Edmonton Bookkeeping | Understanding Financial Statements
One of the more important things that an entrepreneur can do to help them make great financial decisions according to Edmonton bookkeeping, is understanding the financial statements of their business. Since most entrepreneurs make important financial decisions based on the information contained in their financial statements, if those financial statements have errors, business owners may end up making bad financial decisions without even knowing it, because their financial statements are wrong and yet they do not know why.
When entrepreneurs are looking at their financial statements, an important thing that they should understand is the difference between their tax payable accounts and their tax expense accounts. According to Edmonton bookkeeping, the payable account is where a business owner will indicate the payment they have made on any of their taxes. There are five different accounts, each for the various taxes that they need to pay in business. The tax expense account is where all of the taxes that a business owner gets assessed is noted. Each time a business owner makes payment to any of the various tax accounts, this balance decreases. The amount in their tax expense account will be a negative number, and as the business owner pays their taxes, that negative number gets smaller and smaller until finally by the end of the year, the entire amount zeros out.
Business owners may question why they need to have five separate tax accounts, and it is extremely important to note that there is a federal and a provincial tax payment account, because, in Alberta, business owners need to pay their federal under provincial tax separately. This is not the case anywhere else in Canada, where business owners can make one payment to the Canada revenue agency, and they will calculate the amount of provincial tax that needs to be sent onto the province. It is also important to note that business owners need to have a federal government payable accounts as well as a separate GST payable accounts. They always need to be separated all of the time because they are two very different taxes. Since there are so many different payments and so many different accounts, business owners need to be extremely careful not to co-mingle the payments. In addition to the federal, provincial and GST payment accounts, business owners also need to understand that there is a payroll tax accountant. There is the number of source deductions that a business owner needs to take off of their employee’s checks, and that needs to be kept in one payroll withholding account. But also, a business owner needs to pay an additional CPP amount of 1.4% what their employees had to pay. This needs to be indicated separately on the financial statement says Edmonton bookkeeping.
This works out to five separate tax payable accounts, all that need to not be mixed. If entrepreneurs can understand the difference between each of those tax payable accounts, and how often entries would be made into each of those accounts, and approximately how much is going to be entered into each account at each of those times, business owners can more easily catch errors that happen on their financial statements if any of these tax payments co-mingle.
One of the reasons why it is super important for business owners to understand their financial statements according to Edmonton bookkeeping, is because they use those statements throughout the year to make financial decisions in their business. Decisions such as purchasing assets, hiring or laying off staff, and how much they can pay themselves. If these financial statements are wrong, business owners may end up making decisions that can negatively impact their business without even knowing it.
When an area on the financial statements that are extremely easy to have errors, are the tax payable and tax expense accounts. Business owners should understand the difference between the two to avoid errors. The tax expense account according to Edmonton bookkeeping is where the accountant is going to make an entry for all of the taxes that a business owner has been assessed. The only time there should be an entry into this account, is at the fiscal year-end, by the accountant. Every time a business owner makes a tax payment this amount will decrease.
The tax payable account, on the other hand, is the accounts where the business owner is going to indicate every time they have made a tax payment. The reason why it is very easy for errors to happen in this section is that there are up to five different tax payable accounts that a business owner needs to understand. By understanding the difference between each tax payable account, how often an entry should be made into each one, and approximately how much, business owners can review their financial statements and watch those accounts for errors according to Edmonton bookkeeping.
There is the federal tax payable account, and business owners typically make installment payments on this amount towards all of their federal taxes. Each payment they make will decrease the amount of taxes owing to their tax expense account. There is also the provincial tax payable account, and Alberta is the only province that has this. Every time a business owner makes a tax payment to Alberta finance, it will be noted in this account. All other provinces pay all of their federal and provincial tax to the Canada revenue agency, who then, in turn, sends their province the provincial tax that they are owed from the entire amount that they received.
The next payable accounts that a business owner should understand is the GST payable account, and whether they pay their GST monthly, quarterly or yearly, business owners should understand that this is a different account than their federal taxes account, because they are two separate taxes. By keeping them separate, and understand that on their financial statements maybe they are paying their federal tax monthly but only paying GST quarterly, they can watch for those errors.
Finally, the payroll tax accountant is needed because every time a business owner takes a source deductions from their employees, that needs to be indicated in this tax payable accounts. Whether payroll happens every two weeks, twice a month, or even monthly, business owners can understand what this looks like and approximately how much is coming out each time. There also needs to be a separate payable account for business owners to pay their own CPP amount. Entrepreneurs need to pay 1.4% more CPP than their staff, which needs to be indicated in its payable account.