Bookkeeping errors may not sound like a big deal, but fixing them can end up costing more than time. Fortunately, there are ways to avoid accounting errors altogether. This guide covers the 11 most common bookkeeping mistakes and provides practical tips on how to avoid them.
Mixing personal and business expenses can cause more than a few problems when tax time rolls around. Personal expenses must be removed from financial statements, which is time-consuming and increases the likelihood of errors. This can result in incorrect tax deductions or even legal consequences if there's an audit.
How to avoid it: Open a dedicated business bank account and use separate credit cards for personal and business spending.
Entering expenses in the wrong category or creating duplicate categories will generate inaccurate financial records. This makes reconciling accounts and tracking spending habits nearly impossible. Managing money based on false financial insights is the quickest way to end up in the red.
How to avoid it: Create a comprehensive chart of accounts with consistent categories and sub-categories for all expenses.
Declaring revenue as soon as a sale is made can overlook related expenses. That's why revenue should be recognized on a cash basis, accrual basis, or a percentage of completion. Otherwise, it's difficult to determine actual profits in order to make informed financial decisions about setting prices and managing costs.
How to avoid it: Use a consistent method for recognizing revenue when recording business transactions.
Misreporting transfers as income usually happens when a business receives payments through accounts like PayPal or Venmo. When funds are transferred to a bank, accounting software will generally record the transaction as business income because the total cash in the account increases.
How to avoid it: Update the transaction as a "transfer" (moving money) instead of "income" (new deposit) in the accounting software.
Failing to collect, report, or account for sales tax will lead to income discrepancies in financial records and surprise tax bills. These mistakes could also raise a red flag for compliance. Consequences for neglecting tax regulations include penalties, fines, and potential legal issues.
How to avoid it: Maintain accurate records and receipts, separate sales tax from income, and pay taxes on time.
Cost overruns, missing payments, and overpaying invoices are just some of the problems caused by poor (or non-existent) income and expense tracking. Without proper records, preparing for tax season can be a nightmare, and missing out on reimbursable expenses is pretty much a guarantee.
How to avoid it: Record all transactions manually or with software and keep business and personal finances separate.
Throwing away (or losing) receipts may seem like a small and insignificant action, but these pieces of paper serve as financial records for tax returns and audits. Receipts are used to back up business deductions if tax authorities ever request proof of your expenses. No paper trail means no proof, which generally results in fines and legal troubles.
How to avoid it: File receipts in a folder, save digital copies, and make notes on each receipt of the date, purpose, and expense category.
Missing monthly reconciliations leaves minor accounting errors unchecked, such as entry reversal (credit/debit), incorrect transaction values, or missing expenses. These inaccuracies can have a domino effect on financial records and cash flow, especially when reconciling accounts is only done once a year.
How to avoid it: Review and reconcile bank statements and financial records every month or quarter.
Generating sales is great, but the lights only stay on when customers pay bills on time. Chasing down late payments puts a strain on human and financial resources. These delays can be more serious for smaller operations that can easily develop a cash-flow crisis without proper credit control.
How to avoid it: Enforce policies for late payments, incentives for on-time payments, or upfront deposits
Financial statements provide valuable insights into financial health and performance. Leaving them on the sidelines is the most common cause of incorrect or duplicate payments to vendors. Ignoring financial statements also means missing out on sales trends and opportunities to generate revenue.
How to avoid it: Schedule regular reviews as a meeting or hire a bookkeeper to explain recorded items and highlight areas of concern.
Managing business finances without professional help can lead to incorrect data entries, missed expenses, or miscalculations. Finding and fixing these common errors will end up costing more in the long run. Not to mention any cash flow issues or potential losses caused by inaccurate financial records.
How to avoid it: Hire a professional bookkeeper to accurately record, reconcile, and report every financial transaction.
Accurate bookkeeping requires regular reviews of bank accounts and financial statements. If you don't have the time or expertise to reconcile business accounts, consider hiring a Fractional Accountant on a part-time or project basis to handle day-to-day finances without the overhead costs of adding personnel.
Book a free consultation to learn more about how fractional accounting can help your business avoid bookkeeping mistakes.
