There will be good and bad times for any business, and the way to track those ups and downs directly impacting business should be our primary concern. It will enable you to understand what helped the business make lots of profit or what caused it to liquidate its cash. The way you can do it is through bookkeeping. Bookkeeping is the most fundamental method of recording all the financial transactions of a business to indicate the business’s current stance.
By recording all the necessary and the most crucial financial documents, you can identify the attributes that affect the business’s cash in and cash flow, detect any adjustments to be adapted to secure profit and understand your business’s financial health and cash position. Besides, the major role bookkeeping plays is in taxation.
Failure to comply with proper bookkeeping methods can lead to your business being under the eyes of the auditors of CRA (Canadian Revenue Agency), and penalty charges one after one that might destroy the overall backbone of your business. Therefore, having a proper bookkeeping system can save your tax filing cost if filed on time with no previous error. Let’s look at how bookkeeping can save your tax filing cost and accountant fee in the blog.
What Is Bookkeeping?
When a business operates, many factors sneak in, like tax, double taxation, tax penalty, excess expenses, reconciliation, etc. Maintaining these tasks may differ from the duty of the owners or any executive working within the capacity of a business. These tasks are generally assigned to bookkeepers who specialize in effectively executing all financial record management.
The accurate and standardized way of recording financial transactions to prepare receipts, invoices, balance sheets, income statements, and cash flow statements is bookkeeping. These recordings are then used to give an overview of how the business is operated, how much money is flowing in, how much money has been incurred for expenses, and where the money is spent more than expected.
As a result of this bookkeeping, you can show your business’s performances to your stakeholders and investors, who can decide whether or not the business is aligning with its principles and conditions. This then helps them decide if they want to invest any further or do any cost-cutting to make the business go over a long period with no significant losses.
These transactions are recorded in the accounts for their designated purpose. Let’s say you own a stationary shop in Oshawa and pay your vendors or suppliers for providing you with the sharpener. Once paid, you will record it as the cash account and credit it as Credit cash because your cash account (one of your assets) has decreased by the amount you paid to the vendor. However, on the other hand, your inventory has increased by the worth of the sharpeners. For that, you will use it as your debit inventory.
Once you record all your transactions, where you have your assets, liabilities, and equities all recorded, there’s no way your bookkeeping can go wrong, thus saving you from any tax penalty.
Why Bookkeeping Is Important?
Bookkeeping helps to categorize all sorts of expenses and incomes of the businesses, so you know during audits and your own in-house investigation how much tax you owe to the CRA and how much revenue you can bag. It lets you have all the necessary documents in place to present them to the relevant authority to make decisions for the company’s future.
But the two most important places where bookkeeping becomes immensely imperative are tax-saving strategies and expense categorization advantages. Let’s dive into them one by one.
Tax-Saving Strategies
Business comes with lots of responsibilities, and one among them is filing a tax. Tax filing is a treasure trove of a successful business as you will be devoid of any complications that could arise from it due to not filing it on time. But many other issues like dealing with the clients, taking their payments, marketing through promotions, and paying for the inventory and expenses can make your tax filing take a back seat.
As a result, you may not keep your tax information updated, and failing to provide it to the governing body may lead to a severe penalty. That’s why you should practice keeping these valuable documents prepared so that at the time of their need, you can show them not only to the auditors but also to the bookkeepers.
Remember, bookkeepers are human beings, too, and their time matters. They won’t like to waste too much time on you preparing and rifling through your receipts, tax-claimed papers, and others. They need to invest the same amount of time in others. In that case, you need to hire an in-house bookkeeper to dedicate their entire time to you. But you won’t see any accounting cost reduction in that case as they will charge you a lot of money for this.
Yet, you also need to understand that despite their experience and ability to sort all the lost papers out ready to file your tax, they will still require more time than usual to keep all of them in the centralized system. It means that you will be late filing your tax while squandering your time and money both. Only a solution like bookkeeping in advance – either you do this yourself if you are experienced or hire someone to do it full-time or part-time can save your back from getting a penalty.
Let’s visualize this instance to understand how bookkeeping can save your tax. In Canada, you, as a business owner, are bound to apply GST (Goods and Services Tax) on different products or services with the existing price of the goods and services. This applies when the customers purchase those goods and services as they need to pay that additional GST along with the main price. For example, if you own a shop in Alberta and own an appealing shop where you sell jackets, you may have to add GST (the amount can vary).
If the jacket is worth $100, you may want to add 5% GST – a federal tax that business applies to the price of most goods and services sold. Then the total cost will be $105, and the customers will have to bear the expense. You will need to file this additional 5% or $5 to the CRA.
Likewise, harmonized sales tax (HST) – used in certain provinces in Canada, may also apply to certain products or goods sold to customers. If you charge an HST of 13% of the total price of the book worth $50, the total cost will turn out to be $56.50, from which you need to declare this extra $6.50 to the CRA.
It’s just a product we are talking about, but once you, as a business owner of a retail shop responsible for selling 100 products in a day with GST or HST applied, you need the most effective way of keeping the records of each of this GST or HST documents in the centralized system. The expense tracking benefits you by getting you all the vouchers and tax receipts before randomly filing your tax.
However, some items like milk, bread, and vegetables are exempt from such GST or HST. So, if you by mistake apply GST on such product as a grocery shop owner, the bookkeeping can help you understand the source you wrongly took the tax from and sort it before getting a penalty from the CRA. Also, if you buy any office furniture for which you have to pay GST, you can easily claim tax refunds from them by declaring them to the CRA by showing your recording.
None of these can be useful if you haven’t taken care of your efficient bookkeeping methods. You will either end up paying too much tax than required or not paying the proper amount due to a loss of your precious document. Therefore, the importance of bookkeeping is indescribable.
Expense Categorization
Speaking of expense categorization, you must know that not all expenses are the same. As a business owner, you will need to track various expenses like spending on office furniture, paying salaries to employees, and investing in buying items that have manufacturing to maintenance costs involved. For this, you need to understand double-entry bookkeeping, whereby you will record the transactions where each transaction will affect the two accounts simultaneously.
One is the credit entry account and another debit entry account, and both credit and debit will balance out, meaning that both sides of the following equation will remain the same.
Assets = Liabilities + Equity
Assets: They are the company’s resources that will stay with the company and have future economic value. Examples are the cash that the company owns, inventories, office equipment, etc. Whenever they increase, they will be denoted as debits, and when they decrease, they will be called credits.
Liabilities: When a company has any obligations to others like debt, salaries to be paid to the employees, mortgage, or accrued payment which you owe to them, they are called liabilities. An increase in liabilities is known as credits, and a decrease in them is called debits.
Equity: When you pay all the debts or expenses with the cash you have as assets (subtracting liabilities from assets or assets – liabilities = equity) and finally come to the stakeholders, it refers to equity, and examples include original investment, earnings, sales revenue or cost of goods sold. Bear in mind COGS means the total cost involved in producing a good through material and labor costs. Also, the sales revenue is not an asset as it is not valued for future economic benefits. It is an earning that a company has made.
Let’s put them into perspective to see how bookkeeping can save your tax from flooding with earnings that were supposed to be declared properly with proper recording.
If you own a boutique house where you managed to sell cloth to a customer who paid $300 to you. Since the cash, one of your main assets, increased by $300, you will debit this cash. Now your sales revenue (earnings or income) has just increased by $300, too, you will credit the sales revenue, as we know that an increase in equity (in this case, sales revenue) is always a credit.
Once you sold your cloth, it would no longer be in your inventory, meaning a decrease in assets by $200 (this is the original cost of the cloth), causing this inventory to become credit. In turn, your COGS will increase, meaning the expense will increase by $200, which will impact the equity. When the equity reduces, this will be defined by debit.
Now, if you don’t have these expense and earning accounts and their associated receipts and balance sheets, you might fall victim to CRA, fining you with a lump sum amount since they expect you to keep a systematic record of all of them so at the time of their audits, you can instantly present them to the CRA without searching back and forth.
How Bookkeeping Can Save Your Tax Filing Fees?
Bookkeeping Can Help You Avoid Penalties for Late or Incorrect Tax Payments
Most people doing business don’t realize that late submission of tax may portent for penalty and closure of a business to a certain extent. When you lack any bookkeeping knowledge resulting in disorientation and loss of many important financial transactions, it can lead you to miss the deadline for the tax and incur an unnecessary amount.
This blunder doesn’t always penalize you for not making the tax filing on time; it causes a loss when you mention the wrong amount too, which is deductible. This mostly happens when you leave your documents unattended for a long time or don’t care to relocate them to the right place, either digitally or physically. Suddenly when you get time to see your tax-preparer to prepare your tax documentation as well as financial report, you find yourself in a predicament of not having them in your possession or losing them forever.
Previously we stated that bookkeepers won’t be able to have their whole day for you. Therefore, you cannot search for them with enough time in hands while your tax preparer is busy pushing you to have them upfront. This is when you’ll realize the importance of diligent bookkeeping. But it will be too late, and you have to face the consequence of delaying the taxation.
A lack of well-sorted bookkeeping means that you have been absent-minded regarding this for a long time, and you have no interest in prioritizing the CRA’s value for your business. It is likely to happen when your business experiences a substantial business growth with more transactions to flow in, and that too in a variety of different income categories. Such large quantities of transactions without any valid bookkeeping method in place lead to such dreadful consequences.
For say, if you have a graphic designing agency in Montreal, you’ll need to purchase must-need graphics-related tools and software, hire animators to whom you need to pay salaries, rent office, hire talents by traveling overseas, and purchase office equipment. Now, not all these are subject to tax; some are deductible. If you have no sound knowledge of which expenses went where, you may include some of these fully or partially deductible expenses in your records that might cost you unnecessarily.
Besides, various tax treaties can save you from double taxation– where the government charges you taxes twice on corporate profit or assets in another country other than your resident country. You cannot keep current with all these tax treaties unless you are an accountant or bookkeeper.
However, if you still want to see an accountant or bookkeeper less, that’s possible too when you record everything time-to-time. This helps you save more by reducing the burden of the bookkeeper, thus allowing them to focus only on sorting your paperwork.
Bookkeeping Can Help You Stay Organized and Prepared for an Audit
Be aware of the punishment for the late filing – incurring a 5% penalty of the total amount owing, while an additional 1% will be added to each month’s late return for a maximum of 12 months if deemed necessary.
Hence, being late in paying taxes will come with a price and its consequence as each late payment adds more complexities to your case, making it a delight for the auditors as they have more reasons to ground you with more remittance of tax – but that’s fair to do so as it’s your responsibility to make things right, not theirs.
From statistics of 2017-22, the total number of years serving in prison for evading tax was 119 years with $17M in court-imposed fines. This clearly shows that you cannot get away with tax evasion even if you hide the smallest amount.
Only an accurate and detailed bookkeeping system that tracks all sorts of financial statements, reflects results on the data-driven financial report, and reports all the covert and overt information to the CRA can help your business escape any hassles. Failing to report the correct information, calculate the right amount, and provide sufficient information to reinforce your tax remit will surely subject you to any moderate to major penalty. This is how bookkeeping can save your tax filing cost without inviting CRA to your premises.
Accurate Records Help You Identify Tax Deductions and Credits
Good recordkeeping of your regular financial transactions can itemize the individual sector from which you can benefit from a significant reduction of your tax. You may not otherwise realize it unless you collect those documents and sort them yourself or with a bookkeeper to present them to the authority to claim your portion of the refund.
In Canada, you can have a tax system called capital gains. It defines a tax being remitted on the profit that you make by selling your assets at a higher price than its original price. These assets are recognized for the business’s needs, like property allocated for the business, official equipment, machinery, etc.
If you bought land for $1,500,00 and sold it for 2,000,00, this excess profit of 50,000 will be subject to tax. However, certain rules and conditions apply to this, so it is important to have a professional bookkeeper to educate on how the rates apply and how the rates will vary from region to region. However, there is another term called capital loss in which the sold value will be less than the asset’s original price.
However, the interesting thing for Canada in relation to capital gain is that it only charges you tax on 50% or half of the capital profit, making it a favorable choice over the traditional income tax policy. Let’s say you’ve sold a machinery for $20,000 when its original price was only 10,000, you will be taxed for 5,000 of the overall profit of 10,000.
All these can be tracked and traced with the help of recorded financial documentation that benefits from a well-structured bookkeeping system. When you have all the records saved and sorted in centralized bookkeeping software, it gets easier to detect how you can claim your deductible taxes from there, and that’s how bookkeeping can save your tax filing cost and save yourself through accountant fee reduction.
Besides, there are various other ways you can claim your deductible taxes. Having a diligent bookkeeping system will qualify you for a myriad of tax claims from the followings –
Medical and Dental Expenses: A common question will be when meeting your bookkeeper is where your medical expenses are. You must know your medical expenses can be deductible on your tax return. You can easily claim your medical tax return on the medical services you used, like hospital bills, prescription medication, or medical aids.
Like W-2 employees in the US, the T4 employees – who get a T4 slip signed by the employer certifying the employee’s income can claim tax deductions and are eligible to receive medical and dental care tax waivers.
But ensure you have those supporting receipts or invoices of the medical services so you can give them to the bookkeeper while filing your tax so that you won’t be charged any taxes on these, but instead, you can claim on your behalf.
Child Care Expenses: This becomes a major turn for you when you have kids to raise while juggling your work and businesses simultaneously. To ensure your kid’s proper fostering, you may want to send them to caregivers or daycare centers, etc. Even if the minimum amount you pay to caregivers is as much as $600, that will sum up to $7200 a year. You can save this significant amount by showing the relevant documents as a courtesy of diligent bookkeeping during tax filing and claiming what’s yours.
Moving Expenses: If you need to move somewhere for the sake of your business to meet any shareholders or participate in any events, you can claim a tax deduction. This might include flight or transportation costs, temporary lodging, meals, etc.
Non-Refundable & Refundable Tax Credit: Non-refundable tax credit reduces your tax liability to zero but cannot reduce any more than you owe. In fact, if your tax credit is more than you owe, that won’t get you the tax refund at all.
But the refundable tax credit reduces your tax liability to zero, and in addition, if your credit is more than you owe, you’ll get that as a refund.
For example, your medical expense, as a non-refundable tax credit for a year, is $1,500, whereas your overall tax bill for that fiscal year is $1,000; your $1,000 will be waived but won’t get you the excess $500 as a refund. But the refundable tax credit will get you that excess of $500 while zeroing your tax amount.
All these can help you claim your refund with no hassle and delay once you have a dedicated bookkeeper working for you to save all these documents. Check out more to see how you can claim more deductions using bookkeeping, so you know how bookkeeping can save your tax filing.
The Costs of Bookkeeping
The bookkeeper is involved in tax preparation savings while recording your financial transactions, monitoring your fiscal year’s financial health, generating financial statements, and projecting the economic forecast. With their multifarious role integrated with years of experience, they become an indispensable part of your business if you want to prepare and file your tax statements.
Therefore, bookkeepers don’t come free of cost; their hiring costs depend on multiple factors – how long they are in this profession, do they work full-time or freelance, their presence in the market, their testimonials and reviews, and which sector they feel comfortable working in.
The actual cost of any bookkeeping services varies as it depends on the size of the business, its complexities, and the types of services they need. In Canada, you’ll need to pay from $2,500 to $4,000 to any well-known in-house full-time bookkeeper, whereas part-time self-employed bookkeepers tend to rake in anywhere between $20 and $50/hour.
The problem with hiring an in-house full-time bookkeeper is with their increased wage. Many companies cannot afford to onboard them if they are recent start-ups or have less budget. Besides, their sudden leaving of the company can lead to a huge disarray. This is where part-time freelancing bookkeepers can add value to the company of all stripes. They can work for your company by working on furlough and helping manage all your financial work.
Since their existence is out of touch and they have their own preferred time that the owner must follow, it worsens when the tax session is imminent. Sometimes, they take advantage of your hourly wages, working productively for 2 hours but then charging for three hours.
But if you want to hand over your business to a bookkeeping service agency, they have the potential to become your savior. They may charge a little more, but their physical presence and the ability to provide multifaceted services per your requirement are phenomenal. Since they are used to dealing with all sorts of clients and companies of all sizes, their expertise can greatly help you.
The most important of all is that they are not confined to only one accountant or bookkeeper; they have several prominent bookkeepers specializing in various fields of bookkeeping services in Canada that help them assign the right expert bookkeeper for you. Even though they get busy with multiple clients and they treat everyone equally, they will tell you upfront before taking over a case whether or not they can meet the deadline – which is a good thing.
Also, you can benefit from their face-to-face free consultation, where you can get to choose which services you want and how you want to proceed with their payment. They might have the price written on the website, but you can still discuss further while making your customized bespoke bookkeeping services.
One of the most important aspects of bookkeeping is sourcing the software, as their subscription price is too high, and not every individual bookkeeper can afford to have them. Hence, these bookkeeping service-oriented companies can help you with DIY (do-it-yourself) software and automation tools like QuickBooks, Xero, or FreshBooks.
By taking their DIY software, you can use them at your office without requiring any of their accountants or bookkeepers. But remember, you need to have a rudimentary or some solid bookkeeping knowledge to leverage that software to record and generate your financial statements.
However, if you opt for a bookkeeper from the same agency that will help you virtually while allowing you to use their cloud-based accounting software, that will be possible too.
What’s Next?
Finding the right bookkeeping company that will assist you with bookkeeping on a long-term basis becomes an essential part of life. If you are worried about where you must do your next tax filing or full cycle bookkeeping, we’ve got you covered. At Oshawa Bookkeeping, you will get 360-degree services to all your bookkeeping and accounting-related solutions.
We prepare and file your tax, GST, HST, and PST, manage your payroll with pay slips and T4 generation, reconcile your accounts with unlimited transactions, and consult you with answers to all the possible interrogations by the CRA.
While most bookkeeping companies start their service provision from $500 to $2,000, we, Oshawa Bookkeeping, start our pricing from $250 with a free consultation before the deal is finalized. However, the real pricing is determined after the first consultation, depending on the size of your business, services you want and various other factors.