Common Accounting Mistakes and What To Do To Avoid Them
Even in well-organized accounting departments, errors still occur. Despite everyone’s best efforts, mistakes can—and often do—find their way into accounting procedures and cause all kinds of trouble. A reversed entry can result in an unnoticeable error to casual readers, whereas a transposed digit can visibly throw debits and credits out of balance. Because of this, it’s crucial to have a strategy to identify, reduce, and correct errors.
When you are a small business owner, many things are beyond your control.
Although you have little influence over the economy or customer purchasing trends, you can prevent costly accounting errors from causing havoc on your company’s bottom line.
I understand how damaging clerical errors can be to a small firm. Accounting errors are inconvenient, whether they cost your company money, take up time, or result in an audit. Avoid common accounting blunders to save yourself a headache.
- Accounting errors are unavoidable. However, they can be reduced.
- Inaccurate data input, omission errors, commission errors, and errors in principle commonly cause accounting errors.
- Accounting errors damage a company’s credibility, squander money, and impair the dependability of information for business decisions.
- Errors can be reduced by combining preventative and investigative controls with accounting software.
Here is a list of common mistakes
1. Failure to pay attention to detail
Accounting efficiency is built on attention to detail and organizational skills. The more experienced an accountant is, the better organized they are. The goal is to find a way to apply one’s personal and organizational skills to a variety of company operations.
When most people think of accounting, they have the idea of keeping track of receipts, little (often ignored) transactions, and meticulous recordkeeping. These are, indeed, critical steps in the accounting process. Failure to appropriately account for these variables can substantially influence your cost estimates and, worse, erroneous financial reports.
We understand that no one enjoys filing. Although digital technologies have virtually eliminated the need to sort paper into folders in file cabinets, recordkeeping and records management are still relevant. You must treat digital records with the same care as traditional ones.
During a tax audit, you may be requested to present receipts or other documentation to prove the legitimacy of a business’s spending.
However, the significance of adequate recordkeeping extends beyond tax implications. If you decide to sell your firm, the buyer will almost certainly require an external audit of its financials or a formal company valuation. Receipts and other documents will be sought in both circumstances to verify the correctness of your financial statements.
3. Accounting is treated separately from the business.
It is common for accountants or the Finance Department to be disconnected from the rest of the company’s operations. It is also common for operational personnel to regard them as “gatekeepers” rather than “strategic leaders.” This offers accountants a skewed view of the firm.
Poor financial literacy makes business owners and managers more likely to make such mistakes.
4. Insufficient checks and balances
In a small business, it is customary for one person to handle all financial affairs. After all, there’s only so much work to be done, and it doesn’t make sense to recruit more people only to have checks and balances. More checks and balances might mean disaster for your company.
5. Failing to backup data
Regarding the last point, one of the most devastating (though tragically prevalent) accounting blunders is failing to employ existing solutions to protect and back up your data. We all like to believe that our company’s financial data is secure once it isn’t. Assume your business’s storage device has been damaged, misplaced, or worse, hacked, and you don’t have a backup of it anyplace. The ramifications might be disastrous.
Preventing Accounting Mistakes
Most effective accounting departments have control systems that try to do both. There are two kinds of controls: Preventive controls are designed to keep financial data clean before it is used to generate financial reports for stakeholders. Following the recording of errors or irregularities, detective controls identify them for inquiry and rectification. Curative detective controls must be undertaken on a frequent basis to ensure that accounting problems are detected swiftly.
Make use of accounting software:
This includes error-reducing features such as preventing imbalanced transactions from affecting the balance. Choose a solution with the highest level of automation and system integration to eliminate the need for manual intervention, which is the source of many data entry errors.
Maintain your accounting records:
If you want to avoid accounting errors, you must keep your accounting books up to date with each transaction between your company and another entity. Whether you utilize cash-basis or accrual accounting determines when you update your records.
When you receive money or make a payment, record a journal entry if you utilize cash-basis accounting. If you use accrual accounting, record transactions as soon as they occur in your business, even if you don’t receive money or make the payment.
Divide responsibilities and ensure proper oversight:
To assist in minimizing errors. These controls work in tandem. Errors can frequently be identified at the front end of the accounting process by having a second set of eyes analyze another person’s work product. Because this might be difficult for businesses with a small workforce or if the owner performs everything, consider hiring an outside accountant to check finances regularly.
Accounting information that is up to date is essential for business management. While there is no foolproof method for eliminating all accounting errors, systems, and controls can be implemented to reduce their incidence. Critical initial steps are to understand how and where to look for typical accounting problems. Using automated, integrated software, in conjunction with various preventive and investigative controls, can result in a less error-prone accounting environment.