---
name: bookkeeping-for-small-businesses
description: Sets up and maintains double-entry books for a small business — chart of accounts, journal entries, debits/credits, monthly close, and reconciliation. Use when the user asks to set up bookkeeping or a chart of accounts, record or categorize transactions, reconcile bank or credit-card statements, do a monthly close, choose cash vs accrual accounting, or record owner draws, payroll, or sales tax collected. Do not use for producing formal financial statements (preparing-financial-statements) or for filing tax returns (filing-us-business-taxes, filing-canadian-business-taxes).
---

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Author: Simon-Pierre Boucher
Contact: contact@spboucher.ai
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# Bookkeeping for Small Businesses

## When to use / when NOT to use
- **Use for:** setting up books, recording/categorizing transactions, reconciliations, monthly close, cash-vs-accrual decisions, owner-compensation entries, sales-tax bookkeeping (US and Canada).
- **Do NOT use for:** building the income statement / balance sheet / cash flow (→ `preparing-financial-statements`) or preparing tax filings (→ the filing skills).

## Important limits
- Educational help, not professional accounting or tax advice — complex or high-stakes cases go to a CPA.
- Figures and deadlines are tax-year-stamped and MUST be verified against irs.gov / canada.ca before use.
- Never assist with evasion, backdating, or falsified records; refuse and explain.

## Core rules

1. **Chart of accounts: 5 root types, numbered ranges.** 1000s assets, 2000s liabilities, 3000s equity, 4000s revenue, 5000s+ expenses. Start small (~25 accounts); add only when a category is reused.
2. **Debit/credit rules, stated plainly.** Debits increase assets and expenses; credits increase liabilities, equity, and revenue. Every entry balances: total debits = total credits, no exceptions.
   - ✅ `Dr Equipment 2,000 / Cr Cash 2,000`
   - ❌ A one-sided "expense" line with no offsetting account
3. **Cash vs accrual: accrual becomes the default the moment inventory or receivables exist.** Pure cash basis only for simple service businesses; note that tax filings may still use a cash basis where allowed (US small businesses; Canada mainly farmers/fishers) — keep books on one basis and note the other.
4. **Separate business and personal money absolutely.** Dedicated bank account + card from day one. Owner money in = capital contribution (equity); owner money out = draw (equity) for sole props/partnerships, salary or dividend for corporations — never "misc expense".
   - ✅ `Dr Owner's Draw / Cr Cash` for a sole prop owner withdrawal
   - ❌ Booking the owner's groceries to Office Expense
5. **Sales tax collected is a LIABILITY, not revenue.** GST/HST/state sales tax goes to a `Sales Tax Payable` account and is cleared when remitted.
   - ✅ Sale $100 + $13 HST → `Dr Cash 113 / Cr Revenue 100 / Cr HST Payable 13`
   - ❌ `Cr Revenue 113`
6. **Reconcile monthly, to the penny.** Bank and credit-card statements against the books; investigate every unmatched item — do not plug differences to a suspense account and move on.
7. **Keep the paper.** Receipt/invoice for every entry. Retention: IRS at least 3 years (6 for large underreporting); CRA 6 years from the end of the tax year. Digital copies acceptable in both countries.

## Monthly close workflow

1. Import/enter all transactions; sweep the uncategorized list to zero.
2. Reconcile every bank and credit-card account to its statement.
3. Review AR aging (chase >30 days) and AP aging (schedule payments).
4. Post recurring entries: depreciation, loan interest split (principal → liability, interest → expense), prepaid amortization.
5. Verify sales-tax payable matches the filing-period report.
6. **Validate:** run a trial balance — total debits must equal total credits, and cash per books must equal reconciled cash. If either fails, fix before closing the month.

## Edge cases & failure modes
- **Mixed personal/business card in the past** → reclassify personal items to draws/contributions; do not delete transactions.
- **Missing receipts** → record the transaction anyway with a note; flag for the owner to source documentation.
- **Loan payments** → never expense the full payment; split principal/interest per the amortization schedule.
- **Refunds** → reverse against the original revenue/expense account, not a new one.

## References
Sample chart of accounts, worked journal entries, and gotchas: see [references/reference.md](references/reference.md).