You’ve started a business a few months ago, and to save money you worked on your own books. Now, you’re coming up to a deadline for a government remittance or tax time and you’re not really sure if you’ve been doing the bookkeeping correctly. You don’t want to wait until the deadline, and then find out it’s all wrong and needs to be redone. Or, your accountant just redoes it and gives you a huge bill.
Here’s what to look at for your bookkeeping check-up:
Check the setup of your accounts.
- Are you using the correct accounts in the right spots? Did you let the software setup the accounts? You want to ensure you have the proper accounts setup and that you include all the accounts you need. The software is usually pretty good at getting the basic accounts most people need. Do not allow anyone to setup your accounts based on the tax return. Setup your accounts based on your business’ needs, and what you want to get out of your accounting.
Check your tax codes.
This is a major area where mistakes can happen. What Province are you in? What Provinces do you sell to? The basic code everyone uses is G for GST. Some Provinces do have a PST, so you’ll need to setup that code too. For Sage 50, you can combine the two in one code, for example, GP for GST and PST. Enter a code for each Province you sell into. I usually setup a G – GST, GP – GST/PST, I – GST included and IP – GST/PST included. Note the HST is the same as the GST.
Is your tax being calculated correctly?
This is where you check the setup of your tax codes from Question 2. Go into each code and make sure the correct percentage is entered. GST is 5%, PST varies with Province (BC is 7%), HST also varies with Province (ON is 13%). Check with CRA’s website for the correct percentage, and with your Provinces sales tax website.
Quickly go through account transactions and check for any irregularities.
- You may be asking yourself ‘check for what?’ That’s okay. In your software do up a general ledger printout (list of all transactions) and go through it and check for items that don’t belong in that account. The big ones to check our automobile, meals, and office. Remember, any item you bought over $1000 should be treated like an asset, not an expenses. For example, a laptop bought for $1300 should be treated as an asset and depreciated.
Have you reconciled your bank and credit card accounts?
- This is absolutely imperative you do every month. This is a great way to find items you may have missed entering during the month, and also captures any bank errors.
Do the reconciled balances on the books match the statements?
- Banks only allow you to claim errors within the 30 days after the statement date. If you find that the bank is not reconciling, then it may be the banks error, and you need to catch those things.
Are you correctly remitting your GST/HST, payroll, etc.?
- You can look at your sales and take that total times the GST/HST rate as a quick check. If you have sales outside of Canada, it’s a good idea to keep those in a separate sales account so this calculation isn’t skewed by non-GST sales. You probably want sales accounts that relate to your products or services, some people separate out accounts based on the taxes charged.
Are you recording assets (larger items you own) properly?
- Any asset you purchase over $1,000 (officially it’s $500, however, depending on the asset the $1,000 is used). Computers usually under $1,000 are just written off, however, that desk for $750 should be treated as an asset.
How well are your paper receipts organized?
- Do you have your receipts organized by category? Supplier? What’s the best way? For a sole proprietorship, the best organization method is by expense category. Preferably how they are entered on the tax return. If you have more than one account in your software combined on the tax return, keep them in separate folders (or envelopes) per the software, however, have the folder/envelope paper clipped together.
How well would you survive an audit?
- As I always say to my clients, do you want the 4-hour audit or the 4-day one? The 4-hour audit everything is highly organized and when you are asked for something you quickly grab it and present it to the auditor. The more organized you are; the less time they will spend at your office.
How old are your Accounts Receivable / Payable?
- Look at your customer’s outstanding invoices, are any going to be uncollectible? Have you kept a good trail of emails, calls, etc. trying to collect them? If you find invoices approaching the 120 mark, you may as well write them off now; if you ever do collect it, you can record the income when it’s received.
- For your vendor invoices, what haven’t you paid for some time? Are you going to pay it? Why not? If it’s just something you haven’t received a credit for, you may as well reverse that amount now rather than wait for the credit note. If you have payables over 120 days, you should be reversing those, as you probably won’t pay them.
Are you using the Miscellaneous Expense account too much?
- Never, ever, ever use the Miscellaneous account. Actually, if you look in the Chart of Accounts and it’s there, delete it. If you have items in this account, check what they are, and if you’re unsure ask your accountant or tax preparer.
How are you entering information into your system?
- Are you using accounting software, such as Sage 50 or Sage One? You must be using some kind of accounting software. Spreadsheets don’t cut it anymore, and CRA may even demand you do it in accounting software, or just disallow your expenses; revenue they keep and then base your taxes owing on that. You should be using accounting software for invoicing as well; CRA requires sequential number invoicing (1,2,3,4, etc.), don’t use the clients name or initials as part of the invoice; you can preface the number with the year, if you wish. Spreadsheets don’t allow for this sequential numbering, so you would have to keep a separate spreadsheet listing all your invoices with the number, date, and who so you don’t mess up the numbering.
For desktop software are you taking advantage of recurring and default information.
- Many accounting software allow for recurring entries, those entries that are basically the same each time. This can save you quite a bit of time entering. Even if the amount changes, a recurring entry can save you time having to type in the vendor/customer name, date, payment method, account, etc. Many programs allow you to associate a certain sales or expense account with a particular customer or vendor; even assigning a tax code to them.
Look at your Current Ratio = Current Assets / Current Liabilities.
- The Current Ratio look at the liquidity of the business. Can the business pay off short-term debts (bank overdrafts, accounts payable, government remittances) with the current assets (cash, accounts receivable, investments)? In other words, cash out. For example, if the Current Assets are $100,000 and Current Liabilities are $50,000 then it’s CR is 2. This is a great ratio as it has twice the amount of current assets to pay current liabilities. A CR of less than 1 is considered too high risk by the banks.
Look at your Total Debt Ratio = Total Debt / Total Assets.
With this ratio you’re looking at whether or not you have the monies available to pay down any debt you have. The banks definitely look at this one as to your ability to pay. For example, if your Total Debt is $100,000 and your Total Assets are $130,000 then your Total Debt Ratio is 76.9%. This is too high. Banks are probably looking for a 25% to 40% TDR depending on the industry.
Profit Margin = Net Income / Sales.
- This one is pretty easy. For example, if your Sales were $100,000 and your Net Income was $10,000 then your Profit Margin is 10%. That means for every dollar you bill out, your net income will be about 10¢. Your Profit Margin will vary depending on the type of business you run. Grocery Stores and many retailers are lucky to get a 5% Profit Margin. You should strive for Apple’s at 25%.
If you are doing your own books, then these 17 checkups will ensure that your accountant or tax preparer doesn’t get a nightmare at year-end. I always say that the first thing you should outsource is your bookkeeping, even from the very beginning of your business. It’s always good to have a second set of eyes that may catch things that you never would.