What are the 7 deadly sins of bookkeeping?

Let’s face it.  Bookkeeping is no fun for most business owners.  It requires a lot of patience and effort.  And, mistakes can be costly.  Business creditors can come after your personal assets.  Checks can bounce.  Financial reports can be misleading.  Taxes can be overpaid or underpaid.  You get the picture. So, what are the most common mistakes that business owners make?  We like to call them the seven deadly sins of bookkeeping.

The #1 mistake made by small business owners is mixing personal and business accounts.  This causes them to confuse the two expenses resulting in numerous future issues. Usually, you setup a corporation or LLC to limit liability. The structure creates a shield between the business owner and the business. Mixing personal and business accounts will cause you lose this protection and the most valuable attribute of limited liability is lost. Business creditors can recover all business debts.  They can go after the owner’s personal assets even those held outside the business. Even if you have separate business and personal accounts but mix the two accounts, limited liability is lost.

Many business owners believe that credit card receipts or statements are sufficient.  However, IRS requires the actual cash register tape which shows the itemizations.  It’s also a good idea to save the canceled check images, bank statements, credit card receipts and statements and vendor bills.  Physical receipts fade over time.  So, creating an electronic filing cabinet that stores all of this information in an easy to find format is a great idea.

Business owners are not familiar with the rules of accounting or do not have the time to research the rules.  They end up entering expenses in the wrong categories.  This is often the most common cause of inaccurate reports.

You issued a check for $1,000 but the bank cleared it as $10,000. Or, the credit card company charged you twice. How do you catch such mistakes? Regular reconciliations!  You match your bookkeeping entries against physical bank entries to catch such mistakes and you need to catch them as early as possible. It does not help much if you catch an error more than 90 days later because most banks have some sort of time limit to fix errors. In addition, reconciling books against bank and credit card accounts gives you actual balances which can help avoid bad checks. Tying the actual balances with uncleared checks, undeposited funds and future checks allows you to properly manage cash flow as well.

May owners use Excel or paper to manage their books.  This makes bookkeeping harder and prone to mistakes.  Using popular bookkeeping software like QuickBooks, Xero or Wave can simply your bookkeeping.  Such software also makes it easy to balance your books and produce profit & loss, balance sheet, cash flow, AP aging and AR aging reports.  While there is an upfront or ongoing cost for the software, it saves a lot of time and money in the long run.

Hard disks fail.  Computers crash.  Files become corrupt.  Humans make mistakes.  Such failures are inevitable and only a matter of time.  You do not want your years or months or weeks of hard work and records disappear due to any of these failures.  How do you protect yourself from such failures? Proper Backups! Properly backing up your bookkeeping files is essential to protect yourself from disasters that can destroy your records. For example, if you are using the desktop version of QuickBooks you can save your data in a portable QBM format which is quite compact and portable across different QuickBooks versions.

This is the last of the sins but certainly not the least.  Business owners know that time-to-market is critical to launching a new business.  Plus, their time is certainly worth more than $10 per hour.  Yet, numerous owners waste precious time doing bookkeeping which can be done for $10 per hour. And, no offense but better than most business owners can on their own.  Further, did I say bookkeeping requires a ton of patience?  That’s got to be an understatement.  Bookkeeping is an absolute grind!  The good news is that many bookkeeping service providers can manage books in a professional and cost effective manner.  They can do it better and at a lower cost.  More importantly, you need the time to focus and grow your business.