Bookkeeping might not be the most glamorous part of running a business, but it’s definitely one of the most important.
Good bookkeeping helps you:
- Prevent cash flow issues
- Avoid tax issues and increase tax benefits
- Create more accurate financial forecasting
- Develop plans to grow your business and increase profit
- Decrease the stress of running a business
It’s good business to keep good books.
Yet, there are a lot of mistakes that can make your books inaccurate or ineffective. Let’s look at some of the most common bookkeeping mistakes small businesses make and how you can avoid them to keep the most accurate financial records for your business.
10 Common Bookkeeping Mistakes
#1) Combining personal and business expenses.
When you start a new business, it can be easy to mix up expenses from your personal and business life, but this can create a lot of issues in your bookkeeping. When you blur business and personal expenses, it makes it difficult to monitor business expenses and audit your books. To keep your finances separate, open a checking account and credit card that are for business use only.
#2) Misunderstanding sales tax obligations.
A common bookkeeping mistake is failing to collect, report, and account for sales tax. Sales tax can be a complex issue as rules differ in each state. Planning ahead and understanding sales tax obligations will prevent large, surprise tax bills and income discrepancies in your books. This task is especially important for e-commerce businesses selling products to people across the country or the world.
Related: The 10 Tax Mistakes You Don’t Want Your Small Business to Make
#3) Not tracking all of your expenses.
When you are running a business, you have a lot of things on your mind. So it can be easy to forget or overlook expenses and fail to enter them into your accounting system. But this habit can lead to fewer expenses and a higher taxable income. Create a system for entering all expenses. Even small expenses can add up over the year and make a difference in your books.
Related: These 6 Small Business Tax Deductions Are Overlooked Too Often
#4) Throwing away or not saving receipts.
Just as it can be easy to forget about entering expenses, it can be just as easy to throw away the receipts when you make a purchase for your business. Many small businesses fail to hold onto their receipts. But, keeping receipts can be incredibly helpful if you have accounting discrepancies or are audited. Get in the habit of saving paper receipts and creating files for digital receipts.
#5) Improper categorization.
When you enter expenses and income into your accounting systems, you add categories to define the type of transaction. Failing to properly categorize these expenses is another common bookkeeping mistake. Using the wrong categories can prevent accurate profit measurement and negatively impact your taxes. Make sure you are using the right categories for income and expenses.
#6) Misclassifying hired help.
Another classification bookkeeping mistake relates to your team. When you hire help for your small business, you must classify the type of working relationship. Learn the difference between independent contractors, vendors, and employees so you can pay the appropriate taxes and file the required tax documentation for each type of hired help.
#7) Poor petty cash management.
When you or someone on your team needs to make a small purchase, it can help to have petty cash available. But a failure to manage this “bank” is a common bookkeeping mistake. To avoid petty cash issues, assign a dedicated custodian who manages the cash account, keeps receipts, and takes out money to refill the petty cash bank.
#8) Failing to reconcile bank statements.
With so much going on, a business owner can easily overlook and deprioritize the task of reconciling bank statements. But, comparing your books to your bank statements is an essential bookkeeping task. Every month, you should match up your statements and books to look for:
- Expenses that weren’t entered
- Income that was recorded but not deposited
- Errors in income or expense amounts
#9) Relying too heavily on accounting software.
Another common bookkeeping mistake that happens when business owners have too much on their plate is relying too heavily on accounting software. It can be easy to fall back on automated accounting tasks, but you (or even better, a trained bookkeeper or accountant) should always perform regular audits in your accounting software to check for errors and inaccuracies.
#10) Putting off bookkeeping tasks.
When you have a million and one things on your plate, bookkeeping might be the thing that keeps getting pushed to the side. But treating bookkeeping as an afterthought is one of the worst bookkeeping mistakes a small business can make. The longer you put off tasks like reconciliation, entering expenses, and auditing your accounts, the more work you will have later and the more potential problems you will have.
If you’re a business owner who doesn’t have the time to manage bookkeeping tasks, it’s time to hire someone else to take it over for you.
Related: The 8 Benefits of Outsourcing Your Accounting
How to Avoid Common Bookkeeping Mistakes
You can’t grow your business and increase profits without accurate bookkeeping. You need solid, reliable financial reports if you want to increase profitability, grow your business, and remove the stress of never knowing how much money is in the bank.
Use these tips to improve the accuracy of your bookkeeping. Or, talk to CFO2U about how we can take over this task for you.
Through our monthly bookkeeping services, CFO2U can assign a professional bookkeeper and accountant to take over the management of your books. Take accounting tasks off your plate. Keep better records. Talk to CFO2U about outsourcing your bookkeeping today. Schedule a call with our team to learn more and get started.
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