If you're a small business owner that does your business bookkeeping, I have a lot of respect for you. You're probably one of those curious people who enjoy learning how things work. Or maybe you find it valuable to understand the process.
Anyone who has ventured outside of their lane of expertise has probably felt a tinge of fear that they're doing something wrong. And if their error were to reveal itself, would it be a quick-and-easy fix, or will course correction come at a colossal cost?
Accounting errors can end up being costly if you don't catch them right away. And if you gloss over them, you run the risk of filing incorrect tax returns, which, if uncovered in an audit can cost you a lot in time and money.
Here are the seven most common bookkeeping mistakes I see clients make.
Mistake 1: Mixing business and personal
I've met a lot of people who pardon themselves when it comes to mixing their business and personal finances. If they use any bookkeeping software to keep track of their expenses and income, they're under this impression that it's OK to commingle.
Here's the thing about commingling: you're creating more work for yourself, which means you're wasting your precious time on earth doing bookkeeping. And you're increasing the chances of making a mistake. If you have more transactions to keep track of, there are more chances for errors.
Quit playing yourself and separate your business and personal finances.
Mistake 2: Missing transactions
Missing transactions happen. Sometimes the data feed from your bank to your bookkeeping software gets disconnected, and a transaction might not get recorded. Or you could accidentally delete a transaction that you thought was a duplicate. You can also accidentally duplicate already recorded transactions.
Missing transactions can create errors in your records. And errors in your reports mean that your data is incorrect. You don't want to be making business decisions with inaccurate data.
Mistake 3: Falling behind
If you're a small business owner who does their own bookkeeping - in addition to everything else - it's easy to gloss over the bookkeeping piece. It's easy to tell yourself you'll deal with the books later. But if you don't keep up with making sure your records are accurate, then you're trying to run a business without having your eyes on the right data. You're flying blind.
Mistake 4: Missing or incorrect adjustments
With accrual-based accounting, you'll need to add adjustments at the end of the year, month, or quarter. Adjustments ensure that your reporting accurately accounts for the revenue and expenses for that period. With DIY bookkeeping, it's not uncommon to forget to add these adjustments.
Here are a few frequent adjustments that a lot of folks overlook or enter incorrectly.
The first is if you have a small business loan where your payments are broken down between principal and interest. You'll want to make sure you enter adjustments so that your loan balance is correct, and you're keeping track of how much interest you've paid.
Entering payroll can be complicated too. Multiple adjustments may need to be made to account for the employer and employee tax deductions from an employee's gross pay.
And lastly, adjustments for recording merchant fees. Let's say you have revenue of $2,000 from a photoshoot that you processed through Stripe. After the processing fee, your income is $1,940. You'll need to create an adjustment to record the total amount you earned revenue and the merchant fee you paid.
Mistake 5: Not reconciling your accounts every month
Reconciliation of your bank accounts, credit cards, and loans is one of the most basic accounting procedures. It's critical because it's a way to make sure your balances match. If your balances don't match the bank, credit card, or loan statement, then that means there is an error somewhere.
You want to do this every month to ensure that your records are accurate from month to month. If they're off, making business decisions and potentially paying quarterly taxes or sales taxes based on inaccurate data.
Mistake 6: Having an incorrect chart of accounts
The chart of accounts is the list of categories your business will use to record revenue, assets, liabilities, receivables, and operating expenses. It's critical to set this up correctly because of how the list interacts with your financial statements. If you incorrectly categorize an expense as an asset, your financial reporting will be thrown off.
Setting up a chart of accounts might seem easy, but if you don't have any accounting experience, you're boldly going into a territory where there are a lot of unknown unknowns for your to discover. You'll often save more time and money if you have an experienced professional help you.
Mistake 7: Trying to figure it out on your own instead of bringing in an expert
Bookkeeping is not for everyone. Are you good at something that not everyone else is great at? Maybe you're a graphic designer who is excellent at navigating Adobe Illustrator. You know the shortcuts, you've created hotkeys, you're fluent. Not only are you excellent at navigating the tool of the program, you understand the fundamentals of design. You've been doing this for ten years, which means you've made a lot of mistakes. All those mistakes and all your experience have shaped your skills at executing a design.
An experienced bookkeeper has the experience. They've built their skills, they understand the fundamentals, and they've made the mistakes so that you don't have to.
If you're looking for a bookkeeping expert, we're here to help. Drop us a line. We're now offering fixed-rate pricing.