Bookkeeping is essential for any business and combined with the financial records that can be created when proper bookkeeping practices are maintained can help a business owner get a good sense of the business health of the company. Any person that is as a business which is required to pay or collect taxes is then required by the Canadian Revenue Agency (CRA) to keep books and records of all business transactions. All transactions then generate supporting documents, which is what the business is required to keep and supply to the bookkeepers, accountants and CRA if necessary. The major transactions include purchases, sales, and payroll. These transactions create supporting documents such as sales slips, paid bills, invoices, receipts, deposit slips, cheques, and contracts. To prepare the financial statements and records the supporting documents are used. These then in turn support the numbers and information on the tax return. The supporting documents are extremely important because they are the basis for the information provided to the CRA regarding the tax owing for that year from the company. This is also why the CRA may ask to see and/or verify the supporting documents so that they can confirm the numbers and information stated on the tax return.
With regards to income tax in Canada, most books of accounts, records, and source documents have to be retained for a minimum of six years, but this is only after the end of the last taxation year to which they relate.
Receipts may include invoices or deposit information as these supporting documents refer to any income that the business receives. For these transactions, the amount and source of income should be shown on the documents. Purchases are for any items that the company buys and then resells to customers. For manufacturers, this can include the raw materials or parts purchased to create the finished product that will then be sold. These transactions require more information since there are more parties involved and so any supporting documentation should also include the payee, proof of payment and a description of the item purchased. Expense transactions are costs that the company incurs to carry out the business and these are usually the day to day transactions. Certain expenses relating to travel, transportation, entertainment and gifts can be deducted but there needs to be documentation to prove certain elements of these expenses and validity of the deduction if allowed. Assets or capital property are the most complex and require a substantial amount of source and supporting documentation. There needs to be documents to verify the purchase, the annual depreciation and possible sale of the asset, as well as any gain or loss that may have occurred from this sale. With this, there is a possibility that for capital purchases the last year to which source documents are relevant to that assets is much later than the acquisition date and so therefore it is advised to keep any supporting documents for capital property for six years after the end of the taxation year in which that asset was sold.