When you incur business costs, your bookkeeper records them into expenses, which can then be written off to lower your income taxes. So, having your expenses accurate and up to date is important. CRA audits them from time to time and penalizes businesses for any misrepresentations.
You trust that your bookkeeper is accurately recording the expenses for your business. However, there is an area that requires a little bit of your involvement. Without it, your bookkeeper will not be able to capture all the costs correctly. In my earlier post, I explained why you cannot rely on tax preparer to fix all the inaccuracies when preparing your tax return. The onus for the records is on you, as a business owner.
I will not bore you with all the nitty-gritty of how bookkeepers account for business costs. However, you need to understand that there are two main ways to do it: Direct Expensing and AP.
- Direct Expensing. This is a straightforward process. Your business pays for a purchase through a bank account or with a credit card and that payment gets recorded as a cost immediately.
- Accounts Payable (AP) is used for recording the costs for which your business will pay some time later. For example, you purchased something from a supplier today and their bill allows you to pay within 90-days. There may be more bills like that. So, AP is just a list of such bills that need to be paid sometime in the future.
The AP is the area, where typically many mistakes are made.
- Overstatement of expenses. I have seen AP lists containing old bills that businesses had paid long time ago. These bills were supposed to have been cleared from the AP list and yet they were sitting there. If that is the case with your AP, then there is a good chance that your bookkeeping records duplicate the expenses. Possibly, through different years. As you know, CRA won’t be happy about overstatement of deductible expenses.
- Understatement of expenses. Sometimes, your business may incur a cost, for which you will not pay until some time later. In this case, your bookkeeping should record the expense today anyway, regardless of the payment happening later. This is especially critical if costs are large, and the payment is delayed until the next tax year. If done properly, such expense can be used to lower your taxes this year. On the other hand, if the expense recording is postponed until the next year’s payment, then you will miss this year’s tax savings.
You can’t expect your bookkeeper to record everything right in AP, without your involvement. Here is just a short list of inputs that, if not done timely, will become obstacles for bookkeeping:
- You have to get invoice from your supplier and remember to give it to your bookkeeper.
- If you forget (and even if the bookkeeper knows about existence of the invoice), she will have to chase you for the missing document.
- The bookkeeper must book it to the AP and match it to your payment.
- At times, the matching doesn’t work perfectly because the payment is split into installments. In that case, the bookkeeper must look for your clarification.
Due to reliance on too many parties and inputs, this is time consuming and cumbersome, isn’t it? Waiting for the input from all the parties can prevent the bookkeeper to close the month-end on time. Therefore, potential expense inaccuracies may be left unnoticed.
Steps You Can Take
Here is what you can do to help your bookkeeper ensure your business expenses records are right:
Identifying potential overstatement of expenses
a) Ask your bookkeeper for an “Accounts Payable Aging Report” for the last month. The Report will list your supplier bills that were still unpaid.
b) Look at the list to see if there are any bills that you know your business has already paid. Pay special attention to those that are 90 days or older. Make a list of such bills.
c) Ask your bookkeeper why the bills are still showing in the Report as unpaid. They should be able to fix discrepancies, if any.
Identifying potential understatement of expenses
d) Make a list of major suppliers to whom you pay frequently.
e) Arrange for the suppliers to provide your Account Statement showing how much you owed them (unpaid invoices) vs how much you paid.
f) Ask your bookkeeper to help you reconcile the supplier’s Statement against your AP balance. They should know how to do it.
g) If there are mismatches between the supplier’s Statement vs your AP balance, then that is an issue that your bookkeeper should be able to fix.
By taking the above steps, you should achieve the following goals:
- You will help your bookkeeper identify and fix business expenses overstatement, if any; and
- Bringing your AP records in sync with the major supplier will enable you to, hopefully, claim more expenses in the current tax year.
The above basic steps are just a high-level verification that you can do without acquiring any accounting knowledge. If you want to dig deeper into your bookkeeping records, you can always ask your bookkeeper or accountant for help.