7 Bookkeeping Mistakes Small Business Owners Must Avoid at All Cost
Bookkeeping is an accounting activity that needs to be accurate at all times. It should be without any errors. This is important not just to avoid mistakes when filing taxes. Accurate bookkeeping will help you make informed decisions that will improve the bottom line.
Avoiding bookkeeping mistakes will help in knowing the exact financial position of your company. It will help you avoid mistakes that will hurt your business.
Here are some common bookkeeping mistakes that small business owners make, and also how to avoid them.
1. Not Handing the Bookkeeping Tasks to Professionals
A lot of small business owners try to balance the book themselves. The fact is entering transactions as per the generally accepted accounting principles is a laborious task. Many business owners become so engrossed in bookkeeping tasks that they lose track of what is important for their business.
Business owners who don’t have experience in accounting are also prone to making mistakes in making bookkeeping entries.
You should delegate bookkeeping tasks to professionals. Outsourced bookkeeping services will save you time that you can better utilize in improving the strategic outlook of your company.
The best-outsourced bookkeeping service providers hire professional certified public accountants (CPAs). Professional accountants have experience in the accurate entry of financial transactions based on local and international accounting laws.
2. Not Keeping the Accounting Books Updated
Another common mistake that small business owners make is not updating their accounts whenever a new transaction occurs. Accountants must add entries to update the accounts the moment the transaction occurs.
Updating the accounts depends on whether you use an accrual or cash basis for accounting.
If you use the accrual accounting method, the bookkeeping entry must be made at the time your business incurs an expense. In contrast, if your business is using the cash basis for accounting, the books must be updated whenever the cash payment is made or received.
3. Not Separating Personal and Business Transactions
The third common mistake that small business owners make is not separating business and personal transactions. You must open a separate bank account for business transactions. This is important whether your business is a sole proprietorship, partnership, or registered business.
Combining personal and business transactions can confuse. You could mix the funds which will result in a wrong representation of the financial position of your company.
If you combine personal and business funds, you can lose out on some of the exemptions that the IRS offers to small businesses.
By keeping personal and business transactions separate, you will know exactly how much funds are available for your business. It will also prevent the temptation of allocating your business funds for personal benefits. Keeping the books separate will allow you to invest business funds more wisely with the goal of business growth.
4. Not Budgeting Strategically
You need to budget every detail of your business. But the activity of budgeting is not just about allocating your funds to important expenses. You must understand the strategic importance of every expense to ensure that the funds are allocated optimally.
Consider prioritizing big expenses during the budget review. You must review significant spending to ensure that they benefit your business. Also, you must not ignore the small spending. You must budget for every expense as small amounts can turn into large amounts.
5. Not Reconciling Accounts
A lot of small business owners don’t reconcile the accounts. The fact of the matter is that you need to reconcile all your accounts. You should check the bank statement to ensure that the balance in the books is tallied.
If there is any error in the bank statement, you must inform the bank immediately. Moreover, you should also closely inspect differences and reconcile the accounts so that the balances are the same. The activity will also help you detect any fraudulent activity that could be costly for your business.
Bank reconciliation should be done regularly. It is important to conduct bank reconciliation at least once a year to ensure that there are no errors in your books or bank statements.
6. Not Recording the Receipts
Yet another common accounting mistake is not keeping a record of all the receipts. Keeping receipts is important as the tax authority may want you to verify expenses during an audit.
You must save the receipt of every purchase. It is important to keep receipts of every transaction including petty cash expenses, purchase of office supplies, and others.
Recording the repeats will serve as an internal control technique. It will ensure that all the expenses for the businesses are properly accounted for and no one is using company funds for personal benefits.
Consider saving two versions of the receipt. One should be the paper receipt and the other should be a digital copy of the receipts. Keeping a digital receipt will speed up the audit process. Moreover, it will help avoid possible accounting fraud.
7. Not Reviewing Bookkeeping Entries
Delegating the task of making bookkeeping entries will indeed save you a lot of hassles. But this does not mean that you should blindly trust a CPA for handling your accounts. You must regularly review the books.
Make sure that you review the accounting statements thoroughly. Look for any discrepancies in the accounting entries. You should also request your online bookkeeping provider to provide information about confusing bookkeeping entries.
Conclusion
The tips mentioned above will greatly help reduce the chances of accounting fraud. Recording expenses and income is a time-consuming and complicated task. You can make a mistake in entering a financial transaction that will result in making wrong financial decisions.
Outsourcing bookkeeping tasks will help you focus more on your business. Let Maxim Liberty help you in keeping accurate and up-to-date bookkeeping entries. Contact us today by dialing (703) 957-6938.
