Bookkeeping. It’s tracking your money. Knowing where it’s coming from and where it’s going. It’s knowing what expense account you should assign each charge to and reconciling the books. For most small business owners and entrepreneurs, it’s a tedious and mundane task that can take up hours and hours of time and is nothing more than a necessary evil. It’s all too common to make bookkeeping mistakes. This is why most small business owners don’t keep their finances up to date on a monthly, (or, *gasp,* quarterly), basis.
As mundane as it may appear, bookkeeping is actually your biggest secret weapon when it comes to business management and growth. You’ll need to consult your financial records while planning for the future, making important decisions, and preparing your taxes or for audit.
But it only works with accurate and consistent measurement of your company’s financials.
If your Quickbooks program is riddled with bookkeeping mistakes, you’ll base your business decisions on inaccurate information:
Garbage in, garbage out. If you have a dysfunctional process then good decisions occur only by accident. A functional, open and honest process will lead to many good decisions.
– Mark Swanger
Because of the absolute need for accurate financials most companies work with expert bookkeepers like we have at Ingenium, but the duty might fall to you if you own a bootstrapped business. It’s perfectly fine to be your own personal bookkeeper when your business is getting off the ground. But you need to make sure things are done correctly, so your books reflect your actual financial situation. Here are some common bookkeeping mistakes and tips on how to avoid them.
11 Common Bookkeeping Mistakes and Tips on How to Avoid Them
1. Combining business and personal expenses
If you’ve organized your finances and set up business accounts separate from your personal accounts, you shouldn’t have any business transactions flowing through your personal accounts, and you shouldn’t have any personal transactions flowing through your business accounts. This is actually a requirement if your business is organized as an LLC or corporation, but you should really do it even as a sole proprietor. That said, virtually all business owners do it: we forget and swipe the wrong credit card at some point or another. No worries. Maintain a good practice of reimbursement whenever it happens, or ensure that your books clearly identify personal expenses as Owner Draw or Shareholder Distributions rather than business expenses.
Combining accounts makes for sloppy bookkeeping because you will have to sort out all of these transactions later on. You may even lose track of business expenses, which could cause you to miss out on valuable tax write-offs.
2. Improper or poor record keeping (like throwing away receipts)
Getting rid of receipts is acceptable for most personal purchases, but holding onto receipts from business expenses is essential.
If you keep your receipts, you (or your bookkeeper) can easily include all your expenses for that year when doing your taxes. You can also use your receipts to make sure you’re categorizing your expenses correctly (see our next point). Furthermore, if the IRS decides to question your return, you’ll have all the necessary documentation to prove that your expense write-offs are accurate. Best practice per the IRS is that receipts be kept for all expenses $75 and above, but all receipts for lodging expenses should be kept regardless of amount.
3. Improperly categorizing income or expenses
If you or someone you have hired doesn’t have knowledge of formal bookkeeping practices, this can become a problem. This can occur through typing errors, a lack of understanding regarding expense types, or failing to categorize expenses at all. Accurately tracking income and expenses in the correct categories ensures proper measurement of profitability. Knowing the different tax treatments of each income and expense category can result in significant tax savings, as well.
Here’s how you avoid this bookkeeping mistake: Make sure to re-evaluate your expense categories regularly, update them if needed, and always double-check your work. If this responsibility becomes too overwhelming or confusing, contact a professional bookkeeper or accountant for help. This is what we do.
4. Failing to track reimbursable expenses
Many small business owners pay for expenses out of their personal funds. As time passes, there is increased risk that these expenses get overlooked. Failure to account for reimbursable expenses can result in lost money, lost tax deductions, and an inaccurate financial overview. Create a policy to make it easy for the company to easily and consistently track and record reimbursable expenses.
5. Not reconciling bank statements and accounts (regularly)
Reconciliation is the process of lining up your books with your bank statement. It consists of accounting for any differences between your bank transactions and your books. We saw in point number one that not having separate bank accounts for personal and business activities can become an issue. If you are audited, you may need to provide complete records of business-related activities that are separate from your personal expenses.
The goal is to keep your books up-to-date, so you understand your financial situation. It’s generally good practice to reconcile monthly, to minimize errors and identify potential issues. The longer you go between reconciliations, the more difficult it may be to maintain an accurate picture of your business’s finances.
6. Not securing data backups
This is a critical bookkeeping mistake. If you choose to go with paper records, consider buying a filing cabinet or a file box that can accommodate your organizational system. If you decide to go with a digital filing system, Evernote can organize your files, with tags pertaining to various types of records. QuickBooks Online allows you to attach documentation directly to your transactions, your customer and vendor records, etc.
Finally, be sure to keep your records separate by year, (Evernote makes this as simple as adding a year tag to your record). We recommend Egnyte for secure document storage.
Now that you’ve organized your data, it’s important to note we live in a world of heavy technology dependance where issues can suddenly arise. There is always a chance that something could happen to your data, and you need to be prepared. It’s important for every business to back up their data to avoid potential losses.
7. Neglecting sales tax
Whoops. Oversight in collection and reporting of sales taxes can result in significant fines and penalties. Yet despite those heavy fines and penalties, many businesses fail to report sales tax and not accounting for it is a common error in bookkeeping. (Alternatively, incorrect data entry may result in a higher total sales amount and overstated sales taxes due).
8. Not classifying employees correctly
Businesses often have a combination of both employees and independent contractors. Make sure these are properly classified to avoid misfiling and under- or over-paying taxes.
9. Bad or inappropriate petty cash management
Business owners often operate with a small amount of petty cash, but they have little or no knowledge of how to track it. Avoid this bookkeeping mistake by setting up a system which allows you to track the cash kept on hand for the business and what it is being used for. One way to start would be to buy a petty cash lock box from your local office supply store and obtain receipts for all disbursements.
10. Poor internal and external communication
It’s important to maintain good communication between the bookkeeper and company employees. Keep your bookkeeper involved and integrated with what’s going on inside the business. This helps the bookkeeper to create financial statements which reflect the true operational needs of your business.
11. Wasting too much time
If you want to expand your business, you’ll need to hand off the bookkeeping responsibilities sooner rather than later. As your company grows and increases in complexity, so does your bookkeeping. A professional bookkeeper will know what to record, how to record it, and most importantly, the accounting changes that affect a business on an ongoing basis.
As the business owner, your time is usually best spent on the business itself, not in the back office. Hiring a professional bookkeeper will help you focus on growing your business, save time, and avoid costly errors.
Hire a Professional Bookkeeper to Avoid Common Bookkeeping Mistakes
One way to relieve yourself from some bookkeeping work and common bookkeeping mistakes is to outsource the task altogether. It’s a smart investment to hire someone more specialized, who can dig into your books and give you proper advice and guidance. The bookkeeper you choose should be someone you can trust to help you grow your business. At Ingenium, we make sure your bookkeeping is accurate and organized. We can set you up with an easy-to-manage system so you stay up to date, or we can do it for you.
Accounting Services We Offer
- Set up your QuickBooks Online accounting software
- Set up your Chart of Accounts correctly
- Assign transactions to the right expense or income account, including splitting transactions between categories/classes/locations as needed
- Invoicing, A/R management, and first-party collections
- A/P bill processing and bill payment management
- Expense reporting management
- Inventory adjustments (for third-party inventory tracking systems)
- Reconcile your bank, loan, and credit card transactions at the end of each month
- Create financial reports so you can see the big picture
- Maintain your fixed asset registers (real property, improvements, vehicles, furniture, fixtures, and equipment)
- Maintain your Product & Service item list and fix issues with inventory/non-inventory items
- Complete your sales tax reconciliations and file sales tax returns
- State and local business tax account setup, filings, and issue resolution
- Annual Worker’s Comp audit
- Annual closing entries
- Annual budget process
- Annual business review
- Annual financial projections
- Foreign currency accounting
- Issue annual 1099s to subcontractors and other eligible vendors
- Manage an “accounting@” or “finance@” inbox for your company and give all of your internal and external stakeholders an excellent experience dealing with your “Accounting Department”
- Dedicated bookkeeper, supported by a team of other accounting professionals
- Dedicated project manager tracking all of the tasks associated with your account
- Dedicated accounting manager reviewing your financials in detail and providing quality control
- Dedicated payroll manager providing full-service payroll processing and support
- Support your paperless expense and receipt processing system
- Support your mileage app
- Support your external invoicing system and reconciling with QBO
- Support your payroll software and QBO integration or journal entry imports
- Support your point-of-sale system and process transactions as needed, especially refunds
- Support your CPA, auditor, and internal accounting staff
- Financial dashboarding
- WIP tracking
- Regular financial review calls
- Regular check-in calls regarding budget vs. actuals, A/P status, A/R status, etc.
- Cost control: expense monitoring, analysis, and advice
- Precision accounting with accruals and prepayments
- Unlimited accounting support by phone, email, and text
- Keep your sensitive data protected
- Proactive approach to capturing common tax deductions
If you are interested in QuickBooks services, we are QuickBooks Online Certified ProAdvisors, and can help you set up your account, train you on how to use it, and answer any questions you have.