Back-office accounting, cash flow management, and payroll is time-consuming and most often a stressful task for most small business owners. When working and keeping track of bookkeeping for a company, errors can easily happen if it is not in a done in a meticulously systematic process. And when a record-keeping mistake happens, it then provides false financial data about the organization’s finances which can then lead to poor business decisions being made. Accounting errors can also lead to very serious budget problems as well. This article is meant to guide and point out the 7 most common bookkeeping mistakes that we see happen when company’s try to manage it themselves.
1. Not Having a System that Tracks All Receipts
Business owners are sometimes not aware of the importance of keeping their phone bills, business receipts, bank records for bookkeeping and accounting purposes. Receipts can be vital evidence that can support tax breaks and write-offs to the IRS at tax filing time. Without a receipt or the ability to easily find it, you may the opportunity to claim a tax saving expense on its business tax return. Consider getting a comprehensive document management system that you scan all your receipts to phone or computer and upload them into it.
2. Failing to Properly Log All Major Purchases
Business owners can sometimes miss out on several important tax deductions such as Section 179, due to inaccurately logging major inventory, merchandise or equipment purchases. The type of tax deduction for business overhead purchases can differ depending on the lifespan of the equipment or merchandise of business purchases. As an example, ink cartridges and printer paper are usually categorized as office supplies and immediately written off during the year they are purchased. However, major equipment purchases such as copy machines and office computers, refrigerators, grocery store counters can be allocated as long-term assets. The major purchases value can be depreciated over the years as long the merchandise is still usable.
3. Mixing Business and Personal Finances
When starting a new business, especially if it under a sole proprietorship entity, it may seem convenient to mix or commingle business and personal together. However, it is very important to keep all finances for your personal and business separate. Business banking accounts should be separate also be separate from personal ones to avoid inadvertently intermingling finances. Also by keeping the accounts separate will avoid reporting of inaccurate information, which can lead to an audit by the IRS.
4. Not implementing an Earnings Management Strategy
One common bookkeeping related mistake some business owners make is taking money from one account and using it for another without reporting and allocating the funds correctly. So bookkeeping and appropriate reporting of cash allocation for investments, expenses, and savings are crucial to keeping an accurate financial profile and budgeting strategy. An earnings management strategy that a company develops should determine the amount of profit a business should reinvest back into the company, payments of large expenses and cash flow needed. Now the long term strategy will also enable a business to determine how to allocate cash to each business account.
5. Erroneous Financial Reporting
Erroneous or inaccurate recording of assets and expenses can lead to errors within the financial reports. The accountant or bookkeeper should be able to determine the most appropriate accounting method (GAAP VS Income Tax basis) to use in order to correctly allocate the flow of cash. The cash method is simpler and it is used to show the actual distribution of cash that goes into and out of the business. The accrual method documents income and expenses immediately, rather than waiting until cash is actually exchanged.
6. Allowing Multiple Administrative Access to Accounts
Business owners should never give their administrative login access to their accounting files to another person. There should be separate access granted for each person with their own unique username and password. If you are employing an in-house bookkeeper, then setting up an individual employee login access, which will provide info on who accessed the files on any given time and you can or limit or grant the type of access you want someone to have within the cloud-based accounting system.
7. Lack of Multiple File Backup Methods
Many business owners are now relying and converting their legacy desktop programs that use mobile cloud computing as a data storage backup for their financial information. Although the going “paperless” idea is indeed environmentally more friendly, some companies like to still keep records offline as well in case data or files are lost. We feel the offline storage is not necessary since things in cloud can never really be erased. In order to have solid grasp of a company’s finances, it is essential to understand the meaning of each account. You should consider looking with professional outsourced bookkeeping service firm to determine which procedures and methods are the best for business.
