Being Forthright: Good Bookkeeping Practices in Small Business

While it’s not the rule, most small business owners (and the CRA) are aware that it’s possible to hide a few transactions here and there in a retail establishment and no one would be the wiser, even during an audit. Whether this is morally right or not is not at issue here and not relevant for this discussion. The biggest issue is what effect it has on the owner’s knowledge of the business and what is really happening. How can one know what is really happening if things aren’t tracked?

If an owner has a habit of hiding transactions, such as not ringing sales into the cash register, there are a few issues that should be addressed.  Whether this is honest or moral is not to address here. Such an action will never allow the true overall sales and cost of goods sold to be known. This makes it very hard to have accurate financial statements. And if an owner wants to turn from simply being self-employed to becoming a true business person, then this accuracy is important! There is also the issue of loss. When an owner fails to ring in transactions, it sets an example for employees, making it easier for them to follow suit. And then what happens to the cash from such transactions?

These discrepancies also make compiling financial statements, and the connected tax returns, more difficult for your accountant. How is the accountant to know when a classification is correct if there is no backup documentation to show why imbalances happen? Many accountants will take the safest route possible (for them) when deciding where to put such imbalances, since this is what is in “the public’s best interest” and written into the ethics codes of professional associations. But that isn’t always in the owner’s best interests, and it could be incorrect as far as what really happened.

Accounting, corporate tax, financial statement preparation

For example, if there is a few hundred (or thousand) dollars discrepancy on the balance sheet that shows some money came out of the company, but there is no way to show where or how, it is likely the safest move to consider it as money taken by the owner. While this is “in the best interests of the public”, and follows proper accounting guidelines, it does not favour the owner. Instead, it increases the owner’s personal income, which increases personal taxes. And if the discrepancy is because of missing expenses or stolen cash from un-entered transactions, a whole different set of financial statements and tax liabilities result. And there is the issue of the owner knowing what is really going on in the business! Perhaps there is loss happening that cannot be traced because the owner is also not entering transactions into the books. It would be in the owner’s best interests to know what the true picture of what’s happening in the business.

So, it’s actually in the owner’s best interests to track everything and to never try to “hide” transactions and income, as then the owner knows what is really happening in the business and can make better decisions and thus increase the profits of the business legitimately. And this is what true business ownership is all about.

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