Understanding Accounting Records

Every entrepreneur needs to be aware of and prepared for many things when they go into business. As a business owner, you will be accountable to customers, suppliers, employees, business partners, your bank and tax authorities.

Maintaining reliable accounting records is one of your many responsibilities as an entrepreneur. Accounting documents must be updated regularly and be easily accessible in the event of a tax audit.

To better understand and be prepared for the world of business accounting, find out exactly what accounting records are and the importance of keeping them up to date.

What are accounting records?

Accounting records refer to documents containing all information related to a company’s financial transactions. These are an essential tool for business accounting and fiscal management, as they allow you to observe and control cash flow.

Accounting records can contain information on purchases and sales (invoices), payments (receipts), expenses and income, fixed assets, inventory, etc. The goal is to provide an overview of the financial situation of a company, allowing you to calculate your business income tax and social security contributions, prepare annual accounts, produce financial reports, etc.

Accounting records must be kept accurately and consistently. Errors or omissions can have serious consequences on the management of your company and its tax obligations.

What do accounting records look like?

Accounting records can be presented in a variety of ways, either on paper or in digital format. Many companies choose to use reputable accounting software for simplicity and peace of mind. All you need to do is enter each transaction as it takes place, and all company financial activities will be recorded in an accounting database.

In addition, most accounting software packages can produce a range of reports, giving you easy access to the important data required for tax audits. This data can also be used to produce financial statements or tax reports.

If you prefer not to use accounting software, it is possible to keep your accounting records yourself, either on paper or within Excel spreadsheets. Be aware that this is not recommended, especially if you have a large volume of business transactions.

The importance of accounting records

Keeping accounting records is obligatory for any incorporated business (also for trusts, non-profit organizations, universities and more) in Quebec and elsewhere in Canada. The Canadian tax system is based on self-assessment, which means the government trusts businesses to declare profits from their commercial activities.

However, the government does not trust taxpayers blindly. You will need to keep accurate accounting records detailing all financial and accounting transactions of your company during the year. By checking these records, financial authorities can determine whether you have collected GST/HST in accordance with the law. These records also form the basis of a company's financial statements, which are essential for business tax reports.

The importance of keeping your records up to date

Businesses must keep their financial records up to date and keep all supporting documents for each recorded transaction for a minimum of 7 years. For example, if you want to prove to auditors that a $10,000 deposit to your bank account was not income, but a loan, you will need to be in possession of a written contract with your lender.

The same is true for business expenses. If, for example, you want to claim a purchase of printer ink as a business expense, make sure you have the invoice as proof of purchase.

Be aware that a credit card statement is not sufficient proof to justify business expenses. During an audit, auditors will require invoices.

The components of good accounting records

Proper accounting records are made up of a variety of components. Here are a few of the most common.

The sales journal

A sales journal lists all company sales. It typically includes the date of the sale, the customer’s name, the amount before taxes, tax details (if applicable), and the total amount.

The expense journal

An expense journal lists all business expenses. It includes the date of each purchase, the supplier’s name, the category of the expenditure, the amount before taxes, tax details (if applicable), and the total amount.

The cash receipts journal and the cash disbursement journal

Accounting records also include a cash receipts journal and a cash disbursement journal. Each document notes the date, the amount and the account used for the transaction.

These journals also include the type of receipt (customer sale, loan, advance from a shareholder, purchase return, refund, tax, etc.) or expenditure (supplier payment, loan payment, advance to a shareholder, tax payment, salary, etc.). Every transaction must be linked to a source.

The payroll journal

One of the main components of accounting records is the payroll journal. As its name suggests, it lists all salaries paid for each period, and includes the employee’s name, the pay period, the gross amount, the net amount, and details about source deductions and the employer’s contributions.

Records of accounts receivable and payable

It is also strongly recommended to keep records of accounts receivable and payable. These give companies instant access to information about money owed and owing at any time.

If a customer doesn’t pay you, you can withdraw that sale from your revenue to avoid being taxed on it.

How to keep accounting records

Now that you know what accounting records are and what they should include, let’s look at how you can maintain your records to effectively manage your business. Here are a few practical tips.

1. Choose the right accounting software

The choice of appropriate accounting software is essential for keeping reliable and efficient accounting records. Select software that is suited to your company's needs. Accounting software can include functions like invoice entry, tax management, payment tracking, fixed assets management, etc.

2. Organize and file accounting records

To keep accurate accounting records, you will need to properly organize and file accounting documents. It is important to file them in chronological order and archive them carefully. Documents to keep include purchase invoices, sales invoices, bank statements, contracts, etc.

3. Enter accounting data on a regular basis

It is imperative that accounting data be entered into the software on a regular basis to keep up-to-date accounting recorsd. Data must be entered as documents arrive to avoid omissions or errors. It is advisable to dedicate some time each week to data entry.

4. Check balances and totals

Check balances and totals regularly to avoid errors and inconsistencies. It is recommended that you verify bank balances, customer balances, supplier balances and totals of each different section of your accounting record.

5. Make regular backups

To avoid data loss in the event of a computer problem, remember to make regular backups of your accounting records. Save your data on an external device and keep a copy outside the company to protect it against theft or fire.

6. Hire a good accountant

It can be a good idea to hire a business accounting expert to help you keep your books. A chartered accountant can do data entry, verify totals and balances, prepare financial statements and more. This allows you to focus on core business priorities and benefit from the advice of a professional.

7. Train employees

Finally, it is important to train employees on bookkeeping to avoid errors and inconsistencies. Proper training will enable employees to understand the basic principles of accounting and to enter data correctly into the accounting software. It will also allow the company to improve the efficiency of the bookkeeping.

Benefits of keeping proper accounting records

Maintaining thorough and accurate financial records is essential to effectively managing a business. In this section, we will discuss the primary benefits of keeping proper accounting records.

Tax savings

Comprehensive, well-organized accounting records can help businesses save money on taxes. Accounting records can serve as a reminder for deductible expenses and input tax credits (ITCs).

Financial forecasting

Understanding your company's past and current financial situation can help you predict how it will perform in the future. You can use records of past accounts to take stock of your situation and make adjustments before embarking on new projects.

Unfortunately, SMEs often neglect financial forecasting due to a lack of preparation.

Optimizing business management

In any company, information in the accounting department tends to be centralized. If you access and use that information, you can identify your company’s needs and the problems it faces. You can also look for trends, keep track of earnings or losses and analyze certain KPIs.

This information can help you make important decisions quickly, increase profits and prolong the life expectancy of your business.

T2inc helps you maintain effective accounting records

Every company is required to keep accounting records. But these records are not sufficient in the event of a tax audit—you’ll also need to keep supporting documents for a minimum of 7 years. The ink on bills and invoices can fade with time, so you may want to consider digitizing your supporting documents and keeping them on the cloud or an external hard drive.

It is usually easier to rely on an accountant to manage your records, due to the large amount of information to be processed. If you would like advice or guidance on setting up your business accounting records, contact our team today. We will be happy to answer your questions!