Take a break from worrying about possible mistakes in your financial records. For entrepreneurs, encountering some bookkeeping kinks as they become acquainted with the financial facets of managing a firm is almost a given.
The bright side? The majority of bookkeeping errors are easily fixed, especially if you catch them early.
We’ve included the most common bookkeeping errors we see below, along with advice on how to avoid them. Let’s get started and give you the tools you need to maintain the accuracy and timeliness of your books.
The Drawbacks of Compromising in Bookkeeping
Entering the world of bookkeeping without a well-thought-out plan is akin to traveling without a map.
Entrepreneurs frequently rely on guesswork, which over time builds up into a mountain of mistakes that must be corrected immediately when tax season rolls around. Misclassifying spending, missing out on tax deductions, and missing filing deadlines because of incomplete books are examples of common mistakes. Don’t worry if this seems familiar to you; we’re here to help you steer clear of these mistakes.
A word of caution: you are sure to run into problems if you base your financial records solely on conjecture.
For individuals who are unfamiliar with bookkeeping or experiencing confusion, a basic overview can be extremely beneficial. If the task appears too much to do, it may be time to think about getting professional assistance. Start by reading our advice on how to choose the best bookkeeper for your requirements.
Effectiveness of Your Accounting System
Many hours of wasted time can result from a bookkeeping system that is not tailored to the needs of your particular company.
Fortunately, this may be avoided. It is essential to create a customized chart of accounts from the beginning. If you find this setup to be overwhelming, a qualified bookkeeper or accountant can assist by:
- Adding personal touches to your chart of accounts
- Establishing your starting balances
- Advising you on the proper classification of expenses
- Supplying a bookkeeping checklist for consistent maintenance
The Hazards of Postponing
To be honest, aside from bookkeepers, most individuals don’t find bookkeeping to be the most exciting job. Postponing it until you’re inundated with invoices will only lead to catastrophe. Delaying bookkeeping can have the following effects:
- Forgetting transaction and payment details.
- Making financial reconciliation seem like a monumental undertaking.
- Failing to keep track of expenses that are tax deductible.
- Not having enough time to fix mistakes before they get worse.
- Deciding on commercial matters using out-of-date financial data.
- Maintaining your books on a regular basis will help you avoid these problems; at the very least, do it once a month, once a week for greater control, or even daily for high-volume activities.
Bringing in a professional bookkeeper is usually important when daily reconciliation becomes necessary.
Simplifying Your Financial Situation: Avoiding Typical Errors
Keeping Personal and Company Finances Apart
Have you ever had to use your personal card to pay for a business lunch because your business card was out of reach?
Although it may appear like a quick remedy, combining your personal and corporate funds can make bookkeeping and tax preparation more difficult and make financial management look like a complex puzzle. More importantly, it can compromise your legal defense in the event that your company is audited or suffers legal issues.
Make a distinct distinction between personal and company expenses a non-negotiable regulation in order to avoid this conundrum.
This is how to make things simple:
- Make use of a specific business bank account for all commercial dealings.
- Keep a business credit card on hand for any expenses relating to your job.
- To prevent confusion with personal cards, mark your business cards.
- Keep some money set aside in your business account as a contingency to cover unforeseen costs without using personal assets.
- If you unintentionally use the wrong card, it’s not a catastrophe—you can make up for it by paying your company back or recording it as a “Owner’s Draw.” But because prevention is so easy, why cause needless trouble?
Recognizing the Information in Your Financial Statements
Your company’s financial statements serve as a financial health check, highlighting both its current situation and future growth prospects.
Missing out on important insights for increasing income and avoiding financial dangers results from ignoring these documents or from not knowing how to interpret them. With the use of financial statements, you can:
- Carefully monitor cash flow.
- Respect your spending plan.
- Determine prospects for tax deductions.
- For loan applications, bolster your position.
- Recognize patterns in your finances and decide whether to save or spend wisely.
- Present the success of your company to possible investors.
Do you lack experience interpreting financial statements? It’s time to put that right. Explore resources for comprehending financial reports, and don’t be afraid to ask your CPA for assistance if you want more in-depth knowledge.
Keeping Your Receipts
It might not seem like a big deal to lose your receipts or throw them away, but wait until you’re audited and you have no documentation of your deductions. This error may result in penalties in addition to nullifying your claimed deductions.
Crucial details for handling receipts:
- Receipts in digital format are acceptable.
- If you are audited, be ready to provide receipts.
- Keep receipts for seven years for safety purposes.
- Utilize your smartphone to scan and digitally store receipts, then store them in your accounting software or on cloud storage services like Dropbox or Google Drive. Keep track of every spending, especially for meals and entertainment, so that you can easily retrieve the information and support any deductions made during audits.
The Dangers of Insufficiently Skilled Bookkeepers
Choosing a cheap bookkeeper could appear economical at first, but you won’t understand how much inexperience actually costs. That deal you saw from an internet classified ad might not provide your company with the efficiency or industry-specific knowledge it needs. Invest in a bookkeeper with industry experience; they will improve your financial management with their vital insights and efficiency.
Want assistance locating the ideal fit? Explore resources such as our article on selecting the best bookkeeper for your small company.
How Important a CPA Is
It is imperative for individuals who want to grow their business to work with a Certified Public Accountant (CPA).
A knowledgeable CPA may help you with tax deductions, strategic year-end financial planning, sales tax obligations clarification, audit support, and financial growth strategies. It’s time to bring in an expert if you don’t feel completely comfortable handling these areas on your own.
Additionally, bear in mind that CPA fees are higher for ongoing bookkeeping duties than they are for strategic guidance and tax planning, so keep your bookkeeping and CPA services separate.
Payments to and from the Owner’s Funds: Doing It Correctly
- Owner’s Drawings: If you pay yourself incorrectly as a lone entrepreneur, it might cloud your financial picture. If you classify these payments as company expenses, your tax responsibilities and profit margins will be distorted. Assign these transactions to a “Owner’s Draw” equity account instead.
- Managing Changes: Transferring money between accounts, like from PayPal to your business checking account, might cause accounting software to incorrectly indicate higher income than it actually is. To keep correct financial records, make sure these moves are documented as transfers rather than revenue.
Keeping Up with Sales Tax
Whether you find sales tax confusing or not, it is imperative that you comprehend and manage it. Tax authorities do not care about your comprehension level; they just want sales tax payments that are precise and submitted on time. You can avoid unforeseen debts during tax season by speaking with a CPA as soon as possible to understand your sales tax responsibilities. A trustworthy CPA will help ensure that sales tax is collected, filed, and deadlines are met.
Accurately Recognizing the Members of Your Team
Making the critical decision of whether your new hire is an employee or an independent contractor is more than just an accounting error. Because misclassification affects taxes and required documentation, it can result in substantial fines from the IRS.
The IRS keeps a close eye on this area because some companies may purposefully misclassify workers as contractors in order to avoid paying taxes.
Arm yourself with knowledge to make sure you’re on the right side of tax regulations and traverse this treacherous terrain. Examine materials such as “Employee vs. Independent Contractor: How to Classify Your Employees” to ensure that the workers in your organization are accurately classified.