Why do record keeping the old fashioned way?

Can't you just add up the receipts, plunk the numbers on the form and call it good? Who needs to keep proper records? It doesn't really matter, and even though it is the law that you're supposed to keep records, not just keep receipts...

The topic, of accrual accounting for self-employed taxpayers surfaced over the weekend during my presentation on T2125 Self-employment for the Surrey Langley North Delta CGA Chapter. Someone said that if they had to do accrual accounting for their self-employed clients, they wouldn't be able to do as many returns as they do now and that client's wouldn't be willing to pay for the increased cost.

In the moment I let it go. I should have responded that they'd make more money with fewer clients. Let the clients who don't see your value go, and spend that time on the ones who do. So I thought I'd say it now and add some more thoughts that occured after the event.

Before tax season even hits, consider the following thoughts carefully and then increase your rates, announce your intention to provide first class service and watch what happens.

Here's the start of my great reasons to do accrual accounting list.

Accrual means recording sales on the date the sale is finalized, and recording the cash receipt, even if its on the same day, as a separate transaction, dated the date the funds are received, using Accounts Receivable to clear the transactions through a customer . The date they are deposited might again be a different date, that's why it's so handy to have an Undeposited Funds account automated in QuickBooks.

Accrual also means recording purchases on the date on the purchase document and recording the payment, even if it's on the same day, as a separate transaction, clearing the Accounts Payable using the Vendor name.

Now for the reasons why you'd want to do this for sales/payments received

1. To ensure that the customer actually paid
2. To ensure the payment was recorded against the right invoice
3. To ensure that the sale was recorded on the right date for revenue recognition purposes
4. To ensure the sale was recorded on the right date for GST/HST recognition purposes
5. To ensure that all receipts have invoices - if all you have is a pile of invoices, and one goes missing, how will you know if you don't also record the deposits and cross -check that all invoices and all payments are recorded
6. To provide a historical record of how long it took the customer to pay you, because maybe next time, you'll ask for a retainer up front if you know this customer is really slow at paying, or you'll turn them down if they never paid you at all.

Now that's just on the sales side. On the purchases/payments paid side...

1. To ensure that you've recorded all the purchases, it's necessary to record the payments because that way, you can see if there's a purchase missing - it's called 'exception reporting' where you record all the payments that should have receipts, and then record the receipts, and if there's either a receipt with no payment, or a payment with no receipt, you've got an exception that needs investigating.
2. To ensure that all payments were made because if you can't prove you paid something, you have to add it back in 2 years - S. 78 of the Income Tax Act - unpaid amounts
3. To ensure you only pay something once, and not more than once (that's why all purchases should be recorded in AP and all payments should be recorded to clear AP, no matter how they are paid)
4. To ensure you record all expenses, even if they are reimbursed, and that you invoice all reimbursements, adding appropriate GST/HST or PST now that it's coming back..
5. To provide a historical record by vendor of what you purchased and when in a sub-ledger
6. To provide proof of payment in order to claim an ITC on the purchase

There are lots more reasons, like tracking assets, personal use of vehicles, business use of home, year over year for comparative purposes, but I'm sure you get my drift.

The last reason is all encompassing - it's about success.

When your client's business grows because they have confidence, it very well could be that they can grow because their finances are under control, it's because you put the right controls in place from day one. Great habits, proven methods of control.

The best part, it will help your clients (and you) sleep at night, knowing the receivables are being collected, the payables aren't being paid twice, and the finances are under control.

So if you lack confidence, or you don't believe in yourself or in your clients, go ahead, add up receipts with a tape and tell yourself it's fine to not worry about your client's financial health and future well-being.

If you do believe your clients business's will grow and so will yours because their business
grows, start every client out on the right foot, by doing it properly from the beginning. Otherwise, when there's a question about the tax records, you'll have to do it over anyway because you'll never be able to figure it out from the tapes, which will have faded and may not even be legible any longer.

Doing it the old fashioned way, you'll have instant answers when your client calls to ask for a document, because you did it right the first time and filed it so it could be found, in alphabetical order. And if that doesn't make you look good, I don't know what will.

If you want to know more about how to keep really great records that will give you the confidence to succeed, check out my YouTube Channel for a 49 minute video.

http://www.youtube.com/TaxDetective/