How to Set Up a Simple Accounting System for Your Small Business in Canada



Starting a small business is an exciting journey, but managing the finances can be overwhelming if you don’t have a proper accounting system in place. Whether you’re a sole proprietor, freelancer, or incorporated business owner in Canada, setting up a reliable and simple accounting system is essential for tracking income, controlling expenses, filing taxes, and making informed business decisions.

In this beginner’s guide, we’ll walk you through how to set up an accounting system for your small business, whether you prefer using software or spreadsheets. We’ll also explore essential Canadian tax considerations to keep your books in good shape from the start.

Why You Need an Accounting System

Before diving into tools and setup, here’s why accounting is essential for any Canadian small business:

Track income and expenses accurately

Stay compliant with CRA tax requirements

Prepare for GST/HST filings

Monitor profitability and cash flow

Simplify year-end reporting or audits


Now, let’s get started with how to set up your system.

Step 1: Choose the Right Accounting Method

In Canada, most small businesses use one of two accounting methods:

1. Cash Basis Accounting

Revenue is recorded when it’s received, and expenses when they’re paid. This method is simple and commonly used by sole proprietors.

2. Accrual Basis Accounting

Revenue and expenses are recorded when they are earned or incurred, regardless of when the money changes hands. This method gives a more accurate financial picture and is required for certain types of businesses, especially those with inventory or revenues over $1 million.

Step 2: Decide Between Software or Spreadsheets

A. Accounting Software Options

If you prefer automation and professional-looking reports, consider cloud-based accounting software. Many of these are CRA-compliant and offer invoicing, bank syncing, and tax features:

QuickBooks Online – Ideal for most small businesses with GST/HST tracking and CRA integrations.

Wave Accounting – Free option for very small businesses; includes invoicing and basic reporting.

FreshBooks – Designed for freelancers and service-based businesses.

Xero – Great for growing businesses with collaboration features.


Pros:

Time-saving automation

Cloud access for remote work

Professional reports

Automatic backups


Cons:

Monthly fees

Learning curve for beginners

B. Spreadsheet Accounting

If you’re just starting and want to keep things simple and free, spreadsheets (Excel or Google Sheets) are a great alternative. You can track income, expenses, taxes, and invoices manually using customizable templates.

Basic Sheets to Create:

Income Tracker

Expense Tracker (categorized by type)

Invoice Log

Bank Reconciliation Sheet

GST/HST Tracker


Tip: Always back up your files and keep your spreadsheets organized by month or quarter.

Step 3: Set Up a Chart of Accounts

Your chart of accounts is the foundation of your accounting system. It categorizes your business transactions and makes tax time much easier.

Typical Categories for Canadian Small Businesses:

Revenue:

Sales

Service Income

Expenses:

Office Supplies

Rent

Advertising

Meals & Entertainment (50% deductible)

Vehicle Expenses

Professional Fees (accountants, lawyers)

Assets:

Cash

Accounts Receivable

Equipment

Liabilities:

Accounts Payable

Loans

Equity:

Owner’s Draw or Shareholder Contributions

Step 4: Open a Business Bank Account

Keeping your business and personal finances separate is crucial. Open a dedicated business bank account and use it only for business income and expenses. This simplifies bookkeeping and ensures a clean audit trail.

If you’re incorporated, it’s mandatory to separate your accounts.

Step 5: Track Expenses and Keep Receipts

The Canada Revenue Agency (CRA) requires small businesses to retain receipts and documents for at least six years. Use your accounting system to log every expense, and store receipts either digitally (via apps or cloud storage) or physically in an organized file system.

Common CRA-Deductible Expenses:

Home office expenses

Software subscriptions

Travel and mileage (keep a logbook!)

Utilities and phone (if used for business)

Step 6: Register for GST/HST (If Applicable)

If your business earns more than $30,000 in gross revenue in a single calendar quarter or over four consecutive quarters, you must register for GST/HST with the CRA.

Once registered:

Charge GST/HST on taxable sales

File regular GST/HST returns

Claim input tax credits (ITCs) on business purchases



Your accounting system should clearly track collected and paid GST/HST.

Step 7: Reconcile and Review Monthly

At the end of each month:

Reconcile bank statements to your accounting records

Review income vs. expenses

Set aside money for taxes (usually 15–25% of net income depending on your province and structure)

Generate financial reports (Profit & Loss, Balance Sheet)

Step 8: Work With a Tax Professional

Even if you’re handling daily bookkeeping, working with a tax accountant at least annually is invaluable. A Canadian tax expert can:

Help you identify deductions

Advise on incorporation

Review your system for errors

Ensure CRA compliance

Final Tips for Success

Stay consistent. Record transactions weekly or biweekly.

Go paperless. Use digital receipt tools like Dext or Hubdoc.

Plan for taxes. Consider quarterly tax payments if self-employed.

Invest in learning. Free courses and webinars from BDC, CRA, or Small Business BC can be helpful.

Conclusion

Setting up a simple accounting system doesn’t have to be complicated. Whether you use spreadsheets or accounting software, the key is consistency, organization, and compliance. As your business grows, your system can evolve—but getting the basics right from day one will save you time, money, and stress in the long run.

If you’re unsure where to start or want help tailoring a setup to your business, don’t hesitate to reach out to a Canadian accounting professional. We’re here to make sure your finances are working for you, not against you.

Need Help Setting Up Your Books?

Contact our team at Multani Professional Tax Services, Professional Corporation, for a consultation—we’ll help you build a simple, scalable accounting system that fits your business and tax goals.?

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Please consult a tax professional for guidance specific to your situation.

Photo by Nick Morrison on Unsplash