Words people say that look solid but are actually squishy.
How we say things is how we understand them, and if people have different understandings of different words, then we don’t even know that we’re saying different things.
This page is dedicated to words and terms that I’ve seen get tossed around with the assumption that everybody is on the same page. When we hear or use them, we assume they have a solid meaning that we all understand, but it’s only when we start to unpack them that we can see that there’s a lot of ambiguity and vagueness that isn’t being called out.
From my experience, this is the number one reason why people can feel confused and why people can feel overconfident.
This isn’t only true in accounting, of course, but in life. Clear communication actually helps build each other up and encourages collaboration.
Accounting is one big thing that covers many specific and different things. This is because accounting is the very basic foundation of what everybody is doing; we are keeping an account of what is happening.
That is a wide net. Writing down what you spent in a notebook is accounting. So is a bookkeeper entering a bill, a CPA preparing year end financials, and a tax preparer filing a return. All of it is keeping an account of what happened.
The trouble is that we use this very wide word as though it names one specific thing. And it does, in our head, when we say it. It’s one of those words that can mean different things to different people in different contexts. Someone says “my accounting is a mess” and means their receipts are in a shoebox, or that they are behind on their bookkeeping. Someone else hears it and pictures financial statements that make no sense. Yet another pictures someone behind on their tax filings.
One reason for this ambiguity is the word “accountant.” Colloquially, that often means a CPA who prepares tax returns and summarized financials, and we associate the word “accounting” with an accountant. But somebody who does accounting isn’t necessarily an accountant. Bookkeepers are also accounting for transactions that have happened, and accountants generally are not responsible for the bookkeeping or record-keeping of the business.
There is enough confusion between accountants and bookkeepers in the accounting industry that I answer it in my FAQ: What is the difference between an accountant and a bookkeeper?
And there it is again. “The accounting industry.” That time I used it to mean the whole industry of financial accountants, tax accountants, and bookkeepers.
What is generally accepted is that bookkeeping is a form of record-keeping with an added layer of confirmation (reconciling), and knowledge of how to categorize and treat transactions. It is more than just data entry.
But there’s a nuance to the word that I’ve noticed and don’t see other people acknowledging. There are four different distinctions that aren’t named in the word “bookkeeping” alone:
A business sits somewhere on all four at once. You can do after-the-fact bookkeeping, from source documents, on an accrual basis, done by an office manager. Change any one of those and the work changes. The word doesn’t. This is also what leads to the ambiguity in Bookkeeping Services, and in what the term Bookkeeper means.
I have terms for these different distinctions of bookkeeping. “Operational Bookkeeping” often happens live and is used for the day-to-day running of the business. Invoicing clients when the work is done and recording that the client has paid. Recording vendor bills with their actual vendor bill number, and recording those bills as paid when payment is sent to the vendor. With live Operational Bookkeeping, you are able to manage your receivables and payables in real time.
In contrast, “After-The-Fact Bookkeeping” can record the same details, just later. It isn’t used to run the business day to day, because by then the day is over. What it is good for is verification and reporting. Standing up to a CRA audit or review. Showing the business owner whether a vendor double-charged, or which client invoices are still outstanding.
Depending on the size and complexity of the business, you may have a combination of these two. Perhaps an office manager or business owner is tracking the receivables and payables, and then a professional bookkeeper is contracted to confirm and reconcile. This can be the cause of a clearer financial picture, or it can be a cause of double work and miscommunication.
Another distinction I like to make is “Source Document Bookkeeping” versus “Bank Statement Bookkeeping” (also known as Bank Feed Bookkeeping). Which one you use decides what you can see later: the sales tax detail, what was actually purchased, the bill numbers for verification. It tracks closely with cash versus accrual, and it is one of the biggest differences between bookkeeping in Canada and bookkeeping in the US.
The word “bookkeeping” carries a lot of assumptions that usually aren’t stated. What style of bookkeeping a business needs depends on why it is doing bookkeeping at all.
It’s also why it’s important to discuss which Bookkeeping Services the person you’re hiring is able or willing to do. There’s a huge variety of that out in the world as well.
There are technical definitions for cash accounting versus accrual accounting. Simply put, cash accounting records the transaction on the date it’s paid, and accrual accounting dates the transaction on the date it’s incurred. So you record income on the date of the invoice to your client, not the date your client pays. Same with bills.
If you paid January, February and March’s electricity bill all in April, that does not mean you had no electricity expense in January, February and March, and one really large expense in April. Being able to evaluate your business’s revenue and expenses month over month is a great way to monitor and manage your business.
That succinct definition makes intuitive sense, but it doesn’t incorporate inventory recognition. Sometimes when someone speaks of cash accounting, they’re actually referring to how inventory is taken into consideration.
When inventory is purchased, you increase the inventory balance on the balance sheet. When that inventory is used or sold, you decrease inventory on the balance sheet and increase the cost of goods sold on the profit and loss. That is what accrual means when it comes to inventory recognition: the cost of goods sold is dated the date the inventory is used, not the date it was billed.
If the business isn’t tracking inventory, a bookkeeper may be doing accrual bookkeeping in every other respect, entering the bills separately from the bill payments, while still putting inventory purchases directly to cost of goods sold. The business counts their inventory at the end of each period, and the bookkeeper adjusts inventory and offsets cost of goods sold to reflect the balance at period end. When you account for inventory this way, that can be referred to as adjusted cash accounting in regards to inventory recognition.
So even when it comes to cash versus accrual, we can see that it’s still not black and white. There are still variations that need to be spoken out loud so as to not be simply assumed.
As you can see, whether the bookkeeping method is based on cash accounting or accrual accounting, you will get very different financials. Which of those a business should actually use is a different question, and depends on why the business is doing bookkeeping at all, and interestingly, on whether your business is in Canada or the USA.
What I find interesting is that logistically, how we do the bookkeeping correlates to these very technical terms without anybody explicitly saying so.
If you’re doing bank statement bookkeeping/bank feed bookkeeping, you are working directly from the bank transactions. That is reflective of the cash accounting method of bookkeeping. If you want the more revealing accrual-based accounting, the style you would use is what I call source document based bookkeeping. It’s helpful to evaluate the specific whys for the business when choosing between these two styles of bookkeeping.
The difference between bookkeepers and accountants is already muddy, and I answer that one on my homepage: What is the difference between an accountant and a bookkeeper?. But even once you know they are two different professionals, “bookkeeper” is still a vague moniker that covers a wide range of roles.
Bookkeeping is not a regulated industry. In Canada, a formally trained bookkeeper, or a bookkeeper with equivalent experience, can earn the Certified Professional Bookkeeper designation, and CPB after their name is credentialed and verifiable. It shows they have gone through a proctored exam that speaks to more than just the basics of bookkeeping, and that they keep up their professional development credits throughout the year.
The CPB designation does not necessarily indicate that the bookkeeper has a certain level of experience, but it does indicate that the bookkeeper deeply understands that bookkeeping is more than just record keeping. I have seen bookkeeping files done by “bookkeepers” who did not realize that the bank needs to be reconciled. This very obvious step is a given if your bookkeeper has a CPB designation.
Not to say that those without the CPB designation don’t have knowledge and experience in bookkeeping. The designation was developed within the industry itself, by a body only founded in 2007. Because bookkeeping is not regulated, different bookkeepers are going to have different levels of exposure to different scenarios and varying levels of experience.
A solopreneur bookkeeper is usually very integrated with their clients, and tends to have a deep understanding of the operational workings of the business. They sometimes, though not always, can be more flexible to cater to specific tasks and requests that go beyond the traditional bookkeeping services, such as coming into the place of business and offering more admin style services.
A bookkeeper who is part of a firm has senior bookkeepers to go to with questions, the firm’s standard operating procedures to help with ambiguous situations, and often a connection with an accountant or CPA for more complicated tax situations. Each client is also set up with their own set of SOPs, so if the assigned bookkeeper falls ill or needs to take a leave of absence, another bookkeeper can take over the file.
There are also in-house bookkeepers who have a firm grasp of bookkeeping but are employed by just one business, and often have other administrative duties tied to their role. In larger businesses, you can have different specialized clerks, such as an AP clerk and an AR clerk, working in an accounting department. Payroll might sit there too, or it might sit under human resources, depending on the business.
Then there is the accidental bookkeeper. An accidental bookkeeper is often an office manager, a spouse of a business owner, or even the business owner themselves. When a business owner does their own bookkeeping, we refer to them as a DIY bookkeeper.
Accidental and DIY bookkeepers often have an excellent grasp of the operational side of record keeping, but they generally appreciate guidance from other sources for anything beyond that. The issue is that I often find accidental and DIY bookkeepers go to their accountants for support, but accountants are not bookkeepers.
All of these people are called bookkeepers. What they actually do for you is a separate question, and that is Bookkeeping Services.
Bookkeeping services are not standardized across providers, just as bookkeepers are not a regulated profession.
Generally, professional outsourced bookkeepers have a set of clients whose bookkeeping they complete in an after-the-fact bookkeeping style. The industry standard is that it is done on a monthly basis, but this is not always the case. Some providers offer quarterly bookkeeping. Some businesses only have it done once a year, at tax time.
I have also known solopreneur bookkeepers to offer services well beyond outsourced bookkeeping roles. That can include going into their client’s actual place of business and doing the live operational bookkeeping, along with handling other admin tasks. That is not the standard, but I have seen it offered.
There is also a difference between a bookkeeping firm providing bookkeeping services and an accounting firm that offers bookkeeping as a side offer. A firm whose main gig is bookkeeping will have senior bookkeepers supporting their juniors, with SOPs and checks and balances in place. They are usually the source document/accrual based bookkeeping style, and often have a standardized way to intake the source documents, such as software like Dext. An accounting firm offering bookkeeping alongside tax services tends toward, though not always, bank statement style bookkeeping. This may come at a lower cost, but it also may come at a lower level of detail.
Payroll is not a default bookkeeping service, and it adds a layer of complexity to the business. Different providers will also come with varying levels of payroll experience. There are also providers who specialize in just payroll services. If the bookkeeper offers payroll services, they likely also offer T4 preparation as well as WSIB and WCB filing and reporting.
Bookkeeping services do go further than simply recording the transactions based on the documentation provided. Data wrangling is part of the assignment. The business will generally not give the bookkeeper everything they need, and it is very rare that a bookkeeping period passes without a set of questions going back to the business owner about transactions that don’t have enough information to be recorded properly. This back and forth over missing documentation decreases efficiency and can decrease accuracy. Working towards reducing this is to the benefit of both the business owner and the service provider.
Part of bookkeeping services is not only following up on missing documentation, but also various types of reporting. Bookkeeping Reports are not the same as the summarized financials produced by your accountant. For a bookkeeping period, the standard reporting is the profit and loss report and the balance sheet, and can also include an unpaid bills and open invoices listing.
Some bookkeepers go the extra mile to provide a list of all transactions categorized to owner’s draws or shareholder loan for the period, and a list of transactions entered without a receipt, referred to in the industry as NR, which can stand for either “needs receipt” or “no receipt.”
A business owner can also ask their bookkeeper to walk them through the reports provided, if they have questions about what the numbers are comprised of and where they come from. Whether that is included, and at what price, varies by provider.
Filing sales tax, such as the GST/HST or PST, also often falls within traditional bookkeeping services. Income tax filing, whether the corporate tax return or the business owner’s personal tax return, often falls under the accountant services.
So when two providers both say they offer bookkeeping services, they may be describing quite different work. Which services a business actually needs depends on why it is doing bookkeeping at all.
One of the absolute biggest misconceptions I see people stumble on is the distinction between the three zeros.
All three of them collect no sales tax. On the invoice they look the same. They are not the same, and picking the wrong one puts the wrong revenue total on your GST/HST return.
Zero Rated. It’s a taxable supply at a rate of zero. Honey, eggs, groceries, or a taxable good sold and delivered to the US. The business is registered, it collects the official zero percent, and because it’s registered, it gets back the GST/HST it paid on its business expenses.
Exempt. It’s sales, but not a taxable supply. Residential rent, daycare, therapy services. A business with only exempt supplies is usually exempt from registering for GST/HST, which means it can NOT get the HST back that it paid on business expenses. That HST is just cost. That’s why zero rated exists: those businesses are registered to collect zero, so they’re eligible to get their HST back. You can’t do that if the income is exempt supplies.
Out of Scope. It has nothing to do with sales or sales tax at all. A customer deposit or a prepayment on a job, gift card sales, funds going into the bank from petty cash, a grant, owner contributions. Out of Scope means “this is completely out of scope of anything to do with sales or sales tax, ignore”.
It all comes down to line 101 on the GST/HST return. Line 101 is Sales and Revenue, and anything you tag as Zero Rated Sales or Exempt Sales is going to be included in it. If a business is registered because it sells both taxable and exempt supplies, then those exempt sales do belong on line 101 when you file. That’s why QuickBooks Online includes them.
And that’s exactly why you can’t use Exempt or Zero Rated on items that have nothing to do with sales tax at all. A gift card sale isn’t revenue. A customer deposit isn’t revenue. Tag either of them Exempt and they land on line 101 anyway, and now line 101 is wrong. Anything Out of Scope will not go on line 101, which is the whole point of having the code.
Line 101 also doesn’t come from the Income accounts on your P&L. This is because you can collect sales tax on things that aren’t revenue. Sell a capital asset and that’s subject to GST/HST, even though it decreases Fixed Assets on the balance sheet rather than increasing income. Hotel tax collected on behalf of a municipality is a liability, and it’s still subject to HST. So not all “line 101 Revenues” are income.
And not every sales tax is a VAT tax. Some of the PSTs in Canada aren’t. Whether the tax on your bill is recoverable at all depends on which tax is being charged, and also on whether your business is registered for GST/HST at all, which is one more reason that why you’re doing the bookkeeping decides how you do it.
If you’re unsure which one applies to a sale or a deposit, CRA’s GST/HST Rulings helpline is 1-800-959-8287. Low wait time, knowledgeable staff, and way better than the general CRA line.