Accounting and bookkeeping - explained briefly and concretely

What is an account

An account is an overview of your company's income and expenses. An account usually consists of a profit and loss account and a balance sheet. It can show you whether you have a profit or loss in your company by making a statement of the result for a certain period.


An account can be made either for tax purposes, a tax account, or for accounting purposes, an annual account.

What is an annual report?

The figures in the annual accounts come from the bookkeeping that the company is obliged to prepare. For most small businesses, the bookkeeping consists of the sales invoices sent to the customers for work performed and the expenses incurred by the business. The two items should be compared with the movements that are in the company's bank account.


The financial statements are the most important showcase for the company because they show your partners and suppliers how healthy your finances are. You must therefore choose to have an annual report prepared if your bank or one of your partners requires you to see it.

What is a tax account?

A tax account is an account that contains tax figures. This means that income and expenses are registered in the tax accounts according to the method that the tax legislation writes that they must. The result that is stated in a tax account is equal to the result that is reported on your tax return and thus what you have to pay tax.

The tax accounts can give a good overview of what costs you have in your company, which you get a deduction for, ie can deduct from your income before you have to pay tax.


You will need the following to prepare an annual report/tax return (applies to most small businesses):


All vouchers from the whole year (period 1/1 - 31/12)

All printouts from the bank

Cash reports (applies to shops, cafés, etc.)

What is bookkeeping

Bookkeeping means the systematic recording of financial transactions. You have one transaction each time:


You buy something

You pay a bill for something you have previously purchased on credit

You're selling something to a customer

A customer who has previously received credit pays his bill

The word bookkeeping comes from the time before IT and financial systems. Here, the company's transactions were registered in a book, hence the name bookkeeping. Today, one would typically use a financial system to post. From the financial system, you can always get an overview of the company's income statement, balance sheet, send invoices to customers, and much more.


When you are self-employed and have your own business, you need to keep track of the company's finances. You do this by posting your income and expenses. In this way, it is also easier for yourself when you e.g. must report VAT, make a tax returns, and annual accounts. With Bookkeeping Services Mississauga you keep track of:


Your income and expenses (income statement)

How much you owe (liabilities in the balance sheet)

How much your assets are worth, such as your cars, machines, etc. (assets in the balance sheet)

What your business is worth (equity in liabilities)

The double-entry bookkeeping

There are some rules when posting. In practice, debit and credit must be used, and this method is called double-entry bookkeeping. This means that each transaction must be posted twice; once in debit and once in credit and it must be the same amount. For example, if you buy a cleaning agent for your cleaning company, it must be posted as:


Debit on your purchase of goods (the cost in the income statement is booked)

Credit at your bank (your bank balance in the balance sheet will be smaller, corresponding to the price of the cleaning agent)

Appendix

You need to keep track of your vouchers. You do this by:

Give them a document number, typically in the order 1, 2, 3, etc. The most important thing is that the document numbers come in order, so it is clear that no documents are missing when the year ends. If you want to start with Appendix 2000, just do it.

Put the documents in numerical order in a folder or store them electronically in your accounting program.

You must save the vouchers for 5 years after the end of the financial year. They may be stored electronically.

At Azets, we help more than 750 small businesses so we know all the shapes and colors of newly self-employed people.