The Secret Project

Although we've shared occasional updates, we've actually been quiet for a while. The reason is something every business must face: filing the annual tax return.

Since it's our first year and we don't have an in-house accountant, I had to study the process myself to ensure everything was done properly. In the end, we filed the return with a registered accountant, but the legwork and learning fell on me. It turned out to be a very personal, and at times painful, journey.

I'll publish separate posts diving deeper into the details and strategies we used. For now, this log highlights the key hurdles, challenges, and concepts I've encountered.

From both the perspective of running the business and searching for accountants, I realized there are essentially four distinct services one might need:

1. Tax planning
2. Tax return
3. Bookkeeping
4. Payroll

Back in university, I took Econ 101 - a course many engineering students dreaded. The struggle was often not with advanced math, but with deceptively simple algebra applied in tricky accounting contexts. Personal accounting never felt that serious since most things (tax withholdings, investments, etc.) were handled by employers or brokers. Business accounting, however, is an entirely different beast.

Something I Didn't Know

At first glance, I assumed "tax planning" was the most advanced service, while "bookkeeping" and "payroll" were the more routine tasks. For example, some accountants quoted me $450 per month for bookkeeping but a few thousand for a one-time tax return. Based on that, I thought bookkeeping must be the lower-value work.

Turns out, bookkeeping is the core of everything.

The most challenging part is accrual accounting, where every transaction has both debit and credit legs. The foundation of accounting is the equation: Assets = Liabilities + Equity. Which, more practically, can be understood as: Assets = Liabilities + (Equity + Revenue – Expenses).

Every transaction must fit into one of the five fundamental categories: Assets, Liabilities, Equity, Revenue, and Expenses. More than that, every fragment of a transaction needs classification.

For instance, in Canada, if you buy something for $902.87, a portion (say $103.87) is sales tax. If your business is GST-registered, that portion is refundable and must be recorded separately under Taxes recoverable/refundable (GIFI category 1483, Current Assets).

So a simple PC purchase ends up looking like this:

Purchase of PC: $902.87

Debit:
  Asset   Taxes recoverable/refundable   1483   CAD $103.87
  Asset   Computer equipment/software    1774   CAD $799.00

Credit:
  Liability   Business Visa   2707   CAD $902.87

And since that's more than $500, it's classified as a capital asset, meaning we can't expense it immediately - we need to depreciate it gradually.

Financial Statements

After filing the T2 corporate return, we're required to hold a shareholder meeting and issue financial statements. These statements are closely tied to the information in the T2 and typically include:

1. Balance Sheet (Statement of Financial Position): A snapshot of assets, liabilities, and equity at a specific point in time.
2. Income Statement (Profit & Loss): Revenues, expenses, and net income over a period.
3. Cash Flow Statement: Inflows and outflows of cash, broken into operating, investing, and financing activities.
4. Statement of Changes in Equity (sometimes required).

Those statements are also derived from the bookkeeping results.

Bookkeeping Systems

There can be a lot of confusion for someone who's never done it before, but essentially, there are two main concepts involved: accounting method (cash vs. accrual) and recording system (single-entry vs. double-entry).

1. Cash-basis vs. Accrual-basis (timing):
   • Cash-basis: Record when money changes hands.
   • Accrual-basis: Record when the right/obligation arises, regardless of cash movement.
2. Single-entry vs. Double-entry (system)
   • Single-entry: Only records inflows and outflows (like a checkbook).
   • Double-entry: Records both sides of every transaction (debit & credit).

A challenge with single-entry is not straightforward with "future cash": e.g. for $10,000 Government Funding, you earn entitlement in December, but only receive cash in January next year.

The "hard part" of accrual accounting is less about math and more about rigor — categorizing correctly, ensuring debits = credits, and following consistent rules.

What "Double-Entry" Actually Means

As a clarification, "double-entry" does not mean one debit and one credit only.

It means:

• Every transaction affects at least two accounts
• The total debits = total credits (they balance)

So:

• A transaction could be a simple two-legged entry:
  • Debit: Supplies $100
  • Credit: Cash $100
• Or a compound entry with multiple debits and/or credits:
  • Debit: Rent Expense $600
  • Debit: Utilities $300
  • Debit: Office Supplies $100
  • Credit: Cash $1,000

Both are "double-entry" because they involve debits and credits that net to zero.

Our Hybrid Approach

While trying to understand the tax return process and gradually consolidate all the transactions into a single book (journal), we've adopted a hybrid system:

• Start with cash-basis, single-entry bookkeeping (closely matching bank statements).
• Add memo-tracking for receivables and payables.
• Layer in accrual, double-entry bookkeeping as needed.

This gradual build-up helps keep things practical while still moving toward rigor.

Accounting Software

One might expect that modern accounting software would greatly simplify the bookkeeping process. In my case, however, that expectation proved overly optimistic. Below, I compare two very different tools—each with strong representative value. Hopefully, it can shed some light on the complication of the process.

QuickBooks (and similar cloud platforms):

• Automates most double-entry mechanics (you record an invoice, it automatically posts Accounts Receivable and Revenue).
• Connects to bank accounts to auto-import transactions, reducing manual work.
• Generates financial statements on demand (Balance Sheet, P&L, Cash Flow).
• Provides tax-oriented features (sales tax, payroll, 1099s).
• More user-friendly and widely accepted by accountants and tax preparers.

QuickBooks Online (QBO) and Desktop both always record journal entries in the background — you just don’t usually see the debits/credits. When you enter a transaction through its interface (paying salary, recording an expense, etc.), QuickBooks:

1. Translates your action into a journal entry.
2. Ensures every debit has an equal credit.
3. Posts it to the general ledger.

Example: When you “Write a Check” for $500 office supplies:

• Debit: Office Supplies (Expense) $500
• Credit: Checking (Bank) $500

You never type debits/credits, but the system does it automatically.

GnuCash (open-source alternative):

• True double-entry system, but less polished than QuickBooks.
• Great for someone comfortable with financial concepts (more transparent about debits/credits).
• Lacks some automation (e.g., bank feeds may be clunkier, less integrated with tax prep).
• No subscription fees, but steeper learning curve.

The Bookkeeping Role

A good set of books (journal → ledger → trial balance → statements) tells the full story of a business.

Below I built a small example flow demonstrating a little scenario for some fictional July 2024 business activities, and shows exactly how: Journal → Ledger → Trial Balance → Financial Statements all flow together. It covers:

• Equity funding
• Asset purchase (computer equipment)
• Operating expenses (software, salary, rent)
• Revenue
• Cash movement

1. Journal (by Transaction Date)

See the table for a diverse set of transactions for July 2024 for a start-up tech business:

Transaction ID,Date,Type,Account,Category,Amount,Note,Split ID,Direction
1,2024-07-01,Equity,Share Capital,Initial Investment,10000.00,Founder invests cash,1,Credit
1,2024-07-01,Equity,Cash,Bank,10000.00,Founder invests cash,2,Debit

2,2024-07-03,Asset,Computer Equipment,Macbook Purchase,3000.00,Purchase for dev work,1,Debit
2,2024-07-03,Asset,Cash,Bank,3000.00,Purchase for dev work,2,Credit

3,2024-07-05,Expense,Software Subscription,SaaS Tools,200.00,Slack & GitHub,1,Debit
3,2024-07-05,Expense,Cash,Bank,200.00,Slack & GitHub,2,Credit

4,2024-07-10,Expense,Salaries,Engineer Salary,2500.00,July payroll,1,Debit
4,2024-07-10,Expense,Cash,Bank,2500.00,July payroll,2,Credit

5,2024-07-12,Expense,Rent,Office Rent,1000.00,Co-working space,1,Debit
5,2024-07-12,Expense,Cash,Bank,1000.00,Co-working space,2,Credit

6,2024-07-20,Revenue,Cash,Bank,5000.00,Client software project,1,Debit
6,2024-07-20,Revenue,Service Revenue,Software Services,5000.00,Client software project,2,Credit

2. Ledger (Posted by Account)

Organize the journal by account, we have ledger:

Cash (Asset)
Jul 1   Debit 10,000 (Investment)
Jul 3   Credit 3,000 (Computer purchase)
Jul 5   Credit   200 (Software tools)
Jul 10  Credit 2,500 (Salary)
Jul 12  Credit 1,000 (Rent)
Jul 20  Debit  5,000 (Revenue)
Balance = 8,300 (Debit)

Computer Equipment (Asset)
Jul 3   Debit 3,000
Balance = 3,000 (Debit)

Software Subscription (Expense)
Jul 5   Debit 200
Balance = 200 (Debit)

Salaries (Expense)
Jul 10  Debit 2,500
Balance = 2,500 (Debit)

Rent (Expense)
Jul 12  Debit 1,000
Balance = 1,000 (Debit)

Service Revenue (Revenue)
Jul 20  Credit 5,000
Balance = 5,000 (Credit)

Share Capital (Equity)
Jul 1   Credit 10,000
Balance = 10,000 (Credit)

3. Trial Balance (as of July 31, 2024)

Summarize it in a table, we have trial balance.

Notice in the end, Debits must equals Credits.

4. Financial Statements

From the trial balance, we can start preparing financial statements.

Income Statement (July 2024)

Revenue:

• Service Revenue: 5,000

Expenses:

• Software Subscription: (200)
• Salaries: (2,500)
• Rent: (1,000)

Net Income = 1,300

Balance Sheet (as of July 31, 2024)

Assets:

• Cash: 8,300
• Computer Equipment: 3,000

Liabilities:

• (none in this example)

Equity:

• Share Capital: 10,000
• Retained Earnings (Net Income): 1,300

In summary, Total Assets = 11,300, Total Equity = 11,300, and we have: Assets = Liabilities + Equity (11,300 = 0 + 11,300).

Cash Flow Statement (July 2024)

Operating Activities (CFO):

• Cash in from Revenue: +5,000
• Cash out for Software Tools: (200)
• Cash out for Salaries: (2,500)
• Cash out for Rent: (1,000)
• Net Operating Cash Flow = +1,300

Investing Activities (CFI):

• Purchase of Computer Equipment: (3,000)

Financing Activities (CFF):

• Owner's Investment: +10,000

Net Cash Flow = +8,300 (Ending Cash matches ledger).

(Notice different accounting standards might count different things as CFI vs CFF)

The result: the books balance, the statements align, and the story makes sense. That's when accounting feels less like paperwork and more like insight.

Tax Return

Once bookkeeping is solid, filing a tax return really does feel like filling in forms. The heavy lifting is in the preparation.

Having a trustworthy accountant at this stage helps with navigating complex regulations, ensuring accuracy, identifying eligible deductions and credits, and reducing the risk of costly errors or audits.

They can also help with strategic planning - timing expenses, structuring income, and making sure compliance today supports long-term goals.

Summary

As a technical founder, my challenges fell into a few categories:

1. Understanding the overall process
2. Interpreting accounting standards
3. Navigating tax return requirements
4. Grasping accounting concepts and methods (T-accounts, depreciation, accruals)
5. Acting as the bookkeeper while running the business

I don't intend to become an accountant or file the T2 completely on my own, but I do believe a founder should deeply understand the process. A well-kept set of books is already halfway to a compliant and insightful tax return.

Ongoing Challenges

That said, bookkeeping remains tough because:

• Bank statements don't always reconcile cleanly.
• Transactions come from many non-standard sources.
• Accrual adjustments require constant updates.
• Foreign exchange adds complexity.

QuickBooks has been my starting point, and while their support is excellent, the platform doesn't feel designed for developers. It feels built for accountants - so the search for a better-fit tool continues.