Eileen Reppenhagen, ProAdvisor
Over the past 18 years in practice, I have learned that when I deviate from the principles listed in this article, I usually have trouble with a client file. So, I would like to share these principles for successful processing and storage of client documents with you today. Combined with QuickBooks, Quicken and ProFile tax software, these are the principles that keep me out of trouble and help my clients survive a tax audit.
Who will like these principles?
It is so much easier to set out on the right foot with a new client if you review these principles with them. Not only will it assist the client in surviving a tax audit, your new client will get a sense of comfort knowing that their records will be maintained in a uniform fashion. You will be able to easily and quickly find what you are looking for every time. It is really impressive when clients call you to ask for documents the day after you receive their shoe box of financial information; you pull out those documents and fax them while they are still on the phone with you. When you hand back the box of records, your clients will be able to find what they want as well.
If an employee processes and stores documents in the same way, file preparation time should be minimized. You will know that all the receipts are in the box. When your employee arrives to work, hand them the box along with this list of principles.
These principles have been copied by several auditors from within the CRA. The auditors were able to find everything they came for quickly and easily. What more could you ask for than to have quick audit turn-around time?
Share this list of principles with all of your clients and employees. Clarity about your expectations for processing and documentation of transactions will reduce stress, processing time and audit time.
- Account for each business, rental or investment property separately. Use accrual accounting unless cash basis is allowed by the CRA (farming and fishing).
- Keep all of the records for each client inside a banker’s box with the lid attached 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, do it. Never lose any client documentation or mix up several clients’ documentation by working on more than one file at once.
- Sort all of the paper received from a client right away, or ask your client to provide documentation in the following format:
- Bank statements by month by account.
- Credit card statements by month by account.
- Investment statements by month by account.
- All purchases regardless of payment type, in alphabetical order by supplier name.
- Sales by invoice number.
- Government reports and correspondence (GST, PST, WCB, Payroll, Tax, etc.).
- Tax receipts for personal expenses (donations, medical, RRSP, etc.).
- Note: put any paperwork not listed above in a “To Do” File for the accountant in the front of the box.
- Use the transaction dates to post sales, deposits, purchases and payments. GST, Income Tax, PST, Payroll, and WCB all require correct transaction dates. As you post, file the paper away so if you are interrupted, there is no filing pile for next time and you know exactly what isn’t posted yet. 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.
- Post deposits when deposited to bank coded to accounts receivable to clear the sub-ledger.
- Reconcile accounts receivable and provide the client with a list of outstanding invoices.
- Post all purchases as Accounts Payable at the date of the invoice. Code purchases to expense or prepaid, regardless of payment type.
- Post cheques, debits, credit payments at date of payment coded to accounts payable to clear the sub-ledger.
- Reconcile Accounts Payable and provide the client with a list of unpaid bills.
- Reconcile bank accounts, credit card statements.
- Amortize prepaid expenses over the remainder of its useful life.
- Amortize property and equipment over the remainder of its useful life.
- Other adjustments for year end.
- Reconcile all business and personal bank accounts, credit cards and supplier statements monthly and file in separate folders for each account.
- Keep all business and personal bank and credit cards statements by account by year. File the most recent month on top.
- 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.
- 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, GST registration may be required.
- Deposit all money received from sales intact to your business account. This makes it easier to clear accounts receivable 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.
- 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.
- 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, 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.
- Never move actual cash from bank to 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 take money from their business account, walk across the street and deposit it into their savings account.
- Write why (business reason) and if applicable, who it’s for (customer) on every purchase document.
- Don’t code purchases or income to “Miscellaneous”: Use clear coding choices. See the CRA Business and Professional Income Guide for examples: http://www.cra-arc.gc.ca/E/pub/tg/t4002/README.html
- Document business claims for telephone use, cell phone use, home office and vehicle usage with business reasons and customer names. Put a ‘B’ for Business and a ‘P’ for Personal to distinguish between business and personal use.
- 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. If you post all purchases as bills and reduce payables with payments by source, it’s easy to see the transactions for each vendor all in once place. I use Accounts Payable 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. Over 18 years, I have had 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.
- One method you could use for expense accounts is to use a credit card register for each employee. Write the employee’s name and paid by on each receipt. Post the bills to Accounts Payable and code to expense. Post the amounts paid for by the employee to increase the credit card register account, coding all amounts to Accounts Payable to clear the payable. File the receipts in alphabetical order so you can find the receipt from the supplier without having to hunt through employee expense reports. Post the payment to the employee to reduce the account. Put a copy of the register report with the total amounts paid with a copy of the payment in the employee file. If you want to see the receipt from a supplier, why would you need to remember who or how it was paid in order to find it?
- File purchases by vendor in alphabetical order. i.e. use a separate file for A, B, C, …Z and more individual files for suppliers with more than 10 pieces of paper. File supplier statements in the same file as the purchases after reconciling invoices and payments to the balance owed.
- Know and implement the employee versus self-employed criteria to minimize risk (includes spouse and family payroll): http://www.cra-arc.gc.ca/E/pub/tg/rc4110/README.html
- Report contract payments when required: http://www.cra-arc.gc.ca/formspubs/topics/contract-e.html
- Keep a separate file for each year for each employee and contract worker. Include copies of pay cheques, summaries, correspondence, TD1, T1213, job descriptions and time sheets.
- Check for compliance with GST, PST, Excise, Import/Export, Payroll, WCB and Provincial Employment Standards (includes spouse and family).
- Keep documentation for each year as a set of records with copies of your tax return and tax return schedules. Don’t shred or throw out financial records for at least 6 years after assessment or re-assessment. See Books and Records Retention/Destruction and IC 78 http://www.cra-arc.gc.ca/E/pub/tp/ic78-10r4/README.html
- If you want to destroy your books, records and related vouchers before the minimum six-year period is over, you must first get written permission from the Director of your tax services office. To do this, either use Form T137, Request for Destruction of Books and Records, or prepare your own written request.
Here is a list of the files for each client for each year:
- All business and personal bank accounts with reconciliations.
- All business and personal credit card accounts with reconciliations.
- Sales (numerical).
- Purchases (alphabetical).
- Payroll Summary (T4’s and PD7A).
- Employee file for each employee.
- T1 for each taxpayer.
- T2 or T3.
- General Ledger – either paper or electronic copy as required by CRA.
- All investment account statements and information for each account since inception. Required to prove the calculation of the adjusted cost base of each investment, especially if there are capital losses to carry forward that are not used up.
- All information about the cost of each property, plant and equipment in a separate file. Required when you sell the asset, either business or personal assets including a principal residence, with or without a rental suite, a rental property, a boat, a car or a motor home.
- All information about the debt associated with each acquisition of property, plant and equipment. Include your home mortgage documentation as you may be required to prove that the amount you owe today is the original amount borrowed.
- All information about each customer should be kept in a set of customer or contract files. Of course in a retail environment, it’s more likely these are supplier files. The files could be broken down into a number of files including Permanent, Correspondence, Billing, Contract, and Job or Project files.
Controlling the time spent and consequently the cost of working on a client’s files is important to you and your clients. The biggest benefits of using these principles:
- Allows you to find what you are looking for quickly.
- Helps control double posting of expenses.
- Assists with control over receivables, payables and money.
- Surviving a tax audit.
If you follow these principles:
- Your employees will be happy that they know what is expected from them when processing and posting your clients transactions and preparing reports.
- Your clients will be happy with their reports, the outstanding receivables listing, the outstanding bills listing and the timeliness and accuracy of their financial reporting. After all, there are 3 really critical things to know when you have a small business: who owes you, who you owe and how much money there is in the bank.
- Your auditors will be able to verify the documentation, compare it to the reports and leave in record time.
Surviving a tax audit will make everyone happy.
Eileen Reppenhagen, QuickBooks ProAdvisor
All articles are copyright protected. Most articles are not available for re-print unless you obtain permission from third parties. Please respect copyright. For more information or permission to re-print please contact firstname.lastname@example.org
If you obtain permisison to re-print an article, include this tagline: "Eileen Reppenhagen is a Certified QuickBooks ProAdvisor and speaks and writes about accounting and tax. Contact her at email@example.com".