Most entrepreneurs have at least one favourite tool – something that makes the business of running a business a bit easier. For Martina Rowley, owner of Beach Business Hub in Toronto, it's a low-tech accordion file folder.
"I use it to store my receipts, with each slot representing different categories such as travel or office supplies, as well as personal expenses," says Ms. Rowley, whose company provides virtual administrative-assistant services. "At the end of the year, I just add up the receipts from each slot and enter the totals into an Excel spreadsheet to hand to my accountant."
Not all entrepreneurs have Ms. Rowley's knack for keeping their business finances organized. Many small-business owners fail to track income and expenses and often end up mixing business and personal receipts, says Teya Mali, owner of Homeroom Small Business Solutions Inc., in Vancouver.
This increases the possibility that they will file an inaccurate tax return, with personal expenses claimed as business costs and legitimate company spending omitted from the return, says Ms. Mali.
"If everything is just going into one pile, it makes it hard to figure out how much you should be putting away for your income tax and for your sales tax," she says.
It can also cause trouble with the Canada Revenue Agency, says Keith MacIntyre, a partner in tax services at Grant Thornton LLP, an accounting and business advisory firm. He points to one entrepreneur who claimed the cost of his daughter's wedding as a business expense.
"In some cultures, it's customary business practice to invite clients to events like your child's wedding," Mr. MacIntyre says. "But you need to be able to prove to the CRA that the expenses you're claiming really were in service of the business."
So how do business owners make sure they're putting business and personal expenses in the right pile? Here are tips from experts for getting organized and staying on the CRA's good side.
Open separate banking and credit card accounts
This makes it easier to account properly for all income and expenses, Mr. McIntyre says. A bonus: Many credit card providers issue statements that organize purchases into categories. For the busy entrepreneur, this means no more tallying up receipts at the end of the year. "Credit cards are great because they give you documentation, and you can access the statements online," he says. "If you lose a receipt, you can just contact them and they're usually pretty good with providing you with that information."
Log as you go
If you're using your car for both business and personal activities, keep a log book in your glove compartment where you can record every trip you take, Ms. Mali says. "Make sure you write the reason for the trip and how many kilometres you drove," she says. "If you try to do this at the end of the year, it's going to be a lot of work trying to figure out which trips were for business and which were for personal, and what distance you travelled for each one."
Label your receipts
In addition to her accordion file folder, Ms. Rowley says she uses another low-tech solution to track her business and personal expenses: a pen. "When I get a receipt I immediately write on it what the purchase was for – a client meeting, or lunch during a full day of working outside the office," she says. "It's a simple way to track your expenses – all you need is a pen with you at all times and the discipline to do it consistently."
Put bookkeeping on your work calendar
Whether they hire a professional or prefer do-it-yourself bookkeeping, business owners should schedule time each month or each quarter to sort receipts and tally their incomes. "This should be part of your business process and not something you're just squeezing in when you have some extra time," says Mr. MacIntyre. "If you do this frequently, then you avoid that last-minute panic that happens when you wait until tax time, and you're less likely to make mistakes."
Check out the app store
There's an app for everything, including tracking expenses and storing receipts. As an example, Ms. Mali points to Receipt Bank, which extracts data from photos of receipts and exports it to compatible accounting software. "This way you don't have to keep your receipts in a shoebox," she says.
Get help from the pros
Business owners who insist on doing their own bookkeeping and taxes may be missing out on opportunities to reduce their tax bill by failing to claim all legitimate business expenses, Mr. MacIntyre says. Or they could run into trouble with the CRA by claiming something that doesn't count as a business expense. (If you were wondering, the case of the entrepreneur who claimed the cost of his daughter's wedding is still under review, Mr. MacIntyre says.) "Accountants generally exercise a measure of care to ensure that the expenses you're claiming are reasonable for your business," he says. "They'll also compare your numbers against what you've done in previous years, so if they see that you're claiming significantly less for advertising this year, they'll check with you to make sure you didn't miss anything there."