Start a business, Do your taxes, Save money

Setting up Your Business Books: Step 2 – Revenue

Revenue = Show me the money!

It’s time to get out a fresh envelope for the shoebox and write “Revenue” on it.  Or “Sales”, or “$$$ I collected”.  Any of these will do.

The important thing is that whatever you put in this envelope gives you enough information to trace where, and in what form, the money came from.

This might be a good time to re-read the section about bank accounts in my post “What do I name my business?“.

MAGIC RULE #3: Open a dedicated bank account that you use ONLY for BUSINESS. Deposit all revenue into this account and, whenever possible, pay expenses from here as well.

Not “mostly” for business and “occasionally” for gas or pet food. Don’t go there. And whatever you do, NEVER deposit personal money into your business account unless it is well-documented. Occasionally, you may need to loan your business money so it can pay its bills, but when you do this write out a promissory note and keep it with your business papers in case you ever get audited (but don’t put it in either the Expenses or Revenue envelopes). If you do have to loan the business money, make it for an amount greater than what it needs at present. Don’t lend it $22.79 for duct tape. Lend it $200 once instead. Pay it back as soon as you can, write “paid in full” on the promissory note, but keep it with your papers for the year. You don’t have to put “loans” on the tax return at the end of the year.

Why am I being such a stickler for this you ask? Because when Revenue Canada audits small business owners, the first thing they do is look through your business’s bank statements. If things don’t look organized and reasonable, then they  go into every personal account you have ever owned. If they find deposits in any of them that you cannot prove were personal, then they attribute that as business income and you will have to pay tax on it. And maybe even a penalty if they think you were trying to pull one over on them.

Say Uncle Larry, the deadbeat, finally paid you back the $1,000 he borrowed. You tell the CRA auditor this and he says, “Yeah, right. Larry says he can’t remember paying anything.” So they slap you with tax owing, a penalty, and most of the windfall disappears.

“Thanks a lot Uncle Larry.”

I don’t ever want to hear anyone have to say that. Open a free bank account somewhere instead.

July 13, 2011 - Posted by | Magic Rules, Running Your Business, Starting Your Business |


  1. What if you’ve loaned money to the business (sole prop) that you cannot yet pay back (1st year). That amount will carry over – and how does it affect your personal taxes? Tks!

    Comment by Wilna | April 13, 2014 | Reply

    • Hi Wilna,
      It has no tax effect. It is not an expense to the business, rather, it is simply personal funds that you have invested in your business. However, if the business were to pay you interest on that loan, then the interest would be deductible to the business, but you would have to report that interest on your personal taxes as income. In other words, a lot of work for nothing!

      Comment by jkswift | April 13, 2014 | Reply

      • Thank you! You explain things so clearly – it is really appreciated! 🙂

        Comment by Wilna | April 13, 2014

      • Great! Good luck to you.

        Comment by jkswift | April 13, 2014

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