Common Bookkeeping Mistakes
Small and medium-sized businesses are eager to expand but frequently need help understanding the fundamental requirements. One such thing is bookkeeping, which, if addressed, will ensure your business operation is maintained. Small and medium-sized businesses are eager to expand but frequently need help understanding the fundamental requirements. One such thing is bookkeeping, which, if addressed, will ensure your business operation is maintained.
Bookkeeping is a time-consuming and laborious activity that might take hours upon hours. This is the key reason why more than half of all small business owners fail to regularly keep their accounts up to date. As mundane as it may look, bookkeeping is your most powerful secret weapon for business management and success. Only by accurately and consistently measuring a company’s financials and other critical indicators can we, as business owners, effectively manage and expand our companies.
Most businesses employ a professional bookkeeper, but the responsibility may fall to you if you run a small business on your own. When your business is starting, it’s entirely OK to be your own bookkeeper. However, you must ensure that the job is done correctly so that your records accurately reflect your current financial status. Otherwise, your company’s judgments will be based on incorrect information.
The following are the most typical bookkeeping mistakes to avoid:
1. Failure to save receipts under $75
Receipts under $75, while not required by the IRS, provide backup verification for many of the deductions you may claim. However, keeping them in a folder or box is still needed in the event of an audit.
Most online and digital accounting applications include accompanying apps that allow you to photograph your receipts and correlate them with the proper register entry. If you prefer to keep your receipts separate, there are numerous third-party apps to pick from.
2. Not allocating enough time to bookkeeping.
Accounting is one of the predictors of your small business’s success. Whether it’s a small payment or a significant transaction from consumers or clients, it is vital to ensure that every financial transaction is accurately recorded and classified in your records.
Regardless of how tiny your business is, following the bookkeeping process correctly provides an accurate picture of its success and helps you to understand how well (or poorly) you’ve performed over a specific time period.
3. Improperly categorizing expenses
This can be a problem if you or someone you hire is new to professional bookkeeping practices. Accurately documenting income and expenses in the appropriate areas ensures proper profitability measurement. Knowing the various tax treatments for each income and cost category can also result in significant tax savings.
4. Combining work and personal expenses
So you take a client to lunch but need to remember to bring your business credit card. Don’t be concerned. You can use your personal debit card to pay for it, right? In the heat of the moment, covering a corporate expense with personal funds may appear simple. However, combining your finances makes bookkeeping (and taxes) more difficult in the long run. It can even eliminate legal protection if your company is audited or sued.
To prevent this problem, make it a practice to refrain from using your funds to meet professional expenses (or vice versa).
5. Failure to do basic account reconciliation
You must reconcile your company’s books with the bank statement every month. Account reconciliation is a basic process. You must verify your books with your bank statement to ensure no discrepancies.
Contact your bank immediately to address the problem if you discover an error. By repeating this process every month, you can ensure that bookkeeping errors are successfully eradicated before they cause a significant financial setback.
6. Misclassification or overclassification
It is vital for your bookkeeping to retain a clean and structured chart of accounts. While most spending categories are very conventional and easy, many business owners must establish duplicate categories or record items in the appropriate area while performing their bookkeeping.
Use standard bookkeeping rules for conventional categorizations and generate as few new categories as possible. A professional bookkeeper can assist you in cleaning up your records and maintaining a lean and clean chart of accounts.
You will almost certainly make one of these costly accounting and bookkeeping errors, if not all, when running your firm. Make sure you understand accounting well or employ an expert, and always be on the lookout for potential red flags.