Summary of a Simple Bookkeeping System

This basic outline captures the key elements and processes of a bookkeeping system for a small organization. Bookkeeping should follow standardized procedures. It should fit into a management system that includes regular financial statement of review, and feedback to the bookkeeper.

Business papers/source documents. These are the “raw materials” of bookkeeping: invoices, receipts, contracts, leases, sales reports, cash register tapes, etc. Each item may trigger a transaction, such as issuing a cheque or making a bank deposit. Ideally, all transactions will be documented. That is, there will be some explanatory paperwork that offers proof that expenses are legitimate, and that the company received all the revenue it was entitled to. The Canada Revenue Agency requires most organizations to retain their business papers for the current year and six previous years for audit purposes.

Withdrawals and deposits. Most transactions take the form of withdrawals from or deposits to the bank. Not that long ago, most business bank transactions were made by cheque, which provided excellent documentation. Nowadays, online banking, electronic funds transfers, preauthorized payments, direct debits and other electronic transactions are becoming more prevalent. Make sure you retain sufficient documentation of all items. This not only meets your CRA requirements – it also ensures that your bookkeeper has enough information to compile accurate records.

Journals. All of your accounting entries are made in journals. Journals capture financial transactions day by day; note the French root “jour.” Most accounting software packages provide an array of journals, organized by type of transaction. For instance:

  • the purchases journal records incoming bills (accounts payable)
  • the payments journal records cheques or other forms of withdrawal, to pay those bills
  • the sales journal records invoices issued to customers for goods/services (accounts receivable)
  • the receipts journal records payments from customers to clear those receivables
  • the payroll journal records employee paycheques, with a detailed breakdown of deductions and employer contributions (e.g. EI, CPP, company health plan)
  • the general journal offers a catch-all for items such as error corrections that may not easily fit elsewhere

If I purchased a newspaper ad for $1000 plus HST, my journal entry might look something like this:

May 30, 2011The Weekly News re: ad buy
Adverstising Expense 1,000.00
GST paid on purchases 130.00
Accounts Payable1,130.00

General ledger. The general ledger reorganizes the data captured in your journals into an account by account format. Note that my advertising payable entry, above, updates three accounts: accounts payable, an expense account, and the GST/HST account. The journal entry captures all of this as one record. In the general ledger, the lines are split up and assigned to the individual accounts:

  • A $1,000.00 debit would appear in the Advertising Expense account
  • A $130.00 debit would appear in the GST/HST Paid on Purchases account
  • A $1,130.00 credit would appear in the Accounts Payable account

The general ledger allows you to review transaction detail by account. For example, the Advertising Expense account would list all my ad buys throughout the year, with a running balance showing the total spent in this category.

Check your work: Bank reconciliation. Most business bank accounts provide monthly statements by mail – although with online access, you can see your statement any time you want. Because cash is the lifeblood of small organizations, it is crucial to prove that your books show the accurate bank balance. The bank reconciliation provides a structured way to compare the bank’s records to yours and identify variances. It is normal for the two balances to be different – but you should be able to explain those differences to the penny. Some need to be corrected – for instance, errors (yours or the bank’s) and bank charges or interest that you hadn’t posted. Other variances are legitimate – for instance, cheques that you issued that have not yet cleared. Legitimate reconciling items such as these should explain the difference between the bank statement and your books.

Check your work: Other reconciliations. Your bookkeeper may have similar methods of verifying other accounts. For instance, some suppliers send monthly statements listing all outstanding transactions. These can be compared to the payables records. The Canada Revenue Agency provides regular payroll statements that can be compared to the source deduction remittances you have made.

Financial statements. The statements summarize the information in your ledger. They take the month-end balances in all of the accounts, and slot them into two statements: the Balance Sheet (a.k.a. Statement of Financial Position or Statement of Fund Balances) and the Income Statement (a.k.a. Profit and Loss Statement, P&L, Statement of Revenues and Expenses, Operating Statement).

Read your statements regularly! Typical moments for reviewing statements are: at month-end, at the end of a project, prior to a board meeting. You should always do so with extra care at the end of the fiscal year. Many not-for-profits engage a chartered accountant to audit their statements. The auditor tests the transactions in your books for accuracy, makes any changes s/he feels are necessary (with your approval!) and presents a formal set of statements for the year.

Check your work: Do the statements look right? Some errors can only be caught through the scrutiny of someone who knows the company's financial activities well. For instance, the bookkeeper could record a purchase in the wrong expense account and the bank reconciliation wouldn’t reveal the mistake. The manager, who knows what purchases have been made, may be able to spot the problem by noticing that one expense account is surprisingly high and another surprisingly low. This is not a very scientific way of checking – but it’s extremely effective in the hands of an astute manager who questions everything that looks unusual, and pursues answers until they’re satisfied that the statements fairly reflect the company’s activities.

This tip sheet was created by Heather Young of Young Associates. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.