The Canada Revenue Agency (CRA) is targeting consultants & contractors in the oil patch.
A tax audit could cost you $6,000 per year or more in taxes and penalties. We have a solution to eliminate this concern. We will take care of all your tax compliance issues and provide all your bookkeeping in our solution. Check out SOS TAXMAN.com or PadgettAlberta.ca
For more information PH: 780 466 6747 FAX: 780 640 1246 email Les@PadgettAlberta.ca
If you are a contractor (especially in the oil patch) Canada Revenue Agency (CRA) may be looking at you closely. If you contract to only one company you are on their hit list. The problem is related to the employee contractor definitions used by CRA. To avoid getting caught in this trap most oil companies will insist their contractors incorporate. This is great for the employer since this absolves them of any responsibility for this issue. The responsibility is now placed squarely on the incorporated contractor.
CRA will look at this incorporated contractor and determine if the corporation is essentially an incorporated employee. If this is the case your corporation will be declared a Personal Services Business (PSB). Once considered a PSB the taxes are horrendous. You will lose tax deductions for a lot of expenses and almost all of the advantages of being incorporated. In addition the corporate profits will be taxed at a 38%.
If you are audited and CRA determines your company is a Personal Services Business, it will cost you thousands of dollars. It could easily cost you an additional $6,000 or more per year in taxes, penalties and interest. CRA will declare many of the expenses that your corporation deducted as wages to you that will then be taxed. In addition there will be penalties and interest for not paying CRA the source deductions on these expenses that were disallowed.
We have a solution. You will save some tax and avoid the hassle of getting an audit. In addition there are a number of attractive benefits. You can pay many expenses through this corporation and save money.
You will be paid in the form of wages and a dividend. The dividend can go directly to you or to your corporation. Your corporation will receive the dividend tax free. You can then invest this money inside your corporation.
Do you know if you or a loved one is eligible for the disability tax credits offered by the Canadian and Alberta governments?
The disability tax credit is a non-refundable tax credit used to reduce income tax payable. The credit for 2011 is $7,341 for federal taxes and $13,095 for Alberta taxes. That could be a savings of up to $2,410 depending on your tax bracket. If you have a dependent eligible for the disability amount with little or no income all or a portion of this credit may be transferred to you. The dependent can be your or your spouse’s or common-law partner’s parent, grandparent, child, grandchild, brother, sister, uncle, aunt, nephew, or niece.
If a child is under 18 years and is eligible for the disability tax credit that child is also eligible for the child disability benefit, an amount available under the Canada Child Tax Benefit. Individuals who have a prolonged impairment in physical or mental function, use form T2201 to apply for the disability tax credit. The form must be completed by a qualified practitioner and CRA (Canada Revenue Agency) must approve the form. Often the practitioner will charge a fee to complete the form.
There are definitions for several different categories of disabilities. To determine if you are eligible look at Form T2201 or you can look at CRA’s website:
You may want to talk to your doctor or other practitioner about whether or not your situation fits the definitions. But for tax advice talk to a tax professional.
For tax advice talk to a tax professional:
There are a number of companies that will assist you in getting your tax credit BUT be aware that many will charge 25% to 50% of your tax savings for the service. Ours fees are based on the services we provide, not on the amount you will receive. A typical charge for a straight forward request is around $250.
If you are unsure if you qualify for the tax credits, please call us. We will help you with the paperwork and assist you in getting the tax credits that you deserve.
Les Grajkowski CFP
Bonnie Powers CMA (editor)
As a business owner, you have now found out that only you can control how the business operates. Part of this control relates to the finances of your company. This article seeks to discuss the ways for you to pay attention to the revenues and expenses of the business you are operating. The bottom line is the bottom line. Any business is like an old row boat, with a large number of small leaks. Each leak in itself is not important or dangerous to the well being of the craft, but the sum of many leaks leads to disaster. As a business owner you have to have a way to watch for the leaks, and a way to stop them.
Let us first start with the cash coming into your business – my favorite kind of cash. Part of your business must include some kind of system to record sales and account for cash receipts. Today the cash register systems (point of sale) offer a variety of control features. Use whatever you have to come up with a total cash collected, and balance your cash drawer to this amount. In a retail situation where you have a number of floor staff handling the register, you are in jeopardy of leaking some of the cash. The cash drawer should be balanced once per day against the cash register total. It is a simple exercise where you count the entire drawer and match it to the internal tape maintained by the register. Beware of cash over and cash short situations. At the very least, these are indicators of poor customer service; at the worst, they are signs of an organized attempt by dishonest people to remove your cash.
Inventory & Supplies
The next area of control is in the supplies and inventory that you have on hand. A steady gross profit margin is usually the easiest control to have and this is achieved through regular inventories and a monthly profit and loss statement. If you achieve a stable gross profit margin consistently, then you are likely in control of your stock. Other ways include secure storage and display areas. Obviously, you cannot restrict access to the point where customers are unable to get at it, but that access should be visible so that this important asset does not develop legs. In your storeroom, keep supplies neat and organized. Keep this area secure with limited and controlled access. Keep track of the supplies that you use so that abnormal usage can be spotted. Make sure that your employees understand that shrinkage will not be tolerated.
Essentially, you should not have accounts receivables. Accept credit cards instead. In the service retail situation, giving credit to customers is unlikely to increase your business volume, so why bother? My attitude has always been if customers are unable to get a credit card to use, why should my business extend credit? The cost to accept credit cards, the vendor charge, will be much less than the running of your own credit department.
When paying your bills, be very careful that you are paying only for goods and services actually received. Inform your vendors that orders can only be placed by authorized personnel, and thoroughly check every shipment of goods you receive into your shop. Ensure that you are receiving what you ordered and it is in acceptable condition before you sign the shipping receipt. When studying your invoices, double-check the mathematics. These computer print-out bills can look very formal and correct, but check the addition and cross multiplication. Computers may not make a mistake in adding, but programmers do sometimes make mistakes on the instructions that they give. Pay particular attention to goods purchased for resale and use. These purchases may or may not be subject to sales tax, and careful attention on your part will save you money.
Pay your bills on time. While this may not be the time on the invoice, set a policy that your cash flow can live with. Always match the received date to the invoice date and take the later of the two. Set aside a portion of your week or month to do this task. Try not to hastily pay a bill because someone is trying to exert pressure. Paying of bills results in money leaving your business, and this is the worst kind of money.
We all work too hard to ring sales up in our cash registers, and when you consider how little of the total sale actually ends up in net income, you can appreciate how little mistakes can hurt you. Make sure that all services are billed to the customer. Often it is easy to overlook that small item, especially if several of your staff were involved in providing the service to the customer. Have some kind of system that records each service rendered to the customer, and make sure this reaches the final billing. At the billing stage make sure that the bill is calculated properly. If using an electronic cash register (point of sale) system, periodically review the “price look up tables” to ensure that they conform to your current pricing structure. A customer will usually check to see if he is over-billed, but few are looking for under-billings during this glance at the charges. Periodically review your billings to check the math and the services billed. If you have a number of people doing billing in your company, make sure that you can track mistakes back to the person so that appropriate action can take place.
All of the above can be generalized into the issues of the completeness, the accuracy and the authorization of every transaction your company makes. We appreciate that you cannot be there every moment for every transaction. You can, however, set up simple procedures for yourself and your staff. Ask yourself the following questions:
- Are my sales complete and accurate? How do I achieve this within my system? Am I sure that every product delivered and every service provided is at the price I have specified?
- When I pay a bill, am I getting the services and products I ordered, for the price I agreed to, and have I fully received the billed items?
- Am I keeping control of my assets? Am I getting full value for the resources I give away in order to improve my net income?
These are the basic questions that need to be answered by each company in business today. Take a moment and see if you can plug a few of those leaks. Do not fall for the temptation of thinking that if you have never had a problem, no problem will ever occur. Do not depend solely on people to catch mistake or not make them in the first place. After all, making mistakes is what humans are all about.
Before we can start the reading of an income statement, we need an income statement to look at. For this article we are going to use the following as a basis:
To begin we will review the basic terminology. This statement can be called an income statement, a statement of operation, a profit and loss (P&L) or the simple revenue and expense. They all mean the same thing. It is the financial results of operating the business for a specified period of time.
The third line uses the phrase “For the 5th month Ended 05/31/03”. This phrase gives you the period of time under consideration. In our sample statement we show the current period (May) and the year-to-date totals. In an annual statement you may see this year and last year and the titles will note this.
Generally speaking, the income statement will show the results of operation separate from other related business activities such as interest revenue and gain on sale of fixed assets. Next the statement will show net income before taxes. The estimate of taxes is listed next and deducted to give the true net income. Remember, while the business may be, say, a hair salon, the net income reflects all of the business activity of the company. For this article we will concern ourselves only with income from operations.
Statements always start with the sales. This is followed with the expenses of the operation. In this sample we have listed them alphabetically; other statements may show the categories from largest to smallest in dollar value.
The above are the basics of how an income statement will look. Let us now move on towards how to read it and what it should tell you. Keep in mind that accounting seeks to turn all decisions into mathematical relationships to show the results of those decisions.
To do this I have reorganized the income statement slightly to highlight certain features.
These lines will tell you the composition of the business in terms of gross dollars. In our sample the sales are essentially based in the provision of services (hair salon). Very few dollars are derived from the re-sale of products. If this line of sales had been larger we probably would have wanted to show the cost of these sales separately and calculate a gross profit. The questions are: “Can the company do better with product sales?;” “Is that an area that can be expanded?;” “Should we simply ignore this and concentrate on providing services where the bulk of our sales are?” The low-product sales should also indicate a low inventory of product. If we do not sell much, we should not have to stock much. In our sample statement we have put together the supplies and the costs of these sales.
Now we move down into the body of the statement and look at the different types of expenses that this company is incurring. They are realigned into three types: variable costs – expenses that vary with the volume of business above a certain level; fixed costs – expenses that will remain the same within a wide range of volume; and discretionary costs – expenses that occur as a result of a specific purpose. Now we can look at each type and learn more about this business.
These costs will vary with the level or volume of business. The reality is that no expenses are truly variable as all costs have a fixed element. Labor, for instance, is included here, but there is a certain labor cost to simply open the doors. Until the operation hits certain volume levels, the fixed portion is higher than the variable portion. In our sample, the year-to-date labor expenses, as a percentage of sales, is higher than the current period. It would seem that the volume is reaching a level where the labor costs are incremental. This means now that we have passed the base sales and the expense should fluctuate with volume. If the percentage is erratic, or constantly shrinking, it could mean you are under or over staffed. The labor expense is the largest item on this income statement and that alone requires that we examine the return on this expense closely. It is easier to save money on the larger expenses than on the smaller ones.
This type of expense is obvious. It tends to remain the same, period in and period out, within certain wide ranges of volumes. The rent expense, for example, is unlikely to change until such time as more space is needed. Rent is not something that you can buy piecemeal, and as a result needs to be considered in determining how close to capacity this business is. Department stores often use a ratio of sales per square foot of retail space as an indicator of how efficiently the space has been used. The same can hold true for your business. Look at the fixed components of cost to determine the base level of sales that this business can be supported on. Look also in terms of the highest level of business that can be done before an expansion of fixed costs is necessary.
These are costs that are incurred in order that a specific result is achieved. In our example, we show advertising as discretionary. You should be reviewing these types of costs in terms of their ability to help the company grow. What the amount will not show you is how effective the expenditure was. Often these types of expenses, while incurred in the current period, will have longer lasting benefits. When reviewing these lines try to understand why the money was spent, and what it was meant to achieve. Think in terms of long and short term effectiveness.
To summarize, look at the following areas – sales, to learn where the core business is and where it could be expanded, and variable costs, to understand the direct costs incurred in order to earn the revenue. This will also give you an indication as to whether the businesses are above the base sales needed to survive. Fixed costs speak more to the capacity of the business. They tend to stay the same for periods of time and often cannot be reduced quickly. This is a good indicator of how much it will cost to operate a business with no sales. The discretionary costs are those expenditures designed to achieve a specific result. Look to see if they are achieving that result and whether a clear definition of these expected results are present.
In this sample statement we have shown clear-cut divisions among the three types of expenses. This has been done for simplicity. The reality is that every expense contains factors relating to all three. In budgeting it is useful to break out the fixed, variable and discretionary portion of each expense.
Finally we look to the bottom line. Here is where the sum of activity shows. Is the company profitable? Without profits, we do not survive in business. Recognize that this is an accounting profit. Adding back depreciation will give you a close look at cash profits, and by better understanding your tax situation, there may be a third type, the taxable profit. (Yes, it may sound confusing.) First, under any basis be profitable; accountants can sort out the rest.
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There are times when you have to provide financial information to outside parties. Generally speaking, you will only do this when you have no choice (i.e., the government) or when you want something.
In the case of government reporting we suggest the minimum. As with all contact with the government, give them what they can legally ask for and ignore the rest. This is a perfect example of not “gilding the lily.” Too much information is worse than too little information.
The other times you provide information, you are trying get something. You may be trying to establish new or additional lines of credit, enticing new ownership contributions or simply showing that you are capable of handling a lease commitment. In each of these cases you want the party reading these financial statements to be as impressed as possible. This article suggests some ideas that you can adopt.
Currently your monthly information should have mostly management value. You need information to run a better business. You need the details of each area of importance. In the case of new projects you want to be able to determine the financial impact, so you may need more information. All of these “details” are important in the use of your financial statements. The details in this format are not necessarily good for you when you want to impress other people.
There are two main statements that you need to concern yourself with. The first is the income statement. Here you show the revenues and expenses of your operation. Second is the balance sheet, where you show the assets of the company along with what the company owes outside parties. Finally, this statement will show how much the ownership has in the company. First we shall deal with income statements.
First and foremost, reduce the detail in your information. As much as possible, consolidate the operating or income statement. The key numbers here are sales, gross profit, inventory, wages, rents and other operating-type numbers. There is no need, for instance, to separate all of the different levels of payroll such as ownership and management. These numbers can be provided separately, if needed. Another example is to reduce the number of lines of sales. Consolidate this to one line. You want to show that you have a viable operation, not to invite comment on a sideline sales category.
Separate Core Activities
In the above paragraph it’s suggested that you consolidate wherever possible, but sometimes you’ll need to separate items. The point here is that few businesses work on one idea at a time. They often mix different activities into the same operation. Examples of this include sub-leasing, renting signs, wholesale activity and sideline activities. When these are combined with the core activity of, say, a hair salon, you hide the true operational results of the main business. The other readers are not interested in these sidelines -they are interested in the manner in which you make your money. Sometimes these little adventures cost us money, or are still in the development stages. This being the case, they are making the core business look bad when, in fact, it is doing well enough to support these outside activities. You need to show the reader of the income statement how well you are doing with the main business and how much it contributes to bottom-line expenses. You can show these other activities below the line called income from operations.
Use Comparative Information
Many readers are trying to determine the trends in your business. Show growth rates and management accomplishments. Commonly, companies show the prior year in their statements. There is nothing wrong with the consolidation of a number of years on one page. Here you can see how the company has grown and the cost controlling measures that you may have put in. It is impressive to see sales increasing by ten percent and expenses only by eight percent.
Not all of the same rules apply for the balance sheet. Here some additional detail can be useful, but do not try to overwhelm the reader with too many details.
Make sure you show the various assets you actually have. Show the key current items such as inventory, accounts receivable and cash. This will show your reader how liquid you are. Show you payables split among remittances required by governments and those to outside trade suppliers. If any money is due to the principals of the company, show these separately.
Reduce details in the fixed asset area to the main categories of land, building, equipment and leasehold improvements. Group all of the accumulated depreciation and amortization together.
The reader should be able to easily extract how much you own and the general categories in to which it falls. They should be able to see how much you owe to outsiders and what type of outsiders they are, and finally they should be easily able to determine how much you have in the business.
In the balance sheet there is a delicate line of too much information and too little. Help the reader understand where your business is without trying to show them where every piece of stock is located.
It is tempting to inflate sales and income to impress someone. Never do this. First, the numbers will stop making sense to a skilled reader, and second, by exaggerating, you might be opening yourself up to litigation, possibly even jail time. Certainly you are permanently losing all credibility with your reader. Avoid this at all costs.
Next, while non-cash expenses such as depreciation is tempting to exclude (after all, it does not result in cash,) resist it. A skilled reader knows it should be there, and in its absence, will make assumptions that are not in your favor.
Resist the transfer of expenses from the income statement to the balance sheet. There are accounting rules with respect to what expenses can be capitalized, but readers on the whole are looking for the “hard” assets. Certainly set up a legitimate prepaid expense (where the value of the expense extends into future periods,) but do not over do it. Readers catch on.
A skilled accountant can easily prepare these statements for you, but that does not change your involvement. Read your own statements and see if they are telling the story you want told.
The quick and easy answer to how to select a good accountant is to say, “Select me!” That, however, is not the purpose of this article, so we will provide you with some additional criteria for the selection of an accountant for your business. Before we discuss the attributes of a good accountant and accounting firm, let us review why you need the help of any accountant, good or bad.
At the very least, you will require an accountant to assist you in the preparation of your tax return. The tax department views your business as a series of taxable income and deductible expense transactions. The income tax return summarizes these transactions and calculates your contribution to the national revenue system. Unless taxation is a major hobby of yours, you will need an accountant to sort this out for you. Therefore, it is in the area of taxation that you need a good accountant.
The next reason to use an accountant is to prepare your monthly, quarterly and annual reporting to the government. Each report to the government, be it sales tax, payroll taxes or whatever, requires the completion of forms that are governed by strict regulations… regulations that, if not followed, will result in the taxing agency levying heavy fines. Again, unless you have a outside interest in this, it’s best left to people who work with it every day.
You may be thinking that the above reasons for using an accountant imply that you will be financially punished by the government if you do not do so. Partially, this is true. Inadvertently, the powers that be have devised a tax collection and reporting system that places a large burden on the independent business owner. With few exceptions, the reporting required by a five-person operation is similar to the reporting required by an organization employing thousands of people. The difference is the resources available to accomplish the task.
Now let us turn to some positive reasons for using an accountant in your business. After handling your compliance issues with the various levels of government, a good accountant should go further and help you with the financial circumstances of your business. This leads us to the first major criteria of a good accountant. Will you and your accountant be able to fully understand each other? It is extremely important that the lines of communication are clear, and the accountant takes the time to review the financial information provided. A good accountant will drop the jargon and speak to you in a way that helps you better run your business. When selecting an accountant, select someone who appears interested in your business and someone with whom you feel you can develop a rapport. The second step is to ensure that this person is the one with whom you will talk. Is the person selling the service the one who will work with you? How will this contact be made? On what schedule and under what circumstances will your calls be returned? You cannot expect this accountant to be available 24 hours per day, but it is reasonable to expect a return call within 24 hours.
For your accounting information to be useful, it must be on time. Find an accountant who can set a delivery schedule that gets you the information within a few days of the end of your month. It still amazes me to find people who are accepting accounting information way past its useful life. If it is a monthly P&L, you need the information within ten days. If you are getting quarterly information, it can still be useful within 20 days of the quarter end. If it is annual work, we suggest that the information be available within 45-60 days. To truly run your business properly, get accounting information every 30 days. A good accountant will train you in what to have ready and when to have it, then will stick to the schedule.
In order for an accountant to meet the above deadlines, you will have to be important to him. A simple fact of the accounting business is that you serve your largest clients first, because they generate the largest fees. Find out where your organization will fit into this scale. If you are the smallest account your accountant will handle, can you really expect timely service? Look for an accounting company that has selected your size of company as their target client.
This leads to the next step in the selection. This has to do with the expertise your accountant will bring to your work. Certainly there are a number of degrees for accounting and tax, and you should inquire into the education and the experience of your accountant. Formal education will not tell all, however. Look to experience outside of schools. If the person has a number of years experience either in your field directly, in your industry or in businesses of your size, this might be better than a string of college credits.
Experience and years in the industry cannot make up for the ability to answer technical questions. A good tax practice is based upon a good second opinion, and your selected accountant should have the ability to ask others for a second opinion. No one practicing taxation can ever claim to know it all, but a good accountant will have a formal procedure in place to refer your problems on to other “experts” in the field.
In selecting an accountant, be sure that you fully understand the services to be provided for the fee. You should ask exactly what will be provided and how often. Be skeptical of the following types of packages: 1) A person who says he will do everything. No one can do “everything” for you. Worse, “everything” can be defined as what an accountant thinks you will need, as opposed to what you really do need. 2) The accountant who wants to build your tax return into the price. This may mean that your return will be competing with cash returns when it is due. 3) An accountant who says he will do the tax return for free. In your own business, how much importance do you place on “free” work?
When speaking of fees, find out the basis for the fee. Part of the fee will be based upon the time necessary to complete the work. Look for someone who is willing to say that if you give him your information in this format, at this time, we will do the work for “this” much. Fees should be based on a combination of the volume and the condition of the accounting information. Many accountants will simply state their per-hour rate for doing the work. This makes sense when the person proposing to do the work has no idea of what to expect. It can mean, however, that any inefficiency on his part results in extra fees to you. While you may be satisfied with an hourly quote in the beginning of the relationship, you should establish the most likely fee, along with the conditions for meeting that fee. To leave this too open-ended results in too many surprises. Make sure that your accountant understands that you will not pay for extras that have not been discussed beforehand. While the extra work may be warranted, i.e., a unique tax situation or especially confusing information from you, you have the right to approve any increase in fee prior to the work being done and the bill presented.
Understand the pricing structure so that when a change in fee occurs, you won’t be surprised. Two factors will affect this increase. The first is simply rising prices. Like you, your accountant must absorb price increases and pass them along. The second reason is an increase in the volume of work. By understanding the basis of the pricing, you will be in a better position to evaluate the fee. Like any other expense, fees should be affordable to your business. For smaller companies there is not a set ratio for what you should pay. It will depend upon your part of the country and the volume of work that you have. Our company uses a formula based upon the number of entries and the number of employees. Shop for value, which translates into service for a fee. When comparing two different fees, make sure that you also compare the level of service you will receive.
In conclusion, to select a good accountant look for the following: 1) someone who you will be able to communicate with fully on a regular basis; 2) someone who can solve your problems either himself or through a backup system of support; 3) someone who will treat the servicing of your account as a priority; and, 4) someone who will give good value for the fee. Good luck!
Revenge of the math club is how many independent business owners view the need for accounting. Unfortunately, this may result in the owner totally ignoring the entire process and using other tools to run his business. We say unfortunately, because accounting, and the products of accounting, can assist you in the operation of your business. Just as you have had to learn other skills to be successful – personnel, law and purchasing, to name a few – learning a little about the process and products of accounting will make you more powerful as a business owner. Your company probably represents your major personal investment and your retirement plan, so it is worth the time and effort to better understand what accounting can do for you. This article, and the ones that will follow shortly, will help you in turning accounting from a dreaded past-time into something that can give you more control over your day-to-day activity. While it’s realistic to say that you may not actually enjoy it, it should become another part of your monthly routine. Your business may be involved in your business product; likewise, your business life is concerned with profitability.
Accounting is a language of numbers. The process of accounting seeks to reduce the activities of every business to a common measurement, that being the dollar. By doing this, it allows comparisons of such diverse activities as advertising, banking and the buying of inventory to be expressed in such a way as to make them comparable. In doing this it will give you, the reader, clues as to what happened in a business, and, given that things remain the same, what will happen in the future. The language of accounting also allows other parties to better understand what you do within your business. These other readers of your information (bankers, suppliers and investors) need a summary picture of what took place and how well you are doing.
The process of accounting is designed in such a way that for every monetary transaction that takes place an entry for recording that transaction occurs. An example is the purchase of a new fixture in the store. The accounting system will transfer dollars from your bank account to your furniture account. This process of recording transactions tries to achieve three main goals: assuring that transactions are accurate, that they are complete and that they are authorized. The ideal scenario would be: a customer walking in, the owner recording that particular sale and then depositing the receipt. This is what accounting is designed to do. This aspect of accounting is called “internal control”. It is designed to assist, not replace, the owner in the control of his business.
Financial statements are the products of accounting. These statements are primarily developed to assist you in running your business. Expressed in a common format – dollars – it shows the results of every decision you have made in the past, so that you can make decisions about the future. These are the major benefits of financial statements. Other purposes are to allow you to file an income tax return, to seek additional funding with your lender and to eventually attract a buyer or investor in your business. These other considerations are secondary, however, to the major role of financial statements, which is to assist you in doing better in your business.
The financial statements are usually composed of three different statements, each with its own purpose. The major statement is the income statement, sometimes called the profit and loss statement or P&L. This product of accounting summarizes the results of operation for a given period of time. First it will show the sales, which represent your customers coming into your place of business and accepting what you have to sell. Along with the sales are the associated costs to provide these customers with a reason to give you money. These costs will include the obvious direct costs, such as wages, supplies and advertising. It will also include a class of expense called indirect or overhead expenses. These are usually expenses that will occur in the business regardless of whether you have sales or not. While direct costs will vary with the volume of sales, indirect costs reflect the mere fact that you opened for business. Examples of indirect costs are: rent, interest expense, and utilities. Some of you may want to reclassify these expenses, and I suppose that we could argue that labor, for example, is not a variable cost, but rather fixed. More on this in a later article. Once we have totaled our different types of expenses we then subtract them from our sales. This will give us a net income or loss. The net income or loss represents how well you have used the resources available to you. On one level it also represents how likely it is that you will remain in business. Personally, I always look at the trend in net income. This is the final benefit of this statement. In business it is not where you have been, but rather where you are going. The income statement will help you in this determination.
The second major product from the process of accounting is the balance sheet. This is usually referred to as a snapshot of the financial position of the company at a point in time. At the end of a period (year or month), the accounting system should allow you to examine your exact position in terms of what you have in the company, what you owe to outsiders and what you own yourself. It will show you the original value of the assets you have purchased and still have on hand. Some examples of this are furniture and fixtures, inventory, money in the bank, and monies owed to you by outsiders. This is offset by the liabilities section. These are the company’s obligations to outsiders. Examples of liabilities are: trade payables for goods and services received but not paid for, debt to outsiders such as your bank, and amounts due to the various taxing agencies, such as payroll and sales taxes. The final section of the balance sheet is the equity section. This area of the statement shows your original investment and the sum of undistributed income earned in previous periods. We use this statement periodically to examine the advancement of the company in terms of increasing its assets and to better understand what resources are available to the company in order to conduct business. Typically, bankers, creditors and investors are interested in this statement to help them understand the tangible worth of a business.
The last statement is called the cash flow statement or source and application of funds. This statement shows how the company took in cash and how it was spent. Adjusted net income, for instance, is your net cash position from the operation of your business. You may have paid down some debt, and this would be shown as a use of funds. You may have reduced your inventory from the prior period and this is shown as a source of funds. If you, the owner, contributed funds, this would be shown as a source, and conversely if you withdrew funds it would be shown as a use of funds. The cash flow statement effectively ties together the Income Statement and the Balance Sheet, and expresses it in terms of the change in your cash position. A bank statement will tell you this, but it will not tell you the “how” and “why” of the change.
What we have discussed is the basics of accounting and its products. We realize that you need more information, and that you are going to have to rely at least partially on outside experts. Some of you are relying upon other means to understand your financial position. This is too dangerous for your major investment. The purpose of this article, and ones that will follow in the future, are to make you more aware of accounting, and how to use it to make your business more successful.
How do I deduct business use of my vehicle? I get this question a lot.
The following covers the basics. For specific situations contact your business advisor, book keeper, accountant, tax planner or tax preparer. They should all know this but, if they don’t call SOS TAXMAN (SOSTAXMAN.COM).
First do you have a proprietorship, a corporation, or is this for employment expenses. If it is a corporation you can use option A or B. For all others option B is your only choice. In all situations you need to have a vehicle log to track usage. Only business use can be deducted.
I personally use ODOTRACK to keep my log. It is cellular based and uses GPS to track all my trips. I simply click business or personal at the start of the trip. Later I log in to enter the purpose of the trip. For example “Airport – Toronto – Padgett Convention” or “met John Doe (potential client) for lunch“ are good. The GPS shows the start and end points of the trip and the kilometers. If I made a mistake and marked a business trip as personal I can log in and change it. It is best to do this weekly or monthly before you forget the reason for the trip.
This is the easiest option and what I do in my office. I own the vehicle pay all expenses personally. I then fill out an employee expense sheet and charge per kilometre for the vehicle use. I use the CRA maximum rates.
The automobile allowance rates for 2013 and 2014 are 54¢ per kilometre for the first 5,000 kilometres driven and 48¢ per kilometre driven after that. In the Northwest Territories, Yukon, and Nunavut, there is an additional 4¢ per kilometre allowed for travel.
If my company owned the vehicle and it was available for personal use there would be a problem. You have to use form “RC18 Calculating Automobile Benefits for 2013” to determine the taxable benefits. I find that this taxable benefit can be very high and stays high even when the vehicle ages. For these reasons for most clients it is best to own the passenger vehicle in your own name and charge the corporation for usage. The situation is different for other vehicles such as welding truck that is never used for personal use.
For a typical passenger vehicle I have found the per Km method is the best for most clients. This method results in lower bookkeeping fees and fewer receipts that you need to keep.
This is your only option if you are self-employed or want to claim employment expenses. Again you need to keep a log. You need to keep all vehicle expenses such as, fuel, maintenance and repairs, insurance, registration, and capital cost allowance. The amount that is deductible is the percent of business use determined by dividing business km by total km for the year.