6 Common Bookkeeping Errors

July 11th, 2011 by Doug Boswell

 

Since keeping a complete, accurate and up to date set of books on a company’s financial activity is the core of every business, it is important to recognize the most common mistakes made by small businesses. From cash flow problems to tax compliance issues, small errors can have big consequences. Below is a list of six of the most common problems I see which can and should be avoided.

1. Thinking that no Accounting System is Necessary
One big mistake made early on is especially common with start-ups. The neophyte business owner sometimes thinks they can make do without a real system. Instead of using software, like QuickBooks, the business owner just collects receipts in a box and/or keeps a check register by hand. Or maybe the owner creates the illusion of an system by using Excel to make lists of expenses and payments that add up the numbers. Unfortunately, before having your taxes done, the tax preparer needs to cobble together some sort of makeshift system that will allow your tax return to be prepared, but it almost surely won’t capture all your deductions. And the information that this crude system provides will be too late to help you make the “smart” decisions to run your business in the best possible manner.

2. Doing Your Own Books
The DIY approach is one of the biggest pitfalls I see from business owners and managers. QuickBooks and other software programs essentially promise proficiency with just a few simple clicks. However, unless you are familiar with general principles, any software can be confusing and frustrating. You often end up spending a lot of time trying to figure out where you went wrong. Having a professional bookkeeper with the knowledge and skills necessary to complete your books quickly and accurately, and then analyze your financials, is crucial to small business success.

3. Slow Entry of Accounting Data
Most business owners intend to keep their system up to date, but often they don’t. Taking too long to enter the data into your system creates a problem such that any useful insights that come from your financial numbers will come too late to be really useful. Whoever is doing your books should keep up to date on the data entry. Within a few days of transactions occurring, the system should reflect the activity

4. Inconsistent Reconciliation of the Books with the Bank Statements
One of the key elements of good bookkeeping is to consistently reconcile the books with the bank statements (and your business credit card and other statements too). Many businesses either fail to or improperly reconcile on a regular basis. A major benefit of reconciling the bank statement is ensuring that the cash on a company’s books equals the amount of cash shown by the bank.

Errors will be made in using any system. But the nature of a double-entry bookkeeping system means that it’s usually pretty easy to catch errors as long as you reconcile the bank accounts at the end of each month when the statements arrive. Furthermore, if you hold other valuable assets like inventory or investments, you should periodically compare what the system shows to an actual physical inventory count, or to the statements you receive from external sources. Reconciling your books to your various statements is a kind of reality check that cleans up all sorts of easy-to-miss errors. This is important for all decisions made by the company and it is one of the best reasons for outsourcing your bookkeeping.

5. Incorrectly Tracking Expenses
In order to get the most accurate picture of your business, you need to properly track every business expense. A major issue with small businesses is forgetting to record reimbursable expenses. Often small business owners or managers make business purchases with a personal credit card. These purchases can get lost in the shuffle and consequentially not be submitted for reimbursement. Additionally, the owner may mislabel personal expenses as business deductions. Co-mingling personal and business assets and liabilities makes financial records and books pretty much useless for tax preparation and for use in managing the business.

6. Not Being in Close Contact with Your Bookkeeper
Bookkeepers are only as valuable as the information you give them. Unless you keep them current on all of your financial decisions and transactions, the accuracy of your books will suffer. It is the job of a professional bookkeeper to be able adapt to a surprise or an unexpected inflow of information.

Advertisement

1 comment

  1. Megan says:

    Great advice, thanks for sharing. Doing your own bookkeeping is fine as long as you can keep on top and do it regularly.

Leave a Reply