Bookkeeping Errors Will Cost You Money

Bookkeeping Errors Will Cost You Money

Some business owners don’t fully appreciate the consequences of incomplete or error filled bookkeeping records.

You need proper records and bookkeeping for:

1. Managing your business – without timely and accurate bookkeeping records and financial reports you are flying blind. As a minimum you should have an accurate monthly profit and loss statement.
2. Provincial sales tax (PST) and labour law compliance
3. Federal sales tax (GST)
4. Income tax
5. Payroll and reporting
6. Arranging bank loans and other financing

Taxpayer’s Responsibility to Keep Proper Books and Records

As you may be aware, it is the taxpayer’s responsibility to keep proper books and records.

Poor bookkeeping could lead to incorrect or under-reported items, such as sales, rental income or other types of income. Flawed bookkeeping records could lead to significant tax problems with the Canada Revenue Agency as well as other government agencies.

Your company may incur late fees and other penalties due to poor bookkeeping.

For example, if you don’t have supporting invoices from suppliers on file and organized for your income tax disbursements you could have expenses disallowed in the event of a CRA audit. That could be very, very costly for you.

Canada Revenue Agency Requirements

The following is a direct quote from Canada Revenue Agency (CRA)

“Requirements that all records must satisfy
“Your records must:
• be reliable and complete
• include the information needed to meet your tax obligations and to calculate your credits
• be supported by documents”

Why Good Bookkeeping is Vital

Bookkeeping is the day-to-day recording of the financial transactions of a business and includes these key elements:

• Purchases – items for resale and business expenses all supported by documents – supplier invoices, paid receipts, etc
• Sales – using a cash register, invoices or other forms to record both sales and sales taxes
• Banking – recording of income and expenditures

Bookkeeping can be kept in physical books or computer programs like Sage or QuickBooks.

Bookkeeping is done from source documents by recording income, disbursement and banking. A source document is simply an electronic or paper record of a purchase, sale or bank transaction.

WHEN SOURCE DOCUMENTS ARE INCOMPLETE OR MISSING, BOOKKEEPING IS DIFFICULT AND CAN RESULT IN SIGNIFICANT AND COSTLY ERRORS.

CLIENTS CAN SAVE TIME AND MONEY HAVE PROPERLY ORGANIZING SOURCE DOCUMENTS.

Examples:
• Disbursement from a bank account of $5,000 but no supporting supplier invoice, so not recorded as a business expense. This results in an incorrect profit and loss statement. At a 30% tax rate, that costs the business owner $1,500 in extra income taxes paid for just one bookkeeping error.
• Sales receipts not kept. GST and PST are estimated which could be overpaid.
• Purchase for $12,000 with missing supplier invoice. The GST paid is not recorded which results in a missing GST expense of $575.
• A bank transfer for a business purchase of $4,000 is made but no record is kept. Recorded in error as an Owner’s Withdrawal. Results in $1,200 in extra income taxes paid.

A Simple Bookkeeping Solution

For a small business paper files are your best option, then the bookkeeper records the transactions in an accounting program like Sage or QuickBooks.

A PRUDENT BUSINESS OWNER WILL ENSURE THAT THESE MINIMUM RECORD KEEPING FUNCTIONS ARE DONE IN A TIMELY AND ACCURATE MANNER.

Good business practices:

1. Accurately record the income and sales taxes – use a cash register or sales receipts for all sales.
2. Deposit all income into a business bank account. Don’t spend any income – bank it all. That way your income and deposits will match.
3. Purchase all goods and services using cheques or a debit card. Keep a copy of the purchase invoices or receipts. Avoid paying for goods or services using cash.

A simple file system

1. Use a monthly file folder (paper or electronic) to store the income records
2. Use a file folder for the monthly bank statement and paid invoices. Each month has a separate file folder. Ensure each bank withdrawal is supported by a paid vendor invoice or supply an explanation.

My Accountant Will Save Me

Your accountant would love to save you money on paying taxes or even on accounting fees.

However, if you have bad records or poor source documents, your bookkeeper or accountant is hindered in recording transactions correctly which could result in missing expenses, lost tax savings and could take extra time to clean up a mess.

Why Bother?

Accurate books and records allow you to:

• Know where your business finances are at
• Helps keep your employees and vendors happy
• Proper business records are a legal requirement
• Satisfy government auditors in the event of an audit

We would be pleased to provide training for your team members to help you organize your bookkeeping records.

Creative Commons Attribution: Permission is granted to repost this article in its entirety with credit to New Heights Accounting and a clickable link back to this page.

Image credit: Pixabay 1820796

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