Start a business, Do your taxes, Save money

Accounting Books Vs. Tax Books

Okay, you’ve got a business name, opened a bank account, and have clients thrusting fistfuls of money at you.

This is the stage where most small businesses run out and buy a basic version of QuickBooks or Simply Accounting. In my opinion these are both good software options but have far too many bells and whistles for most small businesses. If you have a few employees (not “contract workers”) and a retail operation with $100,000 in sales or more, then maybe you should buy one of these.  MAYBE.

If your business consists of you and the odd contract worker (I’ll do a post on the difference between a contract worker and an employee at a later date) that you pay a lump sum to every now and then, and your GROSS SALES for the year will be less than $30,000, DO NOT buy any accounting software. And even if your sales are $200,000 you may still  be better off not buying any software.

QuickBooks and Simply Accounting can make the small business owner’s life miserable.  You’ll waste hours of your life trying to figure out the software, hours more correcting mistakes, and at the end of the year you’ll still have to pay an accountant to change your accounting records into categories the Canada Revenue Agency (CRA) will accept for tax reporting.

Huh? Can’t I just plug my Net Income from QuickBooks into my tax form and be done with it?

Nope. Net Income is calculated differently for tax purposes. For example, CRA has strict rules for allowing depreciation of assets as an expense. They even made up their own name for it: Capital Cost Allowance. At year-end a lot of my job concerns backing out certain numbers from accounting software accounts and putting in the numbers in the correct categories that CRA allows for tax purposes.  In other words, I take my client’s QuickBooks file, throw a bunch of stuff out, put a bunch of stuff in, change the names of a few accounts, and then fill out the tax return.  Sometimes this takes me 1 hour, sometimes it takes 40.  Ouch. That’s a bill no one wants to see.

So, why don’t small businesses keep track of their expenses and revenue the way CRA wants them to, rather than the way most accounting systems do?

Excellent question. There are reasons to organize accounts the way most accounting software does, but this structure only benefits a large business or corporation with more than one shareholder or partner.

Since we are starting a small business, we will organize our books exactly the way CRA wants us to.  This will save us a lot of time at year-end when it comes to doing our taxes. And you won’t have to pay a guy like me a dime to convert your “Net Income” to “Net Income for Tax Purposes”.

Next post I will talk about the specific expense accounts we will use, and how to keep track of them.

June 13, 2011 - Posted by | Running Your Business | , , , , ,

No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s