Business bookkeeping tasks can be a source of a lot of hassle for business owners. The piles of paperwork and concern over potential errors can all add up to big-time stress, all caused by common bookkeeping mistakes.
How can you lower stress and raise productivity in your business where bookkeeping is concerned? What are the most common bookkeeping errors? What are the best and most common bookkeeping practices? Equally important: How to correct accounting errors.
There’s no reason your business’ bookkeeping records have to bring you stress. A number of the most common bookkeeping mistakes are easily fixed. Others require a more complex solution. We are going to share with you some of the most common bookkeeping mistakes and show you how to ensure that your business records are in proper order all year round.
1. Lack of organization
In bookkeeping problems and solutions, lack of organization may be one of the most frequent issues. For example, if a business owner takes on the task of balancing the books, they must have a secure location where they can keep all financial documents organized and categorized. Otherwise, they will end up losing receipts, missing or overlooking transactions, and reporting inaccurately.
Here are a few tips on how to maintain a proper bookkeeping system:
- Maintain a clear and easy-to-follow filing system for physical and digital documents.
- Categorize all documents correctly and logically.
- Update financial records regularly to ensure accuracy.
- Work consistently to avoid backlogs in data entry.
- Consider investing in accounting or bookkeeping software.
- Automate processes to minimize the chance of manual errors.
This will help you keep organized in bookkeeping and improve efficiency in your internal processes by ensuring accuracy.
2. Inconsistent account reconciliation
Reconciling accounts is one of the most basic jobs of bookkeeping. A good rule of thumb is to reconcile accounts at least once a month. Failure to reconcile accounts regularly can create bottlenecks and financial problems.
Reconciliation is a must for every business. It ascertains accuracy, giving the most precise portrayal of your company’s financial status. Moreover, reconciliation identifies potential errors or discrepancies in reporting. Identifying these errors at an early stage gives business owners a chance to solve any problems that might occur.
Here’s a quick guide to proper reconciliation:
- Gather all the records: bank statements, accounts receivable and payable.
- Compare transactions, reviewing both your bookkeeper’s records and external statements.
- Identify and explore any mistakes or problems that come up.
- Based on your reconciliation findings, make the necessary adjustments and updates in your financial records.
- Document all findings from the reconciliation process in detail. These records may be needed for future reference or auditing purposes.
Reconciling your business’s bank statements once a month is one of the best ways to reduce errors and spot any problems before they start blowing out of proportion.
3. Inadequate record keeping
Two of the most important tasks that bookkeepers sometimes involve to some extent include keeping a record of a company’s finances. No matter how small, each expense setting is entitled to be documented and recorded in the reports. In this way, a business can get through numerous tax laws to watch and maintain business-finance coordination as an organization.
Failure to keep efficient records may cause crucial issues like; – flawed financial statements – difficulties in auditing – and poor clarity on a business entity’s financial status. All these results can be compounded by poor decision-making where a leader is involved.
Managing the organization of financial matters is likely to prove problematic for new ringers. Here are some tips to help business leaders ensure sufficient record-keeping:
- Ensure finance records all that happens in the financial book respectively.
- Daily all the money received and spent should be recorded with details.
- It is necessary to keep all receipts for all company transactions including petty cash receipts.
- It is necessary to establish an effective way of sorting out all receipts and documents.
- There is nothing more efficient than using various applications and software to speed up work.
- It is important to ensure that financial data is backed up in order to minimize data losses.
To ensure that their books of accounts are proper, every business requires good bookkeeping. To an extent, the precision of records is mostly referred to as the foundation of good bookkeeping. The most accurate and detailed record will now keep your company in the best financial health possible by hiring a bookkeeper.
4. Commingle Business and Personal Expenses
Messing personal and professional accounts can become a very dreadful thing very soon. Combining the expenses is beneficial only for complicating the ability to organize personal and business transactions. This becomes a greater problem if your business is audited as part of OLPC from the business perspective.
That is why one of the basic guidelines to follow especially when beginning bookkeeping is never to use your own money to meet business expenses. Instead, consider these tips:
- The next step is to obtain a small business credit card.
- All business-related transactions in such a venture should be conducted, and all monies should be deposited in a separate business account.
- This is important in that the two namely business bank cards and personal bank cards should be easily distinguishable from each other.
- Business bank statements should also be made easily retrievable.
In such an organization, it becomes more complex to justify expenditure since aspects of personal and business expenditure may be intertwined. By doing this you will avoid a common mistake which is having your books have incorrect records and not well arranged.
5. Inefficient categorization of expenditure
Balancing the books is important and organization when it comes to this is imperative, and a chart of accounts helps. In accounting, a chart of accounts is generally described as a list containing all the accounts in an enterprise with their reference numbers. This list is divided into subheadings including, assets, liabilities, equity, revenues, and expenses.
Managing your chart of accounts is very important. Misclassifying expenses and mere transactions is a setup for a disaster if I may say so. In addition, various transactions may be classified wrongly resulting in wrong account balances. Various mistakes are made while categorizing the expenses and they include; ever creating two categories or over-categorizing the expenses whereby the same expense is placed under two or more categories it belongs to or categorizing the wrong expense whereby a certain expense is placed in the wrong category when categorizing.
Here are some best practices to help business owners accurately categorize transactions:
- Ensure there are clear well-defined accounts in an account numbering scheme or list.
- Both concepts need frequent review and updating of their identified categories.
- Ensure that bookkeeping staff who categorize your expenditures know the right procedure to follow.
- Consider the software for accounting that makes specific processes.
When all the presented categories are kept in order and the best practices listed above are followed, companies avoid inaccuracy of their financial statements.
6. Not backing up financial data
It is always advisable to copy all the information of your company which is in any financial nature. This might render your company vulnerable to losing important data if the right steps aren’t followed. A recent loss of personal data, including financial records, can bring to a complete halt in the functioning of your company and also give rise to compliance concerns.
This could be offset, not to say eliminated, with proper data back-ups on cloud solutions as a regular practice. Cloud-based solutions are flexible; therefore, a person can obtain the data described from any part of the world. These services also have developed security features for protecting the company’s important information and documents.
As one of the most effective means of data safety and no errors, data backup through a cloud solution may be recommended on a regular basis.
7. Ignoring financial statements
Balance sheets and their brethren also provide you with further insight of your business’s financial structure. Failing to read or pay attention to such statements dooms your firm for failure in the business world. For instance, you might fail to identify a way to make some added revenue or avoid a lost tax advantage.
In a nutshell, it will be found that financial statements can be alluring to your company on several counts. For example, such statements can help business owners:
- Stick to a budget
- Monitor financial trends
- Apply for bank loans
- Track spending
- Find ways to cut costs
It is often felt that the use of financial statements might help the business’s leaders to make better financial decisions when operating their business. In addition, a variety of accounting services include preparing accounts for the business owners to have a view of the above statements. If you are not sure on how to read financial statements then an accountant or bookkeeper would be a perfect addition to the team.
8. Forgetting to save receipts
Besides, it is always required to keep the receipts no matter the price level in proper accounting. Small receipts may act in such capacity by providing proof or backing up the company’s core transactions. These receipts will be very useful for bookkeepers and accountants to produce the company’s tax returns and to claim the amount or percentage of those expenditures to be deducted.
The best practice that should be followed is to keep the receipts for at least seven years. You can also save physical copies of receipts if that is necessary. On the other hand, receipts can also be stored in an electronic form. Coz believe it or not there are many apps an online tools to store your receipts safely.
9. Demoting an employee:
An erroneous classification of employees can lead to a number of possible tax penalties and even lawsuits. That is the reason that the correct classification of employees is needed. For example, you can include your employees into full-time employees, part-time employees, independent contractors, freelancers, and consultants. If you are unsure whether a certain member of your team is an employee or a contractor, ask yourself the following questions: What are they paid? Is this worker entitled to benefits? Would the company of this worker be paying taxes for him or her? The obvious annual pay is complemented with other perks such as; Employee Benefits and Taxes are also deducted. Also, employees are usually bound by a working regimen that has been provided to them by their employer. Independent contractors, as opposed to the former, are paid according to the work done and requested by the business. These workers provide taxes and work, contrary to schedules they set for themselves. Freelancers are classified as ‘‘self-employed’’ under the IRS’s rules. It is very important to well categorize employees because in bookkeeping for small businesses, it is very crucial. For instance, when one misclassifies a full-time employee as a contractor, this not only messes up your books but has far worse implications. In fact an employee can be classified in the wrong line of work which attracts various fines from the IRS.
10. Excluding small change amount transactions:
While most business transactions should be processed through business bank accounts, it should be advisable to have some cash in the office for such incidental uses as reimbursement for small unavoidable official expenditures. Working capital or petty cash is referred to as an amount of money that can be used to buy some small items. Although such money may vary from company to company the said funds are intended to cater for any expenditure normal or otherwise that may be incurred.
One of the common bookkeeping mistakes is overlooking or ignoring your business’s petty cash transactions. Whatever form the funds are withdrawn in, the transaction needs to be put down in the books to avoid any problems.
The way these bookkeeping problems and solutions are brought under control, especially with the use of a petty cash box, is a good practice for avoiding errors. Every time money is withdrawn from the petty cash box, record both the amount taken and the purpose of the expense. It is also very important to save receipts for all transactions made in petty cash.
11. Not staying up-to-date on tax laws and regulations
As a business owner or bookkeeper, it is important to keep up to date with tax laws and federal regulations. The failure to adhere to these requirements leads to penalties or fines being imposed as demonstrated amply by the following examples: Staying abreast of changes in the tax laws and federal regulations will help your business to stay on the right side of the law as well as produce more accurate financial statements. Outdated tax laws can lead you not to take advantage of certain deductions that may exist and they can put the health of the company at risk. Thankfully, most accounting services are more than willing to communicate to you such changes and how the accounting processes of your company can be adjusted to implement them. This could also be done via training sessions with representatives from your business once every quarter, tax professionals once every year, and annual reviews of taxes to keep your business informed of tax changes while remaining in compliance.
12. Relying on manual processes
While on the manual mode, where some of the accounting processes may sound very simple most of the time, such processes become a thorn in the side of bookkeeping for small businesses. While relying mostly on manual means of bookkeeping, your firm can face the chance of having various limitations and errors. Keying in data manually can be very slow and also tiresome. Furthermore, this practice is very vulnerable to errors because most spreadsheet programs do not have functionality that would let them notice that one has typed in a wrong figure. The implementation of conventional accounting software programs thus can be a better option in today’s world.
Some benefits of accounting technology and software include:
- Task automation
- Improved accuracy
- Streamlined financial management
- Real-time financial data and intelligence
The choice of the right software does depend on your business’s unique needs. However, it is best to focus on integration capabilities, security measures, and user experience. Transitioning to accounting software helps companies avoid errors, improves accuracy in reporting, and simplifies the process exponentially.
