Those not well-acquainted with the nitty-gritties of the financial world often consider bookkeeping as an easy job that anyone can do. It is frequently underrated and understated, which is why many small businesses usually overlook it. This, however, is a grave mistake. Bookkeeping is anything but easy, and most definitely not something to ignore till the last minute.  On the contrary, good bookkeeping practices are a strong pillar on which every business, especially a small business, can stand firmly. Bookkeeping often provides the first clue to any imbalance in your business finances or potential fraud. In fact, well-recorded books can even protect you from a lengthy, expensive, and frustrating (Canada Revenue Agency) CRA’s Assessment.

Why Bookkeeping Matters

The Income Tax Act grants the CRA the authority to reassess tax returns within three years (for individuals) and four years (for corporations) from the date of tax filing. The Act also requires taxpayers to maintain books and records in a manner that determines their tax liability. If the CRA has reason to believe that the taxpayer has misrepresented the tax due to neglect, carelessness, or willful default, or has committed fraud, they can reassess returns at any time.

A Canadian businessman had to bear the brunt of the CRA’s strict compliance rules due to his poor bookkeeping habits. Despite the mistake being almost a decade old, the businessman was summoned and assessed by the CRA for misrepresentation of tax returns. However, this misrepresentation did not stem from deceit or willful fraud on the part of the businessman. He failed to maintain a live ledger or any form of books. Instead, he created a ledger at the end of the year using information from bank statements and invoices, but failed to separate his business accounts from his personal accounts.

This seemingly simple mistake could have been avoided by adopting an effective bookkeeping system from the beginning. 

How Bookkeeping Can Save You from CRA’s Assessment 

What’s better than successfully emerging from a CRA’s Assessment unscathed? Not attracting one in the first place! And that’s precisely what good bookkeeping is all about. Well-maintained and duly updated books of accounts and other financial records work as an armour shielding you from any CRA action, audit, queries, or penalties. 

Here are some essential tips to save your business from coming under CRA’s lens:

Separate business and personal accounts

Avoid making the same mistake as the businessman in the example given above. Keeping your business account separate from your personal account from the very beginning helps ensure that your business expenses are not mixed with personal costs. Why is this important? 

Mixing up business and personal records can be viewed by the CRA as misrepresentation of transactions and lead to hefty fines. Opening a separate bank account for your business, with its own individual credit card and bank statements, can help keep the CRA at bay while facilitating more practical business matters, such as reconciliations, financial analysis, and internal audits. 

Categorize expenses

Recording every transaction is not enough. A competent bookkeeper knows that it is equally crucial to properly categorize every transaction and expense to avoid making mistakes in accounting. For instance, recording a newly purchased computer for business as an expense instead of as an asset or failing to record outstanding payments correctly can prove to be a costly mistake. Such errors, even if done unknowingly, can trigger a CRA assessment. Thus, accurate revenue recognition and recording are imperative for a small business owner to avoid unwanted queries.

Saving all documents

A thumb rule of good bookkeeping is to save every document, no matter how small or inconsequential it may look to you. From gas receipts for the business vehicle to bills for meals given to prospective clients to invoices and other essential papers, every single document related to your business has to be duly recorded and stored, ideally with a backup, as proof of transaction. 

Many business owners make the mistake of thinking that bank statements are enough to prove business transactions, such as the purchase of raw materials. However, this is not true. You will have to produce the purchase invoice as valid and acceptable proof of the transaction. This is where an experienced bookkeeper can help you, as they are well-versed with the CRA’s documentation requirements and can help avoid an audit. If you still face CRA’s Assessment, bookkeepers help in accumulating the documents that an auditor requires.

Recording transactions

Mixing up personal transactions with business ones is one thing, and completely forgetting to record a transaction is another. This happens, especially in small businesses, where the owners themselves handle multiple tasks. However, missing transactions are a serious issue and can trigger CRA’s Assessment. Hence, it is important to regularly reconcile all books of accounts and ensure every business transaction is duly noted with its valid proof – something that a skilled and knowledgeable bookkeeper knows and can do to avoid unwanted CRA attention.

Why is a Professional Bookkeeper Your Best Bet

Bookkeeping, as you can see above, is not as straightforward as it may appear. To meticulously record every business transaction, categorize them correctly, store the documents carefully, and present them to the CRA during an assessment requires undivided attention and alertness. A single mistake on the part of a bookkeeper can snowball into bigger problems for the business, including bad business decisions based on incorrect data and CRA penalties. Even an accountant uses bookkeeping records as the base to prepare financial statements and file tax returns.

By investing in a competent bookkeeper to look after your business’s books, you can scale your business without the constant threat of the CRA breathing down your neck. Moreover, it will give you more time to focus on other important matters, such as planning for the next level of your business growth. 

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Your Bookkeeping Needs

Talk to a professional bookkeeper to help you set up a bookkeeping system, record transactions, and keep your financial transactions organized. At Edelkoort Smethurst CPAs LLP, our bookkeepers offer services including preparing ledgers and filing documents. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best bookkeeping expertise, contact us online or by telephone at 905-517-2297.