Matt and Curtis talk about common bookkeeping errors and changes to bookkeeping in our latest podcast.
If you're a sole proprietor, we have good news about bookkeeping: it doesn't have to be complicated. Your ultimate goal is to prepare an annual income statement for your accountant. This blog post outlines a 6-step simple bookkeeping method (a.k.a. income statement only).
Keep it simple and help keep your accounting fees low this tax year! Also, make your life a 100 times easier by paying for all of your business transactions with your business bank and credit card accounts, and keeping your personal expenses to your personal accounts (or cash).
In this method, there is no balance sheet required, so there is no need for debits and credits. With that said, we know bookkeeping software like Xero and Quickbooks Online ("QBO") are all the rage. So, we've got fundamentals on those too. Software uses the double-entry bookkeeping method, which is a bit more complicated that our income-statement-only method.
6-Step SIMPLE bookkeeping (a.k.a. Income-statement only)
Step 1: Start with a list (or chart) of accounts
Every transaction your business makes will need to be be categorized to an account. An account is basically a category for all of your income (sales) and expenses (supplies, insurance, bank fees, etc).
See the standard accounts we have on our simple income statement template. Add to this list to suit your business - this one is quite simplified.
Step 2: Gather your business transactions
On a monthly basis, log into your bank and credit card accounts and download the following:
- Monthly PDF bank and credit card statements
- All monthly transactions in an Excel (or .csv) spreadsheet
- Interac e-Transfer history
Save these files to a folder along with all your sales invoices, bills, statements and receipts. Note that bank transactions downloads and Interac e-Transfer history are usually only available for six months from your online banking.
Step 3: Sort your transactions
Copy each month’s downloaded transactions spreadsheet into the income statement template. Assign each transaction to an account category and enter the totals of each into the Monthly worksheet of the income statement template.
Step 4: Add expenses that didn’t go through the bank statement
If you paid cash or used a personal card, then add those transactions manually.
To make things easy, always use your business bank account and/or credit card to pay for everything business related. Use your personal bank account to pay for your personal and home operating expenses.
Step 5: Income statement (a.k.a. Profit and Loss)
You have sorted (or coded) every transaction for the tax year. Now it’s time to add them up and prepare your income statement. True North’s income statement template is a very simple worksheet that helps you sort out the money you make and the money you spend.
Add all of your sales invoices for each month in the Monthly tab. Then fill out the expense accounts totals. To see year-to-date amounts, refer to the annual tab. You can see your net income (revenue minus expenses). Your net income is your profit and what you are taxed on.
Step 6: Home office expenses
Complete our home office template with your rent, utilities, property tax, cell phone and internet. A portion of these can be deducted. Your accountant will put the information from this template into the tax return, so it doesn't go onto the income statement.
CLOUD BOOKKEEPING SOFTWARE
If you do choose to use bookkeeping software, great! We've got a few tips on the fundamentals.
A note on balance sheets
Bookkeeping software uses double-entry bookkeeping, which builds both the income statement and balance sheet. Most sole proprietors don’t really need a balance sheet, since there is no separation between the person and the business.
We recommend only using software if you need to. The end result is unreliable if the bookkeeping is not done right or is incomplete.
Xero or QBO are our cloud bookkeeping software recommendations. Both require some training and background in double-entry bookkeeping to be really effective.
If you choose to go this route, your goal is to prepare a proper general ledger and trial balance, which tracks assets, liabilities, sales and expenses.
Step 1: Set up your Xero or QBO account
You’ll start by establishing December 31 as your financial year end. Import a chart of accounts. Check to make sure the GST imported properly for each account. GST does not apply to all business expenses (e.g. insurance and bank fees), so make sure the GST is only applied where necessary.
Step 2: Import bank transactions
Assuming you have a business-only bank account, you need to import those bank and credit card transactions into Xero. Unless the invoices were generated in Xero, the sales invoices need to be imported too.
You can download your bank transactions from your bank account into a spreadsheet and then import the spreadsheet to your accounting software. Bank feeds connect your bank account directly to your Xero or QBO account, and your transactions are automatically imported in real time.
Invoice from your Xero or QBO account to better track your receivables. If you need a specialized invoicing program, try to find one that integrates with Xero or QBO.
Step 3: Reconcile each transaction
Assign each transaction to an account (a.k.a. expense category). Expenses not on the bank statements, like cash or personal credit card, need to be entered manually.
Once each transaction is reconciled, the ending bank balance in the software should match the balance on your bank statements (and credit card statements).
Step 4: Run reports for general ledger and trial balance
At the end of the year, when you are confident that the general ledger captures all your transactions and the one-page trial balance looks right, then you can give these two reports to your accountant.
If this sounds confusing, don’t worry, it is. Give us a call and we can help you get set up.
Or, just use the 6-step income-statement-only method (unless you need a balance sheet). Wave Apps is a free invoicing program. Use Wave if all you really need is invoicing capabilities.
We’re happy to answer your questions, clear up any confusion about either bookkeeping method and get you on the right path. Having clean, up-to date books will make tax time so much easier for you! Give us a call or set an appointment up with us today.
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