Transcript

Host: Welcome to the segment called Record keeping, part of the Reporting Business Income and Expenses video.

With me is James Lee. Welcome James.

What's the best way for small business owners to record their income and expenses?

Subject matter expert: Use a system that works best for you, one that accurately reflects your business income and expenses. Your records have to support all income, credits and deductions listed on your tax return.

It's best if you keep all receipts, payment information and tax information in one location to make filing your return easier when the time comes. It's important to keep your business and personal income and expenses separate; as you cannot claim personal expenses as a business expense.

The simplest method of recording these expenses is a basic sheet with columns that list the common categories of expenses. At the end of each month, total each column, and then start a new sheet for the next month.

There are a number of accounting software packages available to help you with your record keeping.

Host: How should income and expenses be accounted for?

Subject matter expert: Generally, you have to report business income (other than farming or fishing income) using the accrual method of accounting. Farmers or fishers can use the cash method or the accrual method, but not a combination of both.

Under the accrual method, you have to report income in the fiscal period you earned it, regardless of when you receive payment.

Similarly, you deduct allowable expenses in the fiscal period in which you incur them, whether or not you pay for them in that period. Incur means you either paid or will have to pay the expense.

Host: So at the end of the year I total up all of my sales and report them even if I haven't been paid for them?

Subject matter expert: That's correct. On the expenses side; you can also claim for any expenses incurred during the year even if you have not paid the bill yet.

Host: James, can you tell us more about the cash method?

Subject matter expert: Yes Janice, under the cash method, you report income in the year in which it is received (whether in cash, property, or services) and you deduct allowable expenses as they are paid in the year in which you actually pay them. If you are a farmer, or fisher, you can use the cash method. If you are a self-employed commissioned sales agent, you may use the cash method as long as it accurately shows your income and expense claims.

Host: So with the cash method I don't claim the income until I receive payment and I don't deduct the expense until I pay the bill?

Subject matter expert: That's correct. The accrual method is by far the more common method used by the majority of small businesses.

For more information go to the CRA's webpage on Accounting methods. The link is included in the Related links for this segment.

Host: Can you tell us, how important record keeping is?

Subject matter expert: Yes, persons carrying on a business or engaged in a commercial activity in Canada, persons who are required to file a GST/HST return, and persons who make an application for a rebate or refund are required to maintain adequate books and records. Accurate record keeping enables the determination of their tax liabilities and obligations, or the amount of any rebate or refund to which they are entitled.

Keeping good records is very important. Insufficient record keeping could cause a business owner to over report income and pay too much tax, or under report and pay too little. There are also a number of benefits for you when you keep good books and records.

More information is also available in the following publication;

GST/HST Memorandum 15.2, Computerized records. The link is included in the related links for this segment.

You can also get more information by viewing the CRA tax information video called Keeping records, located at www.cra.gc.ca/videogallery.

Host: OK, can you give us some examples of the benefits of good record keeping?

Subject matter expert: Complete and organized records can help you identify the sources of your income. You may receive cash or property from many different sources. If you don't have records showing your income sources, you may not be able to prove that some sources are non-business or non-taxable.

Complete and organized records can also provide tax savings, since good records serve as a reminder of deductible expenses and input tax credits. If you don't record your transactions, you may forget some of your expenses or input tax credits when you prepare your income tax and benefit return or GST/HST returns.

Your records can also help you to calculate the taxes due and can help ensure that you pay the right amount of tax and claim the credits you're entitled to.

Complete records can help you see your financial position and trends. This could be helpful when applying for loans from a bank for example.

Host: James, what types of sales and expense journals does the CRA require a small business owner to use?

Subject matter expert: The CRA does not issue record books, nor do they recommend any particular book or set of books. There are many available on the market, as well as electronic accounting software programs.

The minimum requirement is a day to day record of your receipts and expenses. A book with columns and separate pages for income and expenses is most convenient.

Keep this record along with:

• deposit slips
• bank statements
• cancelled cheques; and
• receipts that support your expenditures

If you are doing on-line banking, the CRA recommends that you keep a paper or electronic copy of your transactions.

Host: So, let's say I have a business that uses the internet to sell products and services. Are there other requirements for record keeping I should know about?

Subject matter expert: Yes, persons engaged in electronic commerce, which can be broadly defined as the delivery of information, products, services or payments by telephone, computer, over the Internet or by any other automated means, must retain electronic records that meet the CRA's requirements. The retained electronic records must, in combination with any other records, such as price lists and price changes, have an adequate level of detail to meet these legislative requirements.

More information is available in the following publication;

GST/HST Memorandum 15.2, Computerized Records. The link is included in the related links for this segment.

Host: When do business owners have to report their income and expenses?

Subject matter expert: Business owners have to report their income at the end of each fiscal year. Fiscal year-end is also known as the tax year-end or financial year of your business.

The following persons usually use a calendar year (January 1 to December 31):

• individuals and certain trusts
• professional corporations that are members of a partnership such as accountants, lawyers, or doctors
• partnerships where at least one member is an individual

However, some people use non-calendar tax years:

• if you are an individual or a trust that uses a non-calendar tax year, you may elect to use that same year for your GST/HST fiscal year
• if you are a member of a partnership, you may elect to use the same fiscal year for GST/HST as your partnership's tax year

A corporation can elect to use a calendar year for a GST/HST program account or use the same year-end as the corporation income tax program account.

Individuals in their first year of business may sometimes request to use a non-calendar tax year. In this case they would need to use Guide RC4015 and Form T1139 which is included in the guide.

More information is available in the following publication:

Guide RC4015, Reconciliation of Business Income for Tax Purposes.

Host: Where can I go to get more information on this topic?

Subject matter expert: For more information go to the CRA's webpage on Business and professional income. The link is included in the Related links for this segment.

For more detailed information, please view the CRA's video titled Keeping records located at www.cra.gc.ca/videogallery.

Host: Thank you James.

This concludes the segment called Record keeping, part of the CRA's Reporting Business Income and Expenses video.

Thank you for watching.