Two Nails in the Wall:
keeping business records
by Jack Moore, CA
The organisation of business records is really quite simple. If you have
done it adequately, then you will have prepared the necessary records and
documents to enable you to compute your annual taxable income, and even
better, to be comfortable that there will be no hassles from the dreaded
tax man.
As in most things, there is a sequence to keeping records. A bookkeeper
is one who records the transactions of the operation in such a manner that
meaningful information can be easily extracted for the use and benefit of
the owner (management). An accountant is one who takes the figures prepared
by the bookkeeper and massages them so that the accounts then reflect results
on an accrual basis rather than the bookkeeper's cash basis. Generally,
an operation is expected to report its income, taxable that is, on an accrual
basis. Accrual means that you account for income and expenses on a daily
basis rather than on a when received basis. The theory is that interest
on a term deposit is earned daily, not just when payment is received.
In the beginning, a business kept two nails in the wall: one contained pieces
of paper that said who owed how much to the business (receivable); while
the other nail said to whom the business owed money and how much (payable).
Inventories were not of accounting significance. The differing item, or
the balance of the equation was cash in the bank. We have become more sophisticated,
but we have not improved on the basic system.
Even today, the easiest method is to have a bank account that is used exclusively
for and by the business. Every disbursement (cheque, withdrawal) should
be numbered in sequence and an invoice (voucher, hand written notation)
from the recipient of the payment should have the applicable number placed
on it and be filed in sequential order in a binder used for that purpose.
Every receipt (deposit, payment received) should be handled in a like manner
and filed in a binder used for that purpose.
The foregoing represents a cash accounting system. Add to it the two nails
in the wall, as described above, and you have a simple accrual accounting
system. Don't forget to take the pieces of paper off the nails as the accounts
are paid. The systems can get more complicated, but only for the purpose
of supplying more and better information to management. Your professional
accountant should be able to provide the best advice.
The dreaded tax man may tell you that the LAW says that you must have a
voucher (invoice, receipt) for every amount paid out. He may say that the
consequence is that the amount would not be deductible for income tax purposes.
(They seldom take the reverse stand related to amounts paid in or received).
BE NOT AFRAID! The reality is that if most items are substantiated by proper
vouchers and there is a reasonable reason why some are not, then they would
all be allowed. One must be very careful of trying to convince on the basis
of a cash transaction. That runs you into difficulties with various other
Provincial and Federal taxes as well as maybe being called to testify at
the trial of the person to whom you gave the cash (for income tax evasion).
Keeping adequate records is one of the easiest tasks to perform in the ongoing
operation of a business. Unfortunately, it is a task that is too frequently
left to the end of the day. A concerted effort from the start will pay dividends
(those are good things) in the end. Take a few minutes of your valuable
time and consult with that professional accountant. You could do worse.
By the way, the most important action is to have that single-use bank account:
the bank then does nearly all of your bookkeeping for you!
