There is no one correct system for record keeping for tax purposes, however if you are carrying on a business or engaged in a commercial activity in Canada, by law the CRA requires you to keep adequate records. Generally speaking, adequate records involve evidence to support all income and expenses. Your records will need to provide enough details to determine your tax obligations and entitlements and will have to be supported by original or source documents (such as invoices, bank statements, deposit slips, cancelled cheques).
It is important that you find a system that works for you and your business, depending on the size and the nature of your business this system can be very different. Some systems are very simple in nature, for instance using excel to track your income and expenses for each month of the year and collecting and organizing supporting documents accordingly. Larger businesses may have very complex accounting systems in place, which allow multiple users to make entries, track hundreds of expense and revenue entries and can produce very detailed reports. See the software section for a discussion of considerations for accounting software.
One of the largest struggles for owner-managed small businesses is separating or tracking business and personal expenses. It is important that you are able to support that all of your expenses actually relate to your business and that you have recorded all of your receipts. If you fail to keep adequate records, in addition to potential penalties, the CRA may assess personal receipts as business income, or deny your business expenses inflating your taxable income and ultimately your tax payable. The easiest way to avoid these issues is to separate your personal and business finances. Setting up separate bank accounts, although not alone good record keeping, can help to separate your business and personal finances. This will help to eliminate the chances of paying for business expenses with personal funds that are not recorded. It will also reduce the risk of the CRA suspecting that personal receipts are actually business income.