10 Bookkeeping Mistakes Business Owners Often Make
Modern accounting software applications have made keeping the books of a small business much less challenging. However, even the best accounting package will not prevent you from making some fundamental bookkeeping errors.
Every business needs accounting records for tax filing purposes and business management. But bookkeeping will never be a business owner's list of favorite tasks. Even so, avoiding some of these accounting mistakes will make the job easier and save you money. Here are ten of the most common bookkeeping mistakes that business owners make.
1. Leaving It to The Last Minute
Small business owners' most common mistake with their books is leaving the bookkeeping to the last minute. Then, the process of updating the accounts becomes rushed. More mistakes are made, and shortcuts are taken. It would be much better to update your books weekly or daily. If you keep your books up to date, you will have more relevant financial information at your fingertips, and entering the accounting transactions will be a short sprint instead of a grueling marathon.
2. Recording Too Much or Too Little Detail
Every accounting system needs a well-thought-out chart of accounts. Too many categories of income and expense will overly complicate data entry and reporting. However, too few will not provide the information needed to manage the business and create manual work at the year-end. Most business accounting packages have a chart of accounts templates. However, some of these templates are incredibly simplistic and may not be suitable for your business needs. It would be advisable to talk to your fractional CFO, accountant or a professional bookkeeper if you are unsure what level of detail to record in your accounts.
3. Misallocating Transactions
Even when you have your chart of accounts right, you will still need to allocate transactions to the appropriate categories. If you assign items to the wrong expense or revenue types, your books will not be accurate, and it could lead to tax filing errors. So, avoid dumping transactions to a "miscellaneous" or "other expenses" account, and take your time with your accounting data entry. A little bit of extra time taken posting accounting transactions could save you time and money later.
4. Keeping Receipts in a Shoebox
Another tedious part of bookkeeping is filing. Receipts and other supporting paperwork should be marked with the corresponding transaction number and filed away neatly. However, some small business owners make the mistake of dumping all their receipts in a box or the back of a drawer. When the time comes for a tax audit or a query needs answering, it takes hours to find the relevant paperwork. The best accounting packages allow you to scan receipts and attach them to transactions. There are also stand-alone applications designed for organizing scanned images of supporting documents. At CFO Masters we often recommend Hubdoc that easily connects and retrieves your accounts, your recurring bills and statements, save these to your secure account in the cloud and even posts it to your accounting software, like Xero or QuickBooks Online. Hubdoc uses OCR (Optical Character Recognition) technology to analyze your receipts (and other scanned documents) for useable data. You can grant your accountant access to all your bills and receipts directly from Hubdoc or through your accounting software. A fractional CFO can help you implement and set up the automation.
5. Failing to Reconcile Bank Accounts
Reconciling the bank account is crucial to maintaining the accuracy of your books. A bank reconciliation confirms that transactions have been entered at the correct value and ensures your cash flow reporting accuracy. Modern accounting software has taken much of the tedium out of the bank reconciliation process. However, it is still a task that can take some time. Nevertheless, proving that you have entered your cash transactions correctly will give you more confidence in the figures your accounting system produces. Completing a bank reconciliation will also bring to light any cash transactions you have missed.
6. Posting to Incorrect Periods
Some low-cost accounting packages don't have month-end closes. Having no month-end can be convenient when you are playing catch-up with your bookkeeping. However, it can also lead to you inadvertently posting transactions to the wrong period. If you post transactions to an incorrect period, your bank account will reconcile. However, your period-end profit and loss account and balance sheet will be inaccurate, and, if the misposted transaction crosses a year-end, your annual reports will not be accurate. If your accounting software does include a month-end close procedure, it would be best to use it. If not, it would be advisable to take great care with dates when posting accounting transactions.
7. Posting Debits as Credits
Modern accounting software has made life much easier for a non-accountant business owner. There is no longer a need for business owners to understand the intricacies of double-entry bookkeeping. However, it is still possible to post a payment as a receipt and vice versa. Posting a debit as a credit is made more likely by systems that allow you to copy or clone transactions to use as a template for the next item. Your bank reconciliation will highlight any transactions entered the wrong way around, but it can be time-consuming to find the transactions that have been posted incorrectly. The best way to avoid making this common bookkeeping mistake is to enter transactions in batches of like items.
8. Not Reviewing the Accounts
A monthly review of the accounts will help you keep your finger on the financial pulse of your business. But, when you are busy, you might not review the financial reports as often as you should. Failing to review your financial statements, though, could lead to you missing crucial trends in sales, expenses, or profitability. It will also mean that bookkeeping errors are not picked up, possibly until the year-end accounts are produced. So, review your accounts monthly for any anomalies. For example, assets with a credit balance or revenue accounts with a debit balance would indicate an error, and investigate significant budget variances, which will help you manage costs and possibly highlight posting errors.
9. Failing to Train Employees
Accounting software is relatively straightforward to use. Even so, each package has different functionality and features, and not everyone is familiar with even the most rudimentary principles of bookkeeping. So, don't make the mistake of thinking that you can delegate the bookkeeping to just anyone. If you want an employee to take over the accounting tasks, it would be best to hire someone with experience or pay for new employees' software training.
10. Not Getting help When it is Needed
Doing the bookkeeping yourself when you first launch a small business is manageable. There will be few transactions, and the task won't take long at all. However, once the company grows, it can quickly become tricky for a business owner to manage the business and keep the books. It would be advisable to employ a bookkeeper when you become too busy to keep the accounts up to date. If the volume of accounting work doesn't yet warrant an employee, you could always hire a freelance bookkeeper. Or you could employ the services of a professional bookkeeping company. But don't let the accounts get too far behind, or you will start making some of the mistakes mentioned above.
Any sized business must keep proper accounting records. However, the accuracy required to avoid the above bookkeeping mistakes can make maintaining the accounts a time-consuming task. The critical point to take away from the above is to take your time when entering accounting data and review and reconcile the accounts regularly. If you don't have time to keep the books yourself, hiring a professional bookkeeper will probably save you time and money in the long run.
About CFO Masters
CFO Masters is a network of select fractional, interim, part-time, and temporary Chief Financial Officers, strategically positioned to focus on growing and transforming businesses on as-needed, on-demand basis. Founded in 2016, CFO Masters offers an affordable alternative to hiring a full-time CFO that can make a big impact on your business. For more information, please visit CFO Masters.