Standards, policies and procedures assist managers and owners to manage, control, analyze, compare, plan, prepare financial reports and comply with laws and regulations. High standards usually result not only in harm reduction but in increased profits. High standards provide rewards. When we set standards for activities we reduce stress and minimize risk. In the process, we maximize service. Business activities where we set standards, establish policies and procedures include:
n Records Management and Storage
n Policy and Procedures Manuals
n Internal Control Checklists and Evaluation Tools
n Division of Duties
n Risk Management
n Safety in the Workplace – Stop work until it’s safe
n Building quality relationships
n Knowing your clients, employees, suppliers and customers and your neighbours
n Stating and showing you care
n Invoicing – proud and prompt
n Handling Money
n Asset maintenance, repair and security
n Documentation appropriate to the circumstances
n Banking
n Documenting Business Reasons
n Allocating Business/Personal on purchases
n Using full AP and AR Accrual Accounting
n Obtaining rulings re Employee/Self-Employed
n Ensuring compliance with all regulations/laws, not just tax
n Maintaining Permanent and Annual files
n Electronic Records Management
n Time Management
n Asset Management
n Planning, Forecasting and Budgeting
n Regular scheduled review of books and records with client – monthly, quarterly or annual
n Consistent, comprehensive working paper files and checklists
n Identification and affiliation with business and industry organizations
n Identification and relationship with regulatory authorities
n Audits by all regulatory authorities
STANDARDS, POLICIES AND PROCEDURES THAT INOCULATE YOU AND YOUR CLIENT AGAINST AN IVI TAX AUDIT:
1. Account for each business, rental or investment property separately, either with a separate general ledger or use jobs, departments or classes to segregate common activities. Use accrual accounting unless cash basis is allowed by the CRA (farming and fishing).
2. Keep all of the records for each client inside or securely stored on top of a banker’s box with a lid attached. Keep the box away from prying eyes. Only work on one client at a time on your desk. If you have to put away one client to work on another, take the time to put away one client and open up another. Do it. Never lose or mix up several clients’ documentation by working on more than one file at once.
3. Sort all of the paper received from a client right away, or ask your client to provide documentation sorted in the following manner:
· Bank statements by month by account.
· Credit card statements by month by account.
· Investment statements including RRSP’s and RRIF’s by month by account.
· All purchases regardless of payment type, sorted in alphabetical order by supplier name with business reason and customer/job, supplier or other name clearly indicated.
· Sales invoices by invoice number. This article on Invoicing will provide assistance with how to invoice and how to provide customers with statements.
· Government reports and correspondence (GST/HST, PST, WCB, Payroll, Tax, etc.).
· Tax receipts for personal expenses (donations, medical, RRSP, etc.).
· Put any paperwork not listed above in the “To Do” File for the accountant in the front of the box.
4. Always use the transaction date to post sales, deposits, purchases and payments. GST/HST, Income Tax, PST, Payroll, and WCB all require correct transaction dates. As you post each transaction, file the documentation so if you are interrupted, there is no pile of left over filing. When you start again, you know exactly what isn’t posted yet because it is not filed away. Here’s what to post and reconcile and in what order:
· Post all sales first to Accounts Receivable at sale date.
· Post deposits when received from customer, record in Undeposited Funds.
· Accumulate and post deposits when deposited to bank coded to accounts receivable to clear Undeposited Funds.
· Reconcile accounts receivable and provide the client with a report of outstanding invoices.
· Post all purchases to Accounts Payable using the date on the invoice. Code purchases to expense or prepaid, regardless of payment type.
· Amortize prepaid expenses over the remainder of their useful life. Keep the prepaid account with a zero balance. If you have a prepaid that does not amortize, place it in a separate prepaid long term asset account.
· Post cheques, debits, and cash or credit payments at date of payment. Code all payments to accounts payable to clear the sub-ledger and credit the appropriate bank or other account, such as the shareholder loan account for cash or personal payments.
· Reconcile Accounts Payable and provide the client with a report of unpaid bills.
· Reconcile bank accounts, credit card statements.
· Amortize property and equipment over the remainder of its useful life.
· Other adjustments for year end.
Timing: If you don’t have time to post purchases and amortize prepaid expenses, post them later when the bank is reconciled. It is more important to post your sales, clear your deposits, post your payments and reconcile the bank than it is to post purchases, unless you are using a Time and Billing system to bring your purchases forward to your Sales invoices, in which case, you had better post your purchases before your sales.
5. Reconcile all business and personal bank accounts, credit cards and supplier statements monthly and file in separate folders for each account. Staple all of the documentation for each bank account to the statement including cancelled cheques, deposit slips, deposit information submitted by the customer for the reason for payment, which often makes no sense unless it’s with the deposit slip as there often is no identifying information other than an amount, someone else’s cheque # and a bunch of invoice #’s, any money orders or drafts purchased to pay for supplies or services.
6. Keep the purchase document and the credit card payment slip together and file the credit card purchase documents alphabetically in the payables files. When you post the payments to the credit card account, post the payments for business reasons as payments to Accounts Payable.
7. Keep all business and personal bank statements with all of their attached documentation as well as credit cards statements by account by year in separate files for each account. File the most recent month on top.
8. Invoice all sales. Produce 3-part invoices: part one for the customer, part two file in numerical order for accounting purposes and part three file in alphabetical customer files.
9. Keep a file for all residential or commercial tenants with their contact information, how much rent they paid you, rental agreements and correspondence. For commercial tenants including home based corporations, GST registration may be required. For short term tenants, PST and/or hotel tax may be required.
10. Deposit all money received from sales intact to your business account. This makes it easier to clear the accounts receivable sub ledger by customer and to provide a clear trail of all transactions. If you keep the cash, it means you have to find a way to communicate the date and the amount received to the accountant later. Any time there is missing information, it costs you, because it takes time to reconcile accounts for missing transactions.
11. Document the source and reason for receipt of funds on all of your deposits, business or personal, bank or credit card, no matter whom they are from or what they are for. Taking care of revenue means taking care of business first. Focus on revenue generation first so you will have the funds to pay expenses.
12. Tear out your deposit information from the deposit book. Staple the information that came with the deposit from the customer to the back of the deposit slip that you keep for your accounting records. Don’t leave your deposits or the copies of your receipted deposits in your briefcase or car as replacing that information is almost impossible if it is lost or stolen. Over the years, I have at least one client each year whose briefcase is stolen with their deposit book in it. Until the bank statement arrives, tear out the daily deposit information and backup materials and put the posted deposits in the front of the bank statement file. Match and staple these deposits along with cancelled cheques to the back of the bank statement when it arrives at month end.
13. Never remove cash physically from one account and deposit it to another account at another branch or bank. It will look suspiciously like double the revenue was earned. An auditor will think that the new deposit is not the same money as the money that was withdrawn from the other bank. Leave a paper trail from bank to bank or account to account with electronic transfers or cheques. It’s too easy for an auditor to say, ah, that’s new money, not the money you took from the other account, even if it was the same day. I don’t know how many clients I have seen over the years that take money from their business account, walk across the street and deposit it into their savings account. It’s probably some childhood savings technique gone awry; either that or I’ve been duped for years.
14. Write why (business reason) and if applicable, especially for cost of sales or for meals and entertainment or reimbursable expenses who it’s for (customer or supplier or other name) on every purchase document. It makes for easy identification of cost of sales to match sales and costs and is required in order for the bookkeeper to ascertain which expenses are personal and which are business. Who wants to pay their bookkeeper to enter a bunch of personal expenses only to have to re-categorize them later as shareholder loan or proprietor’s draws? That’s a waste of time and money, not only that, but the Civil Penalties rules require that the owner/manager, accountant or bookkeeper ascertain what is business and what is personal before it’s entered. You are just helping them do their job. The exception is when you record vehicle expenses and home office costs and allocate a reasonable portion at the end of the year, adjusting out the personal portion of the GST claim, same with 50% of the meals. The GST/HST administrative rules allow for an annual adjustment of GST Input Tax Credits.
15. Don’t code purchases or income to “Miscellaneous”: Use clear coding choices. See the CRA Business and Professional Income Guide T4002 for examples for self-employed or unincorporated businesses. GIFI Codes are standardized coding of the chart of accounts for corporate tax reporting in Canada. GIFI was established so that corporations who are required to report their balance sheet and income statement with their corporate return would have standardized coding to make comparison between years and analysis of results compared to similar business’s possible by CRA.
16. Document business claims for telephone use, cell phone use, home office and vehicle usage by Km log, stating business reasons and customer names in writing. Again, use ‘B’ for Business and a ‘P’ for Personal to distinguish between business and personal use.
17. Post all purchases to Accounts Payable, regardless of method of payment, be it cash, cheque, credit card or debit card or employee expense account. Have a policy of only accepting original receipts and of keep original receipts in your own records. Provide customers with a copy attached to the invoice if you are requesting to be reimbursed for expenses. Why? You are required to have the original purchase documentation for GST/HST Input Tax Credits claims. Imagine attempting to get back the originals for all of your travel receipts because a GST/HST auditor refuses your ITC claims for all of your reimbursed expenses because you gave away your original receipts. GST legislation requires originals to claim ITC’s and you normally only have four years to claim the credits, two years in larger organizations.
18. Post all purchases as Bills and reduce payables with Payments by source. That makes it easy to see the transactions for each vendor all in once place. Use the Accounts Payable sub ledger as clearing account for all purchases. If you have a payment, but no receipt, or vice versa, the transaction will show up as not cleared. This is what you call exception reporting. It is easy to see that you have not posted the same transaction twice when you review the vendor detail report. The date is usually the biggest clue. Many clients try to pass off the restaurant receipt one month as cash paid and the credit card slip with the tip included the next month as paid by the credit card.
19. One method you could use for employee or owner expense accounts is to use a separate credit card register to keep track of the liability and payments to each employee or owner/manager for expenses. Here’s how to do it:
· Write ‘Paid by” and the employee’s name on each receipt rather than keeping them lumped together as a set of receipts. Ditch the spreadsheet method.
· This way you can compare the purchases to other claims by other employees or owners. Trust me, employee or owner/manager expenses often get claimed more than once and by more than one person with a photocopy of the original receipt or the second claim with the credit card payment slip.