Sole proprietors, let’s talk fiscal year-end. Understandably, it can feel daunting — but it doesn’t have to be!
Before joining Wagepoint as the Community Manager, I was a Certified Professional Bookkeeper (CPB) for many years. As a CPB, I’ve had the privilege of helping many Canadian small businesses prepare for their fiscal year-ends — and have learned a few things along the way. Here are my tips to help you close out the year like a boss.
Keep it strictly business.
My number one rule for sole proprietors: Separate your business and personal bank accounts.
As a sole proprietor, there’s technically no separation between you and your business. That said, if you mix your personal finances with your business transactions and accounts, you’re essentially opening up your personal financial picture to a Canada Revenue Agency (CRA) auditor — which isn’t ideal.
This financial separation is crucial for many reasons when it comes to accounting, but for year-end specifically, having your bank accounts separated and reconciled properly provides a true reference point (at a specific date) for your Accounts Receivable (A/R) and Accounts Payable (A/P) balances. And, if you have a good handle on your A/R and A/P, your revenue and expenses will paint a more accurate picture of your finances.
Year-end tip: Start thinking of your business as a separate financial entity and treat them as such. That way, when it’s officially time for your business to be its own entity, you’ll already be ahead of the curve.
As a sole proprietor, you own and owe everything in your business. This is why the CRA doesn’t require a balance sheet from you. But, that doesn’t mean the balance sheet is not important. It is important — and it can really affect your business.
Think of it as literally the other side of any revenue or expense. The balance sheet essentially tracks the movement of money (assets and liabilities) in your business without affecting the periods in which you earned revenue and incurred expenses.
Year-end tip: Although it’s not an official requirement of year-end filing, I always recommend providing your bookkeeper or accountant with the support documents backing up the accounts listed on your balance sheet. These documents can include things like:
- Business bank/loan/credit card statements
- A/R and A/P reports
- All of your government statements that support any sales tax, income tax and payroll liability balances
- Proof of prepaid expenses
- Asset purchase receipts (Ex. Computer/office equipment)
Report your profits and losses.
Let’s turn our attention to revenue and expenses for a second. In this area, your go-to report is going to be the income statement, also commonly known as the Profit and Loss report (P&L). This is where you go to check out your bottom line (or “net income”) to see whether you’re making or losing money.
As a sole proprietor, you must pay personal income tax on the net income generated by your business activity. To get an idea of what tax information the CRA requires from you, be sure to review the T2125 Statement of Business or Professional Activities (T2125). This is what your bookkeeper, accountant, or you (if you are going at this solo) will have to file for your business activity as part of your personal taxes . Also, remember the P&L we mentioned earlier? Keep it close because that report contains all of the information you need to file your business income and expenses on your taxes!
Filing tax reports is never a fun task and can get a bit confusing. One way to simplify your tax filing experience is to categorize your income and expenses similar to how CRA has laid it out. This will make tax filing much more clear and easy to understand.
Year-end tip: Review the transactions in each of your expense categories to ensure that every transaction is classified properly. This type of accuracy will come in handy when you run your P&L to compare year-over-year.
Go right to the Source (document).
In the world of accounting and bookkeeping, keeping your business records and source documents is incredibly important. Every time your business generates a financial transaction, you must tie it back to a source document. You can have a shoebox full of receipts and statements, a camera roll full of pictures or a folder full of JPEGs and PDFs — it doesn’t matter. However, as your business grows, understanding and implementing solutions to keep your source documents organized and ready for year-end is essential.
Here are some source document resources from the CRA:
- What are records, who has to keep them and why it is important
- Your responsibilities and the requirements associated with records the law requires you to keep
- Acceptable format, imaging paper documents, and backing up electronic files
Year-end tip: Audit proof your records by using receipt capture software to manage and store all your receipts. Streamlining processes using software like Dext, Hubdoc and Auto-entry will save you time by attaching your source document to the financial transaction within your accounting software!
Be proactive and empower yourself.
Being a proactive sole proprietor who understands the expectations of what is required by both the CRA and your accounting service provider will not only save you time and stress, it can also save you money. Ask your bookkeeper or accountant what steps you can take to assist in the financial requirements and review related to filing your fiscal year-end. Knowledge is power!
Year-end tip: If you have vehicle expenses related to doing business, don’t forget to write down your vehicle mileage on December 31 every year.
About our Contributor:
Bianca Mueller, CPB is Wagepoint’s Community Manager and an award-winning Certified Professional Bookkeeper with 14 years of experience as a respected thought leader and social influencer in the Canadian Bookkeeping Industry. She is an early adopter of cloud technologies which enables her to excel in the fintech industry and surround herself with a trusted community of like-minded accounting professionals.
Previous to being Wagepoint’s Community Manager, Bianca was a full-cycle bookkeeper, financial controller, HR manager, workflow automation, and accounting software consultant serving clients across the lower mainland of Vancouver, BC.
Founded in 2012, Wagepoint is simple payroll software designed for small businesses and backed by the world’s friendliest team. Intuitive and easy-to-use, Wagepoint helps more than 12,000 North American small businesses and the accountants and bookkeepers who serve them, automate the most time-consuming parts of payroll. This includes a wide-range of basic (and not-so-basic) calculations as well as payroll tax reporting and payments. In addition to saving time, Wagepoint helps prevent costly mistakes that are often more expensive than the software’s low monthly fee. To learn more, visit www.wagepoint.com.