Now under two weeks left until T-Day in Canada. Ten letters down (including today), with still 16 to go! I might need to squeeze in a couple of letters on the same day at the end.
I'm discovering that the deeper one goes into the alphabet forest, the tricker it is to come up with good lettered tax terms. But today I do have an important one for anyone who has self-employment income. Today, J is for Journal Entry.
No, not as in travel journal, or dear diary kind of journal. But the kind of bookkeeping journal entry that will save you if you're ever challenged about your income or expenses by the CRA, because it presents a complete roadmap of your business financial transactions over the relevant taxation year(s).
WHAT IS A JOURNAL ENTRY
A journal entry is a fundamental accounting concept, but one which most of the general public won't have heard of. The reason you need to know about it if you run your own business is that through it you can prove when, why, and how much money was received or paid out from your business.
A journal based on the double entry bookkeeping system requires that the dollars of debits always equals the dollars of credits. This balancing out is the double check we all need. It'll save you from both missed transactions and transposed numbers.
Usually, each journal entry will contain the date, account name, and amount to be debited or credited. I also recommend a brief explanation of the transaction. Journals can be maintained by hand, on an electronic spreadsheet (like Excel), or in bookkeeping software like Quickbooks or Simply Accounting. If you don't have journals, you don't have bookkeeping records.
SHOEBOXES AREN'T BOOKS
Some small business people believe what accountants pejoratively call the Shoebox Method to be perfectly adequate for tax time. Into one shoebox, you toss over a 12 month period all the receipts for things you bought for the business. Into another shoebox, you toss all your sales receipts for the money you've collected from your customers. Then, at tax time, you toss both those boxes at your accountant, and hope for the best.
With the Shoebox Method, there are no journals. In fact, there aren't really any "books." Just some scraps of disorganized paper. They're a big pain to add up, and can lead to inaccurate tax filings that don't withstanding later CRA audit scrutiny.
WHY YOU NEED JOURNAL ENTRIES
With journal entries, you can figure out almost instantly how much money you netted in a given month or year, because your debits and credit are all summarized in front of you.
What this means for tax time is that you'll know how much tax you owe by plugging your journal summary numbers into tax preparation software (or turning them over to your accountant). You still need those individual receipts as back up documents, but the journals tell the real tale.
I'm not suggesting that journals are super easy to keep up to date by spending 30 minutes on a Sunday afternoon doing a little data entry while watching the game. It's definitely possible to keep your own books, but my suggestion is to turn them over to an external bookkeeper.
No need to hire someone full or part-time. Quality bookkeepers can be had in Ontario from about $35 to $90 an hour, depending on where you live (bookkeepers cost more in big cities) and whether you employ an independent bookkeeper (cheaper, but less supervision) or use one who is an employee of the accounting firm you use (more expensive, but more supervision). Regardless of how you do it, just make sure that you keep some official journals.
Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.