Bookkeeping for SMEs: A complete guide

What is bookkeeping and why is it important?

Bookkeeping is the systematic and ongoing recording of all a business’s financial transactions: sales, purchases, expenses, salaries, and taxes collected and paid. It is the layer of raw data upon which your financial statements, tax returns, and business decisions are based. Without it, it’s impossible to know if you’re profitable.

In practical terms, keeping accurate books means that every dollar that comes in and goes out is recorded, categorized, and supported by a supporting document. In Quebec, this level of rigor is doubly important: you must track the GST and QST you collect and pay, file your returns with the CRA and Revenu Québec, and be prepared in the event of an audit.

• Pay Less in Overpaid Taxes: No deductible expenses overlooked.
• Informed Decisions: You can view your profit margin, cash flow, and accounts receivable in real time.
• Stress-Free Compliance: GST/QST returns and tax instalments filed on time, without penalties.
• Easier Financing: Banks and investors require accurate financial figures.

Good to know: Bankeo is not an accounting firm. If bookkeeping is too much for you, we’ll connect you for free with an accountant or bookkeeper who’s a good fit for your situation, usually within 48 hours.

Bookkeeping vs. Accounting: What’s the difference?

Bookkeeping involves recording day-to-day transactions; accounting interprets this data to produce financial statements, optimize tax planning, and provide advice. The bookkeeper enters and organizes data; the accountant analyzes and plans. The two often work together, but they do not address the same needs or require the same level of expertise.

• Bookkeeping: Record and organize transactions on an ongoing basis, starting with the very first dollar. Deliverables: general ledger, bank reconciliation, GST/QST tracking. Done by you, a bookkeeper, or software.
• Accounting: Analyze, prepare financial statements, and provide advice on a regular basis. Deliverables: financial statements, T1/TP1 and T2/CO-17 tax returns, and tax planning. Performed by an accountant or tax specialist.

In practice, many small businesses handle their own bookkeeping (or outsource it to a bookkeeper) and then hire an accountant at the end of the year to handle tax filings and strategic planning. The larger your business grows, the more your accountant relies on impeccable bookkeeping to help you save money.

How to do your own bookkeeping

Doing your own bookkeeping is a realistic option for a small business with few transactions. Get accounting software, keep your personal and business accounts separate, record each transaction as soon as it happens, reconcile your bank account every month, and track the GST/QST collected and paid. The key is consistency, not accounting perfection.

1. Open a separate business bank account. Mixing personal and business finances is the number one source of errors.
2. Choose a software program. QuickBooks, Xero, Sage or a solution tailored to your volume.
3. Record every transaction quickly. Aim to enter data weekly so you don’t fall behind.
4. Keep all your supporting documents. Scan your receipts; a lost receipt means you won’t be able to deduct that expense.
5. Reconcile your account every month. Compare your journal entries to your bank statement.
6. Keep track of the GST and QST. Separate the tax collected from your customers from the tax paid on your purchases.

Note: Collecting GST/QST generally becomes mandatory once your taxable revenue exceeds the $30,000 threshold for four consecutive quarters. Below this threshold, you can voluntarily register to claim a refund of the tax paid on your purchases.

When to Hand Over the Reins: If you’re spending more time on bookkeeping than on your core business, if you’re no longer confident in your numbers, or if you’re hiring employees and have to manage payroll and source deductions, it’s time to delegate.

What supporting documents to keep and for how long

You must keep all documents supporting income or expenses: sales and purchase invoices, receipts, bank and credit card statements, contracts, pay stubs, and tax returns. The general rule of the CRA and Revenu Québec is to Keep these records for at least six years after the end of the relevant tax year. Scan everything: a lost receipt means a lost deduction.

• Revenue: Sales invoices, contracts, deposit slips, cash reports.
• Expenses: Supplier invoices, receipts, proof of payment.
• Taxes: GST/QST returns, calculations of tax collected and paid.
• Payroll: pay stubs, summaries of source deductions (DAS: income tax, QPP, QPIP, employment insurance), and employment records.
• Banking: bank statements, business credit card statements.
• Assets: invoices for equipment purchases (for depreciation and CCA).

The standard retention period is at least six years following the end of the last tax year to which the records pertain. When in doubt, keep them longer: digital storage space costs less than a tax audit.

Good to know: Scanned documents are accepted as long as they are legible and complete. A digital file organized by year and month will save you hours in the event of an audit.

The most common bookkeeping mistakes

The Most Common Mistakes Common mistakes include mixing personal and business accounts, letting data entry fall behind, forgetting to track GST/QST separately, losing receipts, and never reconciling the bank account. Each one is costly: overpaid taxes, penalties, or wasted time. The good news: all of these can be avoided with a simple routine.

• Mixing personal and business finances. Without a separate business account, you’ll miss out on deductions.
• Letting the backlog pile up. Entering six months’ worth of data all at once increases the likelihood of errors.
• Failure to Properly Track GST and QST. Confusing collected tax with paid tax leads to incorrect tax returns.
• Losing or Failing to File Receipts. No receipt, no deduction.
• Never reconcile your bank account. Discrepancies go unnoticed until the end of the year.
• Categorizing expenses incorrectly. An expense posted to the wrong account distorts your financial statements.
• Forget about tax instalments. If your taxes exceed the thresholds, you must make estimated tax payments throughout the year.

An isolated error can be corrected. The real risk lies in the accumulation of errors: an unaddressed delay turns into a costly catch-up effort and added stress right in the middle of tax season.

Do your own bookkeeping or outsource it

Do your own bookkeeping if you have few transactions, plenty of time, and are comfortable using software. Outsource it as soon as your transaction volume increases, GST/QST and payroll become more complicated, or your time is worth more than the cost of a bookkeeper. Outsourcing reduces errors, frees up your time, and provides you with figures ready for your accountant. To quantify the decision, the Bankeo Fee Barometer estimates the median accounting fee at around $3,000 per year, ranging from $500 to $6,000 depending on the industry.

• Do It Yourself: Low direct cost (software), high time investment, higher risk of error. Ideal for very small businesses with few transactions. Bonus: total control, learning opportunities.
• Outsourcing: Monthly or hourly fees, minimal time required, lower risk of errors. Ideal for growing businesses, payroll, and multiple tax situations. Bonus: figures ready for tax returns, plus advice.

Outsourcing doesn’t mean handing everything over: many business owners handle day-to-day data entry themselves and entrust a professional with account reconciliation, tax returns, and year-end closing.

Good to know: Bankeo is not an accounting firm and does not provide bookkeeping services. We’ll connect you for free with a vetted accountant or bookkeeper from our network, and we’ll stay by your side as your needs evolve.

Bookkeeping for the Self-Employed

Self-employed individuals must keep books even if they do not have an incorporated business: their business income and expenses are reported on their personal tax return (T1 at the federal level, with Form T2125; TP1 in Quebec). They must keep separate accounts, track deductible expenses, manage GST/QST once revenue exceeds the $30,000 threshold, and plan for their taxes, often through tax instalments.

• No automatic deductions. Set aside a portion of each month’s income for taxes.
• Deductible expenses tracked effectively. Home office, vehicle, tools, business expenses.
• GST/QST Above the Threshold. More than $30,000 in taxable income over four consecutive quarters.
• Tax Instalments. If your tax balance exceeds the thresholds set by the CRA and Revenu Québec.
• Contributions. Quebec Pension Plan (QPP) and, if applicable, the Quebec Parental Insurance Plan (QPIP).

When done right, this tracking turns tax season into a simple formality. An accountant experienced in working with self-employed individuals often saves you more than their fees.

Catching up on overdue bookkeeping

To catch up on overdue bookkeeping, gather all your statements and receipts by year, reconstruct the transactions month by month, reconcile each bank account, and then correct the affected GST/QST returns. If you’re several months or years behind, a bookkeeper or accountant will be able to handle it much more quickly and minimize penalties. The key is to take action before the next filing deadline.

1. Gather Your Documents : bank and credit card statements, invoices, receipts, and previously filed tax returns.
2. Reconstruct by Period : year after year, month after month.
3. Reconcile Your Accounts : Each journal entry corresponds to an actual transaction.
4. Recalculate Taxes : GST/QST collected and paid for each period.
5. Correct what needs to be corrected : File or correct any overdue tax returns.
6. Establish a Routine : A consistent schedule helps prevent you from falling behind again.

A delay isn’t inevitable, but it gets worse over time: interest, penalties, and an increased risk of an audit. The sooner you take action, the lower the cost will be.

Good to know: Catch-up accounting for several years is a specialized task. Work with an accountant who’s experienced in these situations rather than spending your evenings doing it yourself.

How long do you need to keep your accounting records in Canada?

The general rule set by the CRA and Revenu Québec is to keep your records and supporting documents for at least six years after the end of the relevant tax year. Certain situations require you to keep them longer. When in doubt, keep your documents longer: a well-organized digital file is inexpensive and protects you in the event of an audit.

Do I need an accountant or a bookkeeper for my bookkeeping?

Not necessarily. A small business with few transactions can handle its own bookkeeping using software. As soon as the volume increases, GST/QST and payroll become more complicated, or your time becomes valuable, outsourcing becomes cost-effective. The bookkeeper enters and organizes the data; the accountant analyzes it and prepares your tax returns. Bankeo matches you with the right professional for free.

When should I register for the GST and QST?

Registration and tax collection generally become mandatory once your taxable income exceeds $30,000 over four consecutive calendar quarters. Below this threshold, you can register voluntarily to claim back the tax paid on your purchases. Check your status with the CRA, Revenu Québec, or an accountant before making a decision.

How can you catch up on several months of overdue bookkeeping?

Gather all your statements and receipts, reconstruct transactions year by year and month by month, reconcile each bank account, and then correct the affected GST/QST returns. If you’re several months or years behind, a bookkeeper or accountant will get the job done faster and help you avoid interest and penalties. Take action before the next deadline.

What’s the difference between bookkeeping and accounting?

Bookkeeping records day-to-day transactions: sales, expenses, taxes, and payroll. Accounting interprets this data to produce financial statements, optimize tax planning, and provide advice. The bookkeeper enters the data; the accountant analyzes and plans. The two roles are complementary.

Does a self-employed person really need to keep books?

Yes. Even without an incorporated business, self-employed individuals report their income and expenses on their personal tax return (T1 at the federal level, TP1 in Quebec). Keeping books allows you to track your deductible expenses, manage GST/QST on income over $30,000, plan your tax instalments, and avoid stress come tax season.