Six Most Common Accounting Mistakes People Make
Business accounting involves more than maintaining books for tax purposes. Accurate accounting plays a vital role in helping you save money, increase profits, identify where budget cuts must be made and which areas need added resources.
Unfortunately, in an attempt to scale the business, most small business owners try to minimize the time and effort spent on accounting and financial management. As a result, they often overlook the little things that can have a huge impact on the company. This impact could be anything from a loss of financial flexibility to unpaid taxes, fraud, theft and even embezzlement.
To help you avoid running into financial trouble, the experts at Your Bottom Line have compiled a list of six of the most common accounting mistakes business owners make.
1. Procrastinating and making data entry errors. Accounting is all about details, and if you drop the ball, you are in for some significant errors in your accounts. There are many ways you can keep accounts, and some methods are more reliable than others. If you are tech savvy, you could use automated programs, if not, even a simple excel spreadsheet or a handwritten ledger will do. But no matter which method you choose, you are bound to make mistakes whether they are transposition errors, transcriptions errors or just entering data in the wrong field.
These errors occur because you aren’t trained to do this kind of dull work. In addition to it being dull, it doesn’t get you paid, so you tend to do it out of necessity and in a hurried manner to get it over with. This usually happens at the last moment when there is a mountain of bills piled up and not enough time to input all the data.
The key to reducing or doing away with errors is to delegate about fifteen minutes a day to get some of the work done so that you don’t have to spend hours or days later.
2. Failing to reconcile books with bank accounts. It is very easy to forget petty cash transactions because they appear small and negligible. But a whole lot of those transactions amount to a very large sum of money. Keeping a strict record will save you from discrepancies in your records. It is called reconciling your accounts. Your bank balance needs to reflect the transactions in your accounting books. Every little transaction counts.
Keeping an accurate monthly account of all transactions prevents the records from going out of sync with the actual account. Once small transactions are taken care of, bigger transactions become easier to handle and record. By keeping a record of small transactions, you’ll be able to easily manage your books as your company grows in size and its number of transactions increases.
3. Inadequate knowledge of accounting software. A little knowledge is a dangerous thing. Accounting software has been simplified for the use of small business owners. Many business owners who do their own accounts fail to update their software or learn anything more than just the basics.
Taking the time to learn more about the software can save you a lot of trouble and time in future. There are online tutorials that teach the software in a step-by-step manner. Some accountants (Including the team at Your Bottom Line) even offer training or courses to teach you how to effectively use your software which in the long run saves them time and you the effort.
4. Assuming profits always mean cash flow. Writing down each deal as income before it happens is like counting your chickens before they hatch. It is a common mistake and can cause accounting chaos. Do not record any deal as income before it is realized. If the company takes longer to fulfill the deal than the date you recorded it as profit, your accounts will go askew. It also gives you a very distorted image of the profits of your company. It may make you feel optimistic, but it also makes you delusional, and you lose track of the real condition of your company.
5. Failing to separate personal and business accounts. Maintaining two bank accounts instead of one may seem like a burden, but it is not. It actually makes your accounts a lot easier to handle. It may seem like a no-brainer to some, but many fail to do so when they first start out.
When all your business finances are taken care of from one account, it makes doing taxes so much easier and simpler. The dedicated business account with its own credit card ensures that all purchases can be accounted for without a hassle.
One thing to keep in mind is that the business account should be used strictly for business purposes. The credit card cannot be used in emergencies for any personal use because it will reflect as a sign of misuse and every transaction will be scrutinized by the accountant minutely. It is also a good practice to file all bills, business and personal separately.
6. Poor communication with your bookkeeper or accountant. Whether it is business or personal, if you are plan on making any big financial decisions, you need to keep your accountant informed. The biggest mistake is forgetting to notify the accountant of transactions or keeping too many things for later and then losing track of your own accounts.
Bookkeepers and accountants need to be involved in every financial decision you make. Keeping timely and systematic records also helps, whether it is digitized, handwritten or filed. Losing touch with your accountant makes the accountant’s work that much harder at the end of the year because then they will have to play catch-up and figure out your yearly expenses to get your End of Year Statements.
Forgetting to call your accountant before making financial decisions may also cost you more money because your accountant is more likely to offer you more cost-effective alternatives.
If you're looking to achieve financial success with your small business, reach out to the experts at Your Bottom Line. We offer the best personal and corporate tax services, bookkeeping, payroll, virtual CFO services across Courtice, Oshawa, Whitby, Ajax, Pickering, Bowmanville, Newcastle, Port Perry, Cobourg and beyond. We can change your business experience from a stressful one to a very profitable and systematic one by providing sound financial advice based on your finances and requirements.