Common Bookkeeping Mistakes and How to Avoid Them
For many small business owners, bookkeeping isn’t an important task when it comes to running a business. From the tedious tasks of bank reconciliations and recordkeeping, your time can be spent better elsewhere, right? This is why a large number of business owners are behind in their bookkeeping.
Did you know that strong bookkeeping procedures can potentially grow your business and increase your profitability? The benefits of accurate bookkeeping can propel your business into new markets all without having to worry about running out of cash, making it essential to understand these common bookkeeping mistakes and how to avoid them.
Poor Record Keeping
Receipts are even harder to obtain in today’s day and age with a digital revolution taking place in every industry. Although this can contribute to poor record keeping, there are other ways to ensure your accounting information is properly kept track of. Skipping the receipt for a small purchase seems immaterial, but every small expense adds up.
The IRS suggests you keep receipts for at least 3 years in the event your business is audited. The inability to produce supporting documentation for your business expenses can land you fines and penalties. In addition, strong record keeping can help you maintain accurate records, which can save you money on your tax return.
Misclassifying expenses is another common bookkeeping mistake that can lead to significant fines and penalties. The IRS taxes some items differently than others, such as meals and entertainment. Improper classification of these expenses can land you in a sticky situation with the IRS.
Reviewing your financial statements on a regular basis helps determine if expenses are properly classified. Oversight on a smaller, but more regular scale, takes the overwhelming burden of transaction review off your plate and allows you to sift through a manageable level of items.
Misreporting Independent Contractors
Business owners often hire both employees and independent contractors. Each of these worker classes is not only paid differently but also requires different year-end payroll forms. Employees create a payroll tax liability for your business while independent contractors handle their own taxes. Incorrectly classifying an employee as an independent contractor opens the door to back taxes with corresponding fines and penalties.
For each new hire you have, go through the steps to determine their proper classification. The IRS has three common law rules that help you work through which type of worker you have; however, if you are still unsure, contact an accountant.
Bank reconciliations compare the information in your accounting system to what the bank says cleared. Discrepancies are common, making it essential that you complete reconciliations on a monthly basis. Furthermore, business owners forgo reconciling their credit card accounts, but this is just as important as your bank reconciliations, especially if you issue your employees a credit card.
Choosing an accounting software program with a reconciliation feature helps you complete the necessary reconciliations through clear instructions and automatically imports the data from your bank account. Make it a goal to complete all reconciliations within the first two weeks after month-end.
Neglecting Sales Tax
The ease of selling products worldwide creates a new demand for business owners: sales tax. Sales tax works based on the sales in each jurisdiction, regardless of if your business has a physical location in that state. Incorrect data in your accounting system leads to overreporting or underreporting your sales tax, both of which come with significant penalties for misreporting.
Finding an accounting software program that tracks sales in each state allows you to avoid this costly error. However, the rules and regulations surrounding sales tax are constantly changing, making it mportant to enlist the help of a qualified accountant when you are doing business in multiple states.
Dismissing Petty Cash
Petty cash accounts are small cash stocks that are generally held in the business office. These amounts are used for small reimbursements and purchases, such as buying donuts for the office. As minimal as these cash levels may seem, they are still an asset in your business, meaning you want to have the proper fraud controls in place. An employee siphoning $20 or even $100 a month adds up over time.
Consider adding the petty cash account to your list of monthly reconciliations. This ensures all transactions are being recorded. Missing entering these expenses results in an overstated taxable income. If you only have one or two transactions in the petty cash account each month, you might not need to set up a separate reconciliation, but you will need to enter these expenses into your accounting software.
Creating Department Silos
As a growing business, you may have brought on office staff to help manage your workload. Poor communication between the different departments in your business leads to mistakes. Your accounts payable and accounts receivable departments should frequently be conversing with each other and other management to understand the direction the business is going.
Frequent meetings with all members of management and the bookkeeping department aids in the brainstorming process and keeps everyone informed on upcoming financial goals. When everyone is on the same page, you might see an uptick in profitability as there are clear operational and financial goals for everyone to work towards.
Forgetting to Back Up Your Data
Data loss is detrimental to business owners. Not only will you have difficulty remembering past transactions, but it can take hours of work to get all of your accounting information back into the software. Most accounting software programs offer a cloud-based program option that automatically backs up your data. For business owners that forget to back up their desktop accounting system, a cloud-based software program might be the right move.
These common bookkeeping mistakes can easily be avoided by implementing a few simple steps in your accounting function. Which of these mistakes have you caught yourself making recently? Understanding past mistakes are the first step to honing in your bookkeeping function going forward.
For some business owners, bookkeeping isn’t in their toolset, which is why working with the team at Bookkeepme is beneficial. Bookkeepme has a fully staffed team of experts ready to tackle your bookkeeping function. Reach out today to set up a consultation.