Every commercial transaction produces crucial documentation such as receipts, invoices, and contracts. However, whether you're constantly traveling as an entrepreneur or engrossed in managing your business, maintaining organization for these records can pose a challenge.
A dedicated and dependable system for storing and monitoring paperwork is the optimal approach to effectively manage receipts.
Why is it crucial to maintain organized receipts?
Small business proprietors have a legal obligation to retain a record of their business transactions.
Maintaining organization of business receipts and other financial documents facilitates the following:
- Prepare and file your year-end tax returns efficiently.
- Navigate through the audit process more smoothly.
- Avoid penalties from the Canada Revenue Agency (CRA) for not providing the necessary supporting documents.
Collecting paperwork for every transaction, regardless of its size or perceived significance, is highly advisable. Opting for a business-only credit card or bank account instead of using cash for expenses such as office supplies, meals, and entertainment will simplify the process of creating a comprehensive paper trail.
The most effective method for managing receipts in your business is as follows:
According to the CRA's regulations, it is mandatory to retain all business records and supporting documents for a duration of six years from the conclusion of the last tax year to which they pertain.
When it comes to filing receipts, there are two available options.
You can:
-Keep physical copies of your documents by storing them in paper file folders.
-Organize your receipts in a digital format by utilizing online accounting software or creating digital folders specifically for storing and managing them.
The optimal approach for managing receipts will vary depending on your preference for storing either paper or digital documents.
Opting to Store Receipts Physically:
For individuals with a natural inclination towards organization, storing paper receipts and invoices may be the preferred method. However, when using physical files to maintain organized storage of receipts, it is crucial to establish a consistent routine and diligently maintain it.
Here are three essential steps to effectively track your receipts in a physical format:
1.Categorize Receipts by Account
By categorizing business expenses based on their respective accounts (e.g., meals and entertainment, advertising expense, supplies expense), not only does it simplify the recording process, but it also enables swift retrieval of individual transactions during tax season, eliminating the need to search through a pile of paper receipts.
2. Arrange Receipts in Chronological Order:
Given that most businesses follow a chronological approach to bookkeeping, it is logical to store your source documents in the same manner. By organizing receipts chronologically, it becomes effortless to locate and verify a specific receipt or transaction based on the month it took place.
3. Add Notes to Receipts:
Ideally, it is recommended to file receipts as soon as you receive them. However, if you are frequently on the move and don't have daily access to your filing system, writing brief notes on the backs of receipts can facilitate easier filing when you have the opportunity. Ensure that your notes clearly indicate the purpose or category of the expense for clarity and organization.
Storing Receipts Electronically:
Due to the potential risks of theft, fire, flooding, and natural disasters associated with physical storage, relying solely on paper receipts can be precarious. Fortunately, by automating your receipt organization, you can save time and eliminate the risk of physical loss.
Here are two methods for electronically storing your source documents:
1. Utilizing document management software
Tools such as Dext Prepare, HubDoc, and Expensify provide convenient cloud-based solutions for storing receipts and invoices. By using your smartphone, you can capture images of your physical documents and upload them to a mobile app. These apps have the capability to extract all relevant data, including vendor information, dates, item details, and amounts.
As these tools seamlessly integrate with a majority of cloud accounting software, you can:
-Prior to uploading the data, it is important to carefully examine and review its accuracy.
-By utilizing these electronic storage tools, you can effectively minimize the need for manual bookkeeping entries to a significant degree.
Receipt-tracking software not only provides excellent organizational capabilities while on the go, but it also ensures that images of your receipts are securely stored in the cloud. This cloud storage allows for easy retrieval of receipts when needed, particularly during an audit.
2. Employ digital folders for storage
If you're not prepared to invest in software, an alternative approach is to capture photos or scan receipts and upload them to a digital folder platform such as Google Drive or Dropbox. Similar to physical storage systems, you can organize these folders by expense type and date to maintain proper organization.
Conclusion:
In conclusion, it is advisable to reduce reliance on physical paperwork and instead prioritize storing receipts and invoices electronically.
One effective way to minimize the need for taking photos and uploading data is by requesting vendors to provide digital copies of documents whenever feasible. Additionally, many cloud accounting software platforms allow for the digital import of bank statements and credit card statements, further streamlining the process.
Developing a habit of organizing receipts is crucial.
Once you have determined the most suitable method for managing receipts, maintaining consistency in your process becomes essential.
If you find yourself lacking the time to establish and maintain an efficient document storage system, it might be worth considering delegating the task to a capable individual such as a bookkeeper, receptionist, or another administrative staff member. They can assist in setting up and managing the system on your behalf.
Despite the time-consuming nature of organizing receipts, it will ultimately lead to significant benefits such as:
- Simplify your bookkeeping process.
- Make it easier to track and monitor your expenses, particularly for tax-related purposes.
- Mitigate the risk of incurring fines from regulatory bodies such as the CRA (Canada Revenue Agency).