Recordkeeping

In 1985 97% of all payments in Canada were made by cheque. In 2018 that number had declined to 14%. Clearly things are changing at an incredibly rapid pace.

from a study by PAYMENTS CANADA

What we used to call bookkeeping involved clerks – ‘writing up’ the bank statements and canceled cheques in a columnar journal.

Over the last 35 years or so, bookkeeping for small business has evolved from an essentially manual function, to an automated system that pulls transaction data from your bank and “automatically” allocates debits and credits to the appropriate accounts.

Today there is no need for a bookkeeper to ‘write up’ or transcribe anything. They simply download transactions from their bank – or create a “feed” directly from the bank to their accounting software.

In the 1980s we started to see accounting software for PCs. Bookkeepers actually began to perform the accounting function. Strangely there was an expectation that the same people who did the books before – often the wives or girlfriends of the business owner – would somehow adapt to perform the accounting function without any additional training.

No more calculating on your own because most accounting software automatically calculates your financials for you.

from PROS AND CONS TO USING AN ACCOUNTING SOFTWARE

- Startup Savant.com 2018

Fast forward to 2019 and the expectation is that a twenty-something ‘entrepreneur’ with no experience can be transformed into an accountant by using software. As any CPA in public practice can tell you “it isn’t enough to take a couple of accounting courses at college”.

While accounting software these days is by and large pretty good, the accounting function is actually more complex than it was a few decades ago. First, the underlying records come in a variety of forms and they need to be made available to whoever is doing the work. That requires an understanding file-sharing technology in addition to an understanding of which records to share.

From our perspective it makes more sense to instruct small business owners on records management techniques and strategies since that is not a function that cannot really be outsourced. The amount of training required is trivial when compared to training an inexperienced person to do their own accounting…no matter what the “experts” say.

 

Records as Evidence

There is a hierarchy of records in terms of their quality as evidence. If a single person creates a record and also records the “transaction” it refers to, there is a weakness in your businesses’ system of internal controls.

For a sole proprietor preparing his or her taxes, that isn’t a terribly important issue – except that the tax department may refuse to accept the proprietor’s version of events.

The Quality of Records

The more independent entities or people “touching” a record, the higher the quality of the record. A cheque is paid to an independent third party and processed by your bank and the recipient’s bank.

It answers the questions:

1. Did you pay?
2. Who did you pay?
3 How much did you pay?

But it doesn’t answer the question:
4. What did you pay for?

For example let’s say that you paid the local electrician to string network and telephone cable in your office. If you were to pay him with an e-transfer, your bank would likely show the name of the electrician and the amount. However you would also need the electrician’s invoice to show that it was indeed a business expense and not a personal one.

Similarly you may write whatever you want on a cheque stub. As long as the amount agrees to what is shown on the bank statement, no one can tell for certain who was paid – without looking at the cheque image. In this case the existence of a vendor’s invoice would help substantiate that the cheque stub accurately reflects who was paid and what it was paid for.

In the case of a tax audit or a financial statement audit, the auditor should first test the “internal controls” in your system. Once they are comfortable with these controls, they should rely on these to reduce the amount of audit work. That is the theory. Of course in reality the CRA is centralizing their operations and hiring unskilled staff to perform audit functions – in effort to reduce their costs.