Accounting is a tedious and often stressful task for business owners. When working on the bookkeeping for a business, mistakes can occur if it is not completed meticulously. When a bookkeeping mistake happens, it provides inaccurate financial data about the company’s finances and may lead to poor business decisions. Accounting errors can also lead to serious budget problems. The guide below provides insight on seven common deadly sins of bookkeeping and how to avoid them.
1. Not Keeping Track Of Receipts
Business owners are sometimes not aware of the importance of keeping their business receipts for accounting purposes. Receipts are crucial evidence that can support tax write-offs to the IRS. Without a receipt, a business may not be able to claim an expense on its tax return. Consider scanning all receipts into the computer as well as keeping the original copy locked in a file cabinet for safekeeping.
2. Inaccurately Logging Major Purchases
Business owners can miss out on several critical tax deductions due to inaccurately logging major merchandise or equipment purchases. The type of tax deduction for business overhead purchases differs depending on the lifespan of the equipment or merchandise of business purchases. For instance, printer paper and ink cartridges are typically categorized as office supplies and immediately written off during the year they are purchased. However, major equipment purchases such as copy machines and office computers can be allocated as long-term assets. The major purchases value can be depreciated over the years as long as the merchandise is still usable.
3. Mixing Business and Personal Finances
When starting a new business, it may be convenient to mix business and personal finances together. However, it is essential to keep all finances for personal and business separate. Business banking accounts should also be separate from personal accounts to avoid inadvertently intermingling finances. Keeping the accounts separate will avoid reporting of inaccurate information, which can lead to an audit by the Internal Revenue Service.
4. Lack of Implementing an Earnings Management Strategy
One common mistake business owners make is taking money from one account and using it for another without reporting and allocating the funds correctly. Bookkeeping and appropriate reporting of cash allocation for investments, expenses and savings is essential to keeping an accurate financial profile and budgeting strategy. The earnings management strategy a business develops should determine the amount of profit a business should reinvest back into the company, payments of large expenses and cash flow needed. The long-term strategy will also enable a business to determine how to allocate cash to each business account.
5. Inaccurate Financial Reports
Inaccurate recording of assets and expenses can lead to inaccuracies within the financial reports. The accountant or bookkeeper should be able to determine the correct business accounting method to use in order to correctly allocate the flow of cash. The cash accounting method is the simpler one because it is used to show the actual distribution of cash that goes into and out of the business. The accrual account method documents income and expenses immediately, rather than waiting until cash is actually exchanged.
6. Allowing Multiple Administrative Access to Accounts
Business owners should never give administrative access to their accounting files to another person. There should be separate access for each person with their own username and password. The individual employee access will provide information on who access the files at any given time and limit the type of access they have within the accounting system.
7. Lack of Multiple File Backup Methods
Many business owners are now relying on the use of cloud computing as a backup for their data and financial information. Although the “paperless” idea is considered environmentally friendly, it may not be advantageous for business information. In short, consider keeping records both online and offline in case data is lost or files have been destroyed.
In order to have a firm grasp of a business’s finances, it is essential to understand the meaning of each account. Consider working with a professional bookkeeping service to determine which procedures and methods are best.