As we say goodbye to the ghouls and goblins of Halloween and feel the crispness of the coming winter in the air, as a small business owner this time of year also probably means that you should start thinking about your company year end. Year end for unincorporated businesses in Ontario is December 31, but even many incorporated businesses have December 31 as their year-end. In this three-part series we examine what you need to do to before, during and after your fiscal year-end.
In this post we discuss the steps that your business should be taking as the end of the year draws closer.
Catch Up on Outstanding Invoicing
The first thing you should do is make sure that you catch up on all of your outstanding invoices for products you’ve sold or services that you’ve performed. The CRA requires that your invoice is applied to the appropriate reporting period, so if you sold products or performed work before the end of the year then the invoice for that work must be applied during that same tax year, even if that means backdating the invoice.
As is often the case in business accounting, there are often some grey areas when it comes to when you should invoice. Say your company writes custom software. You’ve been working with a prospective client all through December and on December 23 they finally give you the go-ahead on a large project. Your sales agreement says they are to pay you a 40% deposit, which you do. According to the Canada Revenue Agency you are only allowed to claim a portion of that invoice that represents the amount of work that you’ve done in the reporting period. Given the project could only possibly start on December 23 and the reporting period ends on December 31, you’re probably not going to get a whole lot done. In that case you can invoice a small portion of the project that matches the amount of work you expect to do before the year end and then invoice the balance as a pre-payment to be earned as revenue in the following fiscal year.
Likewise, if you complete work in the old tax year but don’t invoice it until the new tax year, you need to backdate the invoice so those revenues are earned in the old tax year. For example, say you’re a plumber and you offer emergency service. A customer calls with a frozen and burst water pipe at 8:30pm on December 31. You send out a plumber to fix the problem but you don’t actually invoice the customer until everyone is back in the office on January 3. The services to earn those revenues were rendered in the old tax year so the invoice billing those revenues must also be in the previous tax year so you should backdate the invoice to December 31.
Enter Outstanding Expenses
Just like with revenues, any expenses incurred in the old tax year must be reported in the old tax year. If you purchase goods intended for resale, products to be consumed during the normal operation of your business or services, you need to enter those expenses on the day that they were bought, not the day you received the invoice.
If your company is on the other end of the situation described above where you’re buying a large customized software package then you can categorize the entire payment as a pre-paid expense. Doing so will track your payment, but because your business won’t benefit from the software until it is delivered then you can’t pay the deposit as an expense. Receive the invoice against a pre-paid expense account and when the software is delivered you can convert that pre-paid expense into an expense.
Unfortunately, this also includes payroll if the pay period falls across the old and new tax year. You have to calculate how much of your payroll expense should be included in the old and new tax years.
How a Bookkeeper Can Help
Understanding what revenues and expenses you have to claim in the old and new tax year and which fall into pre-paid revenue or pre-paid expense accounts can be tricky. This is where a qualified and experienced bookkeeper can really bring a lot of value to your business. They are familiar with not only the Income Tax Code but also with CRA’s interpretation of the tax code. They can help you get all of your revenues and expenses entered in a manner that is compliant with the CRA, making your year-end filing and remittance a lot easier.
Before you can file your business year-end you have to make sure that all of your revenues and expenses are up to date. The CRA requires that you realize these revenues and expenses during the reporting period that they were earned, not paid. This can get a bit tricky in some cases, but a good bookkeeper can help navigate you and your small business through this process.
Check back on Monday, November 10, 2014 when we discuss how to process your year-end business tax return.
Simply Bookkeeping1 provides professional bookkeeping services for freelancers, solopreneurs and owners of unincorporated and incorporated businesses. We customize our services based on your needs – we only see some of our clients a few hours a month but others we see on a more regular basis. Our services are reasonably priced and we tightly track the amount of time we spend working for you so you only pay for the services you get.
To learn more about us, please visit our website at www.simplybookkeeping1.com or contact Michele Hyde by phone at (647) 668 – 9363 or by email at firstname.lastname@example.org.
Have Your Say
Are you a small business owner and are you starting to think about your upcoming small business year end? If you are, we’d love to hear from you. Tell us what parts you are or aren’t looking forward to. Also, please share this article using the social media share buttons – chances are there are others out there in the same mindset!