Why Bookkeeping Is Important for Small Businesses in Canada and How to Do It !

Proper bookkeeping is not optional for Canadian businesses; it’s a legal requirement and a critical part of running a successful company. By law, all businesses in Canada must maintain accurate books and records that clearly document their financial activity.
Business records consist of organized accounting and financial documents that summarize your income and expenses and provide supporting evidence for each transaction. Good bookkeeping helps you understand your business performance, meet tax obligations, and protect yourself in the event of a CRA audit.
This guide explains why bookkeeping matters, what records you must keep and how to set up an effective bookkeeping system for your business.

What Business Records Are You Required Keeping?

The Canada Revenue Agency (CRA) requires businesses to keep all documents that support reported income and expenses. Common business records include:

Sales invoices and receipts
Purchase invoices and payment receipts
Bank and credit card statements
Cheques, deposit records, and cash logs
General ledger and accounting journals
Contracts, leases, and agreements
Payroll records and T4 summaries
Supporting schedules and reconciliations

Your records must support all required filings, which may include:

GST/HST returns
Payroll remittances
Corporate or personal income tax returns
WSIB filings
Employer Health Tax (EHT)
NR4 and other information returns

Consulting a qualified small business accountant early can help you set up a compliant bookkeeping system, reduce tax risk, and avoid costly mistakes later.

Why Proper Bookkeeping Is Important

Maintaining accurate and complete records allows you to:

Understand your profit or loss and cash flow
Monitor business performance and identify growth opportunities
File accurate income tax and GST/HST returns
Prove that certain deposits are non-business or non-taxable
Support zero-rated or exempt GST/HST supplies
Substantiate deductible business expenses

If the CRA audits your business and you cannot support your reported income or deductions due to poor bookkeeping, your expenses may be denied, leading to higher taxes, penalties, and interest.

Bookkeeping Basics: Money In vs. Money Out

A simple way to approach bookkeeping is by tracking:

Money In (Income)

Sales revenue
Service fees
Other business income

Money Out (Expenses)

Rent and utilities
Office supplies
Advertising and marketing
Professional fees
Insurance, travel, and vehicle expenses

Every transaction must be categorized correctly to ensure accurate financial reporting and tax filings.

Separate Business and Personal Transactions

One of the most common bookkeeping mistakes is mixing personal and business expenses.

Best practices include:

Opening a separate business bank account
Using a dedicated business credit card
Recording only legitimate business expenses

Personal expenses (such as groceries or personal childcare) are not deductible, even if paid from a business account.

Shared (Prorated) Business Expenses

Some expenses may be partly personal and partly business-related, including:

Home office expenses
Vehicle expenses
Internet and mobile phone costs

These expenses must be prorated based on business use. A properly designed chart of accounts ensures these allocations are done correctly and consistently.

How to Keep Your Business Records Organized

1. Accounting Software

Software such as QuickBooks or Wave allows you to record transactions using a structured chart of accounts. Basic knowledge of accounting principles and GST/HST rules is recommended to avoid errors.

2. Spreadsheets

Some businesses use Excel spreadsheets to track income and expenses. Typically:

Rows represent transaction dates
Columns represent income and expense categories
Separate sheets track bank, cash, and credit cards

3. Bank and Credit Card Downloads

Online banking allows you to export statements into Excel format. You can then categorize transactions and add notes for clarity. This method works best when updated regularly. If bookkeeping is taking time away from growing your business, outsourcing to a professional bookkeeper or accountant is often cost-effective.

Do You Still Need to Keep Receipts?

Yes, absolutely. Even if transactions appear on bank or credit card statements, receipts and invoices are the primary proof required by the CRA.
You should:

Keep receipts organized by category and year
Store them electronically or physically
Retain records for at least seven years, as required by CRA
Without receipts, expense deductions may be denied during an audit.

Professional Bookkeeping Support for Small Businesses

Diamond CPA, a trusted small business accounting firm in Scarborough, Toronto, helps business owners with:

Bookkeeping system setup
Ongoing bookkeeping and record-keeping
GST/HST and payroll compliance
Corporate and personal tax filings
Full-cycle accounting services

Proper bookkeeping is the foundation of a healthy business. Getting it right from the start can save you time, money, and unnecessary stress.

Disclaimer

This article is provided for general informational purposes only and does not consider your specific personal or business circumstances. It should not be relied upon without consulting a qualified accounting or tax professional. Diamond CPA is not responsible for any outcomes resulting from the use of this information.