gains or Losses from Asset Sales
• Debt Forgiveness Income
• Extraordinary Items

Remember, these categories should be tailored to fit your specific business needs. Some businesses may require additional categories or subcategories, primarily if they operate in specialized industries or have complex financial structures. The key is to ensure that your bookkeeping categories are comprehensive enough to capture all your business transactions accurately and meaningfully for financial analysis and reporting.

Below are the top three advices we usually give business owners who are doing their bookkeeping themself:

Stay Organized and Consistent: Organization is critical in bookkeeping. Set up a system for organizing all your financial documents, like invoices, receipts, bank statements, and bills. It can combine digital and physical filing systems; however, the trend is to go paperless, which is very convenient. For example, if you can take a photo of your receipt and attach it directly to the transaction using QuickBooks, you do not need to keep a paper receipt. CRA already confirmed that they accept photos or scanned copies of receipts instead of paper. Make sure to record your transactions regularly, preferably daily or weekly. Consistent recording helps avoid a backlog of unrecorded transactions, which can lead to inaccuracies and added stress during busy periods or tax season.

Use Reliable Bookkeeping Software: Invest in good bookkeeping software that suits your business needs. Tools like QuickBooks, Xero, or FreshBooks are designed to make the bookkeeping process more manageable and efficient. These systems can automate many aspects of bookkeeping, like categorizing expenses, tracking invoices, and generating financial reports. Additionally, many of these apps offer integrations with bank accounts and credit cards, which can streamline the process further.

Understand Basic Accounting Principles: Even if you are not an accounting professional, having a basic understanding of accounting principles can significantly aid in DIY bookkeeping. Familiarize yourself with fundamental concepts like the difference between revenue and expenses, assets and liabilities, and balancing the books. This knowledge helps make informed decisions when recording transactions and understanding your business’s financial health.

If you are looking for more tips and tricks for your DIY bookkeeping, please check out our blog post devoted to Bookkeeping tips for small businesses.

Small Business Bookkeeping, primarily when handled internally or by those without formal accounting training, can be prone to inevitable common mistakes. Being aware of these can help in avoiding them:

Not Staying Consistent with Record Keeping can lead to lost or forgotten transactions, distorting your financial picture. To avoid this, set a regular schedule for updating your books, such as daily or weekly, and stick to it.

Mixing Personal and Business Finances can make tracking business performance difficult and lead to tax complications. Always use separate bank accounts and credit cards for business and personal transactions.

Data Entry Errors can lead to significant issues in your financial statements. Double-check entries and regularly reconcile your books with bank statements to catch and correct these errors.

Poor Documentation and Receipt Management can create problems, especially for tax purposes. Develop a system for organizing receipts and documents, either digitally or physically, and ensure every transaction is backed by appropriate documentation.

Ignoring Accounts Receivable and Payable: Losing track of what is owed or what you owe can impact cash flow. Regularly monitor and manage these accounts to maintain a healthy cash flow.

Misunderstanding Tax Obligations can lead to penalties. Stay informed about your tax obligations, create reminders for all deadlines, such as HST tax payments or Corporate tax payments, and consider consulting a tax professional for guidance.

Not Backing Up Data: Losing financial data due to a technical glitch can be disastrous. Regularly back up your bookkeeping data in a secure location. You can use accounting software such as QuickBooks Online or online file storage software such as OneDrive or Dropbox, which are already capable of regular cloud backups.

Using Inappropriate Accounting Software can complicate bookkeeping. Choose bookkeeping software based on your business size, industry, and specific requirements. Sometimes free software may work, but that is only when your business is very small; if you expect to grow, investing in the right software from the beginning is better.

Being diligent, organized, and informed can avoid many common bookkeeping mistakes. It’s also helpful to periodically review and adjust your bookkeeping practices as your business grows and changes.

The cost of hiring a bookkeeper in Canada varies depending on several factors, including the complexity of your business’s finances, the bookkeeper’s experience and qualifications, and the specific services required. Here are some general cost structures and examples:

• Hourly Rate is a good way to start, especially for occasional or part-time work, but if you need regular bookkeeping, that option ends up being costly.
• A monthly retainer is the preferred payment model for our bookkeepers at Taxory. We provide various bookkeeping packages where you pay a fixed amount every month, and in addition to bookkeeping, we also prepare and file your corporate taxes at the end of the fiscal year.
• Flat Fee Services is another option we provided for some of our services. It may be good for specific tasks like corporate tax year-end preparation where you see us once a year. It is easy to budget and you know the final amount you pay in advance.
• Project-Based Rate where bookkeepers may charge a rate for specific projects, like setting up a bookkeeping system or preparing for an audit.

Make sure you understand how you will be charged, nobody likes surprises. Additionally, seeking quotes from multiple accounting firms can help get a competitive rate and find a bookkeeper who fits your budget and requirements. Feel free to discuss our prices by filling out a simple Contact Us form below.

• Income Statement (Profit and Loss Statement)
• Balance Sheet
• Cash Flow Statement
• Statement of Retained Earnings

At Taxory, we provide an entire accounting cycle, where our team handles bookkeeping, accounting and tax preparation, so you can be sure you get the full list of all financial documents for your company.

Ok, you decided to do your bookkeeping, which is fine, but where do you start? Below is a step-by-step guide with concrete actions for business bookkeeping. In essence, that summarizes all the information provided in this blog post; however, that is not a replacement for three years of college focused on bookkeeping studies.

Decide on bookkeeping software.

Decide what software you will use and stick to it. Spend extra time to ensure you are confident to use the software for a long time, as switching in the middle of the fiscal year may be difficult and time-consuming.

Records keeping

• Record every business-related transaction only (for example, your grocery receipt from NoFrills is unrelated to business).
• If you registered an HST account and require HST filing, ensure you have some indication if the transaction includes HST.
• Keep all receipts related to business transactions; if you do not have a receipt, we suggest excluding that from your business expenses.
• Correctly categorize each expense transaction in your software, and discuss that categorization with your accountant so she does not have to redo the work later.

Home office expenses

Create a home-office expense spreadsheet if you use your home as an office. Include your mortgage interest only, utilities, repairs and maintenance, internet, telephone, or if you are renting, then rental expense. Please note that you can use Home-office expenses only if you are not renting a business office space.

Automobile mileage expenses

Create an automobile allowance log book and keep track of all trips related to the business.

Know your deadlines

• Make sure you know when your taxes/payments are due, for example, HST taxes, Payroll remittance, and corporate taxes.
• Calculate and pay your HST taxes and Payroll remittance on time.

Once your corporate fiscal year ends, contact your accountant and discuss what information she needs from you and when. You have six months to file your corporate tax return, but if you owe any taxes to CRA, you must pay the tax balance within three months, so only wait if you are 100% sure you do not have to pay anything.