Small Business Accounting And Taxes
Why is organized accounting and record keeping so important to a small business?
Accounting and record keeping for your small business is really, really important. Accounting for any business is important. It's important so that you don't lose track of deductions that you may be entitled to. We generally encourage people to use a computerised program. Most everybody has a computer or has access to one, and there are several out of the box, off the shelf programmes that function very, very well. We also encourage clients to set up files; payables files are very common. Set them up by vendor so if you write a cheque to ABC company or you write a cheque to Susie Jones, you have a file set up just for that. Staple your cheque receipt or write your cheque number and amount right on the voucher and file them. Every year take the files, put them in a box, send them off somewhere and start the new year over again. Those basic rules can really help insure that if you are, heaven forbid, audited, you can provide adequate backup for the deductions that you've claimed and the onus really is on the taxpayer to provide that back up. Cancelled cheques are wonderful back up; vendor statements are even better.
Do I need to separate my personal and business financial records?
You should keep separate books and records for your business from your personal finances. The basics are to start with a separate checking account for personal and business. Separate personal and business credit cards are good too (in the business name if possible). Try the best you can to pay your personal expenses out of your personal account (things like rent and groceries). And pay for business expenses like office supplies, salaries, even business rent out of your business account.
What is "cash basis" accounting?
People on the "cash basis" of accounting generally pay tax when they receive money, and they generally take a deduction when they spend money. So, the cash basis taxpayer gets taxed when the deposit goes into the bank account, and the cash basis taxpayer takes the deduction when the check is actually mailed to the vendor.
What are the advantages of cash basis accounting?
The obvious benefit of being a cash basis taxpayer is that the tax follows the cash. An accrual basis taxpayer sometimes ends up paying tax on money that hasn't yet been received--we call it "accounts receivable." Whereas, a cash basis taxpayer has received money and is paying the tax out of the money received, so there's less of a chance of being caught short. If you're a cash basis taxpayer and you want to lower your tax bill, it's always a good idea to try to get all of the bills paid at the end of the year, to the extent you can. If you're working with clients and you're willing to extend terms to them so that they could maybe pay you in a subsequent year, you may be able to reduce your tax liability a little bit.
What is" accrual accounting"?
Individuals that have larger businesses or businesses with inventory may be required to use the accrual basis of accounting. So you may want to check with the regulations or your tax preparer to see if you fit into that category. Accrual basis taxpayers pay tax on income earned and tax on expenses when incurred, rather than when paid. So if you're an accrual basis taxpayer, when you send that bill out to your client, the tax is assessed at that time. You pick it up as income. And when you're an accrual basis taxpayer, when you incur an expense -- when you receive a bill from your vendor -- that's when it becomes a deduction, as opposed to actually when you write a check and pay it.
