Small Business Accounting

Basic Bookkeeping Procedures

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Welcome to Bookkeeping Essentials - The Practice!

Small business or large corporation, by law, if you operate a business, you are required to keep adequate financial records.

On this site, you will find information on everyday problems about how to do basic bookkeeping for a small company. It is a free bookkeeping resource for work from home business owners.

So warm up your tea, get comfortable and let's begin!

The process of basic accounting is designed to introduce internal controls to safeguard the assets of the business because employees have access to these assets. Out of that process comes ...

... the products. The products of basic accounting are the financial reports.

The basic accounting process consists of:

• choosing a filing system that best fits your own organizational style
• meeting government record retention requirements
• establishing the recording system
• putting internal controls in place
• monitoring the accounting system for accuracy
• interpreting the financial reports to help you make sound business decisions

This section of the website will cover the daily, weekly, monthly, quarterly and annual tasks of small business accounting and transactions you need to watch out for ... so your financial product(s) - your financial statements - are accurate and timely ... to help you run your business.

What you will find in "The Practice" section

Instructions on the practical side of doing your books ... week in and week out throughout the year.

There is some information in chats that is specific to Canadian sole proprietors. When possible, I try to find U.S. references for my American visitors.

I have created a separate page that deals specifically with U.S. tax compliance. It is a work-in-progress and will grow as I collect information.

In general, small business accounting and good bookkeeping practices between the Canada and the U.S. are similar. Canada switched to new GAAP standards in January 2011. The US is not expected to converge to similar standards until 2014 ... so the accounting standards are actually in transition at the current time. IF you have a small private business with no debt, you probably will not notice the change in standards.

Just click on any underlined title of your choice and you'll go right to the page.

Do you ever wonder if you are following good bookkeeping practices? You’re organized, keep up with the paperwork. Do you just cross your fingers, hold your breath hoping the tax assessor won’t call?

This article looks at:

• the benefits of good bookkeeping practices;
• the downside of poor record keeping;
• how Canada Revenue Agency audits for non-compliance; and
• the five categories of good bookkeeping practices are given.

Before you jump in to actually recording the transactions, you may want to take a few secs to read this short discussion on how to choose your accounting system ... Manual or Computerized System? - Small Business Accounting Decisions. No point in finding out after you've done hours of data entry that the system you choose wasn't a fit for your business situation.

5 Articles on
Recording Basic Bookkeeping Transactions

An audit trail provides protection in the event of a dispute or a tax audit. It can also protect your business against fraud … and it’s a good bookkeeping practice.

Here's what's covered from a small business accounting perspective:

• How to create an audit trail
• How to reimburse yourself
• How to take a draw
• The business journal
• The auto mileage log

I can't stress enough how important it is in small business accounting to create an audit trail as an effective means of audit proofing your business.

Small business accounting has a lot of rules. Be on the lookout for bookkeeping transactions that are treated differently than you would be inclined to think ...

Got your tea? Okay, here we go.

In addition to categorizing operating and capital leases correctly, there are four types of common bookkeeping errors you need to be aware of ... so that when you come across them, you know they are treated differently.

Certain transactions such as purchase of equipment or inventory, and some leases are NOT expensed.

Monthly loan payments, while not a capital asset (but loan payments do affect the balance sheet), should NOT be expensed either.

Inventory and monthly loan payments for a vehicle or equipment are discussed in The Training section of this web site (click on the links above to go directly there).

Take a moment to look at one type of error ... the common error of expensing capital assets ... and learn how to handle equipment purchases.

Two other common bookkeeping errors you need to be on the lookout for:

• treating owner's contributions and/or loan proceeds as income
• treating customer deposits as earned revenue

It's enough for now to watch out for these special transactions and ask your bookkeeper or accountant for help booking them ... Small business accounting can be complicated! :O)

Side step the common small business accounting problems business owners come up against so your books don’t stink.

I have written two articles on how to book some basic bookkeeping entries (record keeping examples) to help you avoid the worst bookkeeping errors.

One article deals with accounts receivable, accounts payable and inventory, while the other article deals with capital assets, banking, taxes and year-end.

Parts of the second article require an Insider's Pass. Visitors with an Insider's Pass should click here to view the entire article.

Here are just some of the journal entries I have posted so far:

• How to Record the Sale of an Asset
• How to Record the Purchase of an Asset

Tax Filing Your GST HST Form GST34-2 Learn how your GST HST accounts work. Learn how to record your GST HST payment. Learn how to record your GST HST refund.

• How to Record a Discount

How to Record a Loan from the Owner

• How to Record the Receipt of General Loan Proceeds
• How to Record the Purchase and Disposal of a Vehicle
• How to Record a Capital Lease and Capital Lease Payments
• How to Record Cash or Cheques For the Bank Deposit
• How to Record and Apply a Customer Deposit or Prepayment
• How to Record a Deposit on a Purchase
• How to Record a Bad Debt Allowance
• How to Setup, Record and Replenish Petty Cash

You will also find a short sidebar on How the QuickBooks Undeposited Funds Account Works.

The Bookkeeping Forum has some questions and answers on how to deal with bank accounts denominated in foreign currency and the associated transaction gains/losses:

Foreign Currency Transactions discusses the GAAP accounting treatment for translating and reporting foreign currencies on your financial statements.

Foreign Exchange Transactions discusses how to book the exchange rate on a transaction in QuickBooks®.

This article looks at the difference between operating leases and capital leases ... and how to determine which category your lease falls into.

Information on vehicle and equipment purchases is also briefly discussed.

How to claim the input tax credits for business use of your personal vehicle. Both sole proprietors and corporations are discussed.

You will also find more information about business use of your personal vehicle in the Home Business Taxes - A Tax Planning Opportunity series.

5 Articles on
Basic Bookkeeping Procedures and Checklists

What reconciliations should be done to verify the accuracy of your accounting records … and how often?

In preparation for the year-end process, every balance sheet account should be reconciled to a third party document. (A third party document is one that was created by a someone outside of your business such as an vendor invoice, a bank statement, a loan statement.)

Bank statements, credit card statements, and vendor statements should be reconciled monthly. And don't forget to reconcile your loan account or your line of credit account.

You may want to consider assigning all other balance sheet accounts a quarterly review. The idea is to smooth out your work flow. Divide and assign an equal number of accounts to be reconciled each month over a three month period. If done right, every balance sheet account is reconciled at least four times a year. This ensures that come year-end, you are ahead of the game.

Why is it important to do reconciliations as part of your small business accounting procedures?

The purpose is to verify that you have recorded everything and that your small business accounting records are accurate ... so you will know you are making decisions from good information.

An added benefit of doing your small business accounting reconciliations monthly is they assist in fraud control. Reconciliations are a very simple and basic small business accounting internal control procedure to implement.

I was taught that if you ensure your balance sheet accounts are correct, your income statement has to be right ... it can't be wrong.

Check out these two sidebars on bank reconciliations:

• What is a bank reconciliation (and what is its purpose), and
• How to review the bank reconciliation report prepared by your bookkeeper as a deterrent to fraud.
• How to handle stale-dated cheques is covered
• A few suggestions on how to be on the lookout for fraud ... incentive to you as a business owner to always ensure your bank reconciliation is done EVERY month.

How do you reconcile vendor statements to your accounts payable ledger? The same way you would a bank statement or credit card statement. There are two ways to begin ... aren't there always? :0)

One way is to begin is by opening your vendor sub-ledger. Your account balance should be equal to the vendor statement.

The other way is to run your Aged Accounts Payable Report to get your vendor balances at a particular date ... say the date of your vendor statement or the end of a month.

Regardless of the method you choose, if the balances don't match, here's what to do next:

1. Print off the vendor account from your accounting system. Then get a colored highlighter (or a red pen for check marks). If it makes it easier for you, you can use a different color highlighter for each step below.


2. On your printed report, highlight (or check mark) all vendor invoices that match the vendor statement.


3. Circle any invoices on your vendor statement that are not recorded on your vendor report.


4. Now, on your printed reported, highlight (or check mark) all payments you made that are showing on the vendor statement.


5. Circle any interest or late payment charges on your vendor statement that are not recorded on your vendor report.


6. Circle any vendor payments on your report that are not showing on the vendor statement.


7. In an Excel spreadsheet type (or write on the vendor statement) the following descriptions in column A and the corresponding number in column B.


• Column A Vendor Balance - Column B Enter (write) in the vendor closing balance from the vendor statement.


• Column A Outstanding Invoices - Column B Subtract the circled outstanding invoices and missing interest charges on the vendor statement.


• Column A Payments in Transit - Column B Subtract the circled payments in transit from your vendor report.


• Column A Book Balance - Column B Total the above. The total should equal your vendor report.


8. Print the Excel spreadsheet to attach to the vendor statement ... or save the file under vendor reconciliations.


9. Post the outstanding invoices to your vendor account if you are confident they are valid. Phone the vendor and request a copy of the missing invoice(s) if you can't find it in your paperwork. Address any discrepancies with the vendor as soon as possible to avoid late fees or loss of discounts.


• If you are using QuickBooks, use Enter Bills (not Write Cheques) to post the missing invoice. Make a memo note to reference the vendor statement and that a copy has been requested.


10. Post any unrecorded interest or late payment charges to your vendor account.

As you perform your vendor reconciliation, be on the lookout for duplicate payments and outstanding credits. Pay particular attention to items on the statement that are not current. It means there may be a problem. For example, if you don't have an invoice for an item that is already 30 days plus outstanding, call and get a copy of that invoice.

As a general rule, a good small business accounting practice is not to pay vendors off a statement. Pay only off of an original invoice, not invoice copies. There are exceptions to this rule.

You can also use this method to reconcile your loan account or your line of credit account.

Bookkeeping checklists are really handy so I have put together this quick article on some small business accounting and bookkeeping tasks that should be done.

I have categorized the tasks into seven different bookkeeping checklists:

• the daily bookkeeping checklist
• the weekly bookkeeping checklist
• the monthly bookkeeping checklist
• the quarterly bookkeeping checklist
• the annual bookkeeping checklist
• the year-end accountant package bookkeeping checklist
• the year-end bookkeeping checklist

Visitors with an Insider's Pass should click here to view the entire article.

An important part of small business accounting is performing month-end procedures.

In this article, you'll find an overview of how to perform month end. These month-end procedures are intended for work from home business owners who do their own bookkeeping.

You will also find a sidebar chat on Deleting and Voiding Transactions in QuickBooks

Visitors with an Insider's Pass should click here to view the entire article.

A chat on the various types of adjusting entries booked by your professional bookkeeper or accountant. Accruals and Deferrals are included in the discussion.

Visitors with an Insider's Pass should click here to view the entire article.

Professional Bookkeepers, Become An Intuit QuickBooks ProAdvisor and Save Nearly 60% On QuickBooks Software.

Small business accounting and bookkeeping help ... some frequently asked questions and answers for the home based business owner who does their own bookkeeping.

You'll also find links to all the questions asked in The Bookkeeping Forum that relate to the hands on practice of bookkeeping.

Following is a sampling of the frequently asked questions. Just click on the link to get the answer.

• What does an aged payable report tell you?
• Are income tax expense and income tax payable the same thing?
• What is a Corporate Minute Book?
• How do I enter HST/GST into the general ledger?
• Can I pay myself for doing bookkeeping? I am a sole proprietorship.
• How do I enter HST/GST into the general ledger?
• I want to switch bookkeepers. What information do I need?
• I have just started my own business. How do I organize my receipts?
• How do I get started on keeping my own books?
• Where does amortization go on the income statement?
• What is the normal balance for accumulated amortization?
• What is the full disclosure principle in accounting?
• Are customer deposits an asset or a liability?
• Why is inventory not an expense?
• What is the best way to deal with credit card bills / receipts?
• Who has ownership of the electronic data files?

The goal of small business accounting procedures and processes is to help you package your work, maintain your files, record your transactions, and perform your reconciliations the same way all the time.

Consistency helps reduce errors and omissions. Streamlining your basic bookkeeping processes saves you time and gives you control over your numbers … freeing up your time to figure out how to make more money!

Happy posting!

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