Is there any time limit to how far back a bookkeeper can clean up your books? The simple answer is no, a bookkeeper can clean up books from 3 years, 5 years, or 7+ years ago. While there is no time limit preventing books from getting caught up, there are some common issues that occur once you’ve allowed your books to get so behind. The reality is that if you haven’t had books prepared for a number of years, then you probably didn’t meticulously save down all the paperwork that you received from suppliers, meaning that from a bookkeeping perspective there is going to be some incomplete information. Incomplete information is what I often refer to as the grey zone, and it’s the situation where a good bookkeeper can save you thousands of dollars.
What is the grey zone? Well, in order for a business expense to be an allowable deduction for both corporate income tax and GST/HST, it should have supporting paperwork. This is particularly important for reclaiming GST/HST on your expenses, as CRA inspections of GST returns are common. But if you haven’t done your books for several years, then even a small business can have thousands of transactions with no supporting paperwork, and while you as the business owner might in theory be able to painstakingly gather this information from emails and by contacting suppliers, given the sheer scale of the task in a large bookkeeping cleanup, it’s just not going to happen.
This is where a good bookkeeper needs to exercise a lot of judgement. Rather than denying you all GST input tax credits (the GST/HST you can reclaim on expenses) per the letter of the law, they need to determine whether the expense very probably did charge GST, and if you as an owner could track down the paperwork in the event of an inspection. Taking this approach means that you can reclaim the GST on expenses, but only need to gather and provide invoices in the event of a CRA inspection. In a CRA inspection they generally only look for a small number of sample invoices, so this is less onerous than it sounds.
What You Need To Gather Before A Bookkeeping Clean Up
The hardest part of bookkeeping clean up services is often getting the required information gathered. As the business owner this is going to be your responsibility, so below we’ll walk through a bookkeeping clean up checklist, so you can start gathering this information in advance.
Bank Statements
Bank statements are the most essential piece of information for getting books prepared. If you don’t have them then it’s not possible. While normally getting bank and credit card statements isn’t a problem, for bookkeeping catch up it commonly causes issues. You may have to request statements from your bank past a certain date, and the amount of financial data you can download from your bank varies massively from one bank to another.
The most common issue we come across are clients who have closed a bank account, and therefore no longer have access to their statements. Getting access to these usually involves reaching out to your bank manager, but we’ve had clients experience significant difficulty in getting their bank statements from accounts closed years ago.
When downloading bank statements for your bookkeeper, remember that they’ll want both PDF statements showing the balance, and CSV statements listing all of the transactions. The PDF statements are essential, as these are the documents that are considered the ‘master source of truth’. The CSV statement is something that can save your bookkeeper a huge amount of time, as they will otherwise need to convert your PDF statements to a CSV format for uploading to accounting software, and this can take quite a bit of time, even with document conversion software. Anything that reduces the hours your bookkeeper works reduces the number of hours that you get billed for.
E-transfers
Does your business use e-transfers a lot? If you do, then this can cause problems for bookkeeping clean up services. Many bank statements provide no details of who the e-transfer payment was to, meaning that the only way to know who it was sent to is to look at the e-transfer history report in your bank account. We advise clients to download this report for as far back as they can, as this can represent important financial data on hundreds of transactions. Again, banks often cap how far back this report can go, so contacting your bank manager to get this information for the maximum possible time period is advisable.
Business Expenses Paid For On A Personal Card
Although it’s not best practice, it’s not uncommon for small business owners to pay for business expenses on their personal cards. The best way to gather this information is to download a CSV of all of your personal banking transactions and to highlight the ones that are business expenses. If the bank description isn’t obvious, then you should add a comment stating what it relates to and whether or not the supplier charged you GST/HST.
Paperwork, Supplier Invoices And Receipts
In an ideal world, you’d have saved copies of supplier invoices for all of your business expenses, but if you haven’t done your books for several years then the reality is you probably haven’t done this either. The next best thing is to gather sample invoices from your main suppliers. If your suppliers almost always charge you the same GST/HST rate, then your bookkeeper just needs a sample invoice for that supplier to see the tax rate, after which point they can assume this is the correct tax rate for the other transactions from this supplier. Try to have sample invoices for all of your suppliers, and try to determine if any of your suppliers vary the GST rate they charge you due to selling you a variety of products or services, some of which may have different tax rates. If a supplier charges you different GST/HST rates depending on what you purchase from them, then you’ll need to get invoices/receipts for everything purchased from this supplier.
Copies Of Previous Tax Returns
Your books need to agree with what your tax accountant has previously filed. When I worked for an accounting firm it was common for clients to say the books were ready, only for us to discover that the accounting system figures for pervious years didn’t agree with filed tax returns. Any professional bookkeeping service should have this as a standard year-end task, and in order to complete it they’ll need you to provide the year end financial documents from your last tax return. The two documents that are essential are the ‘Year End Adjustments’ and the ‘Adjusted Year End Trial Balance’. Make sure to get copies of these from your accountant and to provide them to your catch up bookkeeper.
Accounting Software
Most businesses use cloud accounting software such as QuickBooks Online (QBO) to manage their bookkeeping. While a professional bookkeeper may not have prepared and reconciled your books for a number of years, that doesn’t necessarily mean that nothing has been posted into your accounting system. Business owners commonly try to do their own books for a period, and QBO often prompts users to set up recurring automated rules. Unfortunately, the QBO prompts are usually incorrect, but many owners assume the software has more AI derived intelligence than it does. The result of this is that it’s not uncommon for us to take on a bookkeeping file where ‘nothing has been done’ per the client, only to discover the system has a large number of incorrect transactions posted into it. It’s much easier to do bookkeeping correctly first time than it is to pick a part incorrectly posted transactions, so we advise giving bookkeepers access to your QBO account so they can determine if there are any major setup or historic posting issues. Most of the time it’s best to correct the mistakes in the existing accounting system, but sometimes the damage caused can be so significant that it’s sensible to create a new version of the accounting system before commencing a bookkeeping clean up.
Do Your Bookkeeping Clean Up Before Tax Season
Tax season is extremely busy for professional bookkeeping services, and if you need multiple years of bookkeeping cleaned up, then this will take a significant amount of time to do. Most firms will struggle to fit this in during tax season, so instead get this sorted out when there isn’t a pressing filing deadline that needs to be hit.
Benefits of Bookkeeping Catch Up Services
We’ll start with the obvious benefit of bookkeeping catch up services – it’s a legal requirement to have accurate records and this information is needed to file your tax returns. Companies without up-to-date books have usually not paid their taxes (due to not know how much was owed), which will result in fines and late payment interest. Getting on top of the books is the first step in paying your taxes and reducing late payment interest. Below I’ll discuss some other benefits:
Financial Reports
No books mean no up to date financial reports. Financial reports are something that every business owner should be reviewing regularly. Not sure how to read a Profit and Loss Statement or Balance Sheet? Then make sure you hire a professional bookkeeping service that bakes in time for a regular call to walk you through understanding these documents.
The biggest mistake we see from companies who don’t have regular financial reports, is relying on their bank balance to gauge how well they’re doing. Many businesses are high revenue and low net profit margin. Since you charge GST/HST and possibly PST (depending on your province) on your sales revenue made to Canadian customers, companies often build up large amounts of cash that is really sales tax they’ve collected on behalf of the CRA. This creates a nasty surprise for companies when their taxes come due. Regular financial reports allow you to clearly see how profitable you are, along with your upcoming tax liabilities. This financial information can then be used to plan your cashflow with confidence, along with helping you make key strategic decisions.
Less Time Wasted On Your Accounts Receivable
If your books aren’t up to date, then neither are your accounts receivable, e.g. the people who owe you money. This can lead to you having a lot of back and forth with your customers as you try to figure out if they’ve paid you everything, which isn’t a good look. It also makes it hard for you to be 100% confident that you have been paid for everything and can easily result in failing to collect all of your sales revenue.
A good bookkeeping catch up service will help you get your accounts receivable cleaned up. This can be one of the most challenging and time-consuming tasks, but it’s essential it’s done right.
Move Onto A Monthly Bookkeeping Service
The moment your bookkeeping catch up service is completed, you should move on to a regular monthly service so that your accounts receivable and financial reports are always up to date. You’ll find that it’s far easier to stay on top of your books each month than it is to try to do them on an annual basis. Even after a few months, business owners often find it challenging to find paperwork or remember what certain expenses related to. Regular books also allow you stay on the ball with tax estimates and installments, saving a lot of wasted money on late payment interest and fines. If you need help then feel free to reach out for a free consultation on getting your books caught up and your business set up with reliable, regular financial reporting.
TL;DR
Bookkeeping catch up can go back as far as you need it to, but the longer you leave your books undone, the more likely it is that there will be complications and significant time needed to properly resolve historic issues. Whether that’s missing bank statements, missing supplier payment invoices, missing e-transfer history or an accounting system that’s full of incorrect transactions – it can be fixed. As a business owner you’ll likely find the bookkeeping catch up service requires you to gather a lot of information, something time poor owners often struggle with. Our advice is to view bookkeeping clean up as a one off exercise, something you do to get your accounts in order, and as a first step in moving toward a regular bookkeeping service that reconciles your books monthly and provides regular financial reports to help you run your business.