Bookkeeping serves as a foundation for sound financial decision making and planning and therefore it is essential that financial records are kept up-to-date. Some businesses procrastinate the mundane process of maintaining financial records because it involves a lot of time and effort. When this happens, it is better to find a bookkeeper so that you can get more time to concentrate on core business activities. Some common bookkeeping mistakes that can be avoided by paying more attention are as follows:
Inaccurate Record Keeping
Business managers can lose important receipts or ignore small expenses that seem insignificant to them and this can hinder proper maintenance of records. When its time to file tax returns or close accounts at the end of the financial year, it results in a loss of both time and money. In case of an IRS audit, you will not have the necessary documentation required for proper tax measures and this can result in fines and other expenditures when dealing with the auditor.
Wrong Categorization of Expenditures
For those of you who are not aware of bookkeeping methods and procedures, it easy to feed the wrong amounts into wrong accounts. When this happens, it is likely that income and expense accounts have the wrong balances and this could result in overvalued or undervalued profits and tax payments.
Mismanaging Liabilities and Receivables
Account receivables and payables must be properly recognized and dealt with otherwise they can result in inaccurate profit figures that depict poor cash flow planning. Separate accounts should be created for credit sales and prepaid expenses for proper tallying of accounts at closing.
Transactions Recorded In the Wrong Period
Sometimes lack of bookkeeping experience results in current transactions entered into previous reporting periods after financial statements have been generated. The resulting errors can complicate reconciliations and create a false picture of the financial position of a business.
Ignoring Bank Reconciliations
When you are engaged in a business, it is essential that personal accounts and bank accounts are kept separate to avoid confusions. Moreover, financial records should be updated and reconciled with any external records such as bank statements on a regular basis. If this is not done, it results in errors and chances of fraudulent practices rise.
Not Keeping Data Backups
Businesses rely heavily on technology in today’s world and with software and privacy issues on the rise, it is essential that backup is maintained of all the important information related to the business. System failures or crashes can result in a loss of important information which can be deleterious to your business’s health. It is better to be prepared for such unfortunate circumstances by keeping updated backups on an offsite location.
Keeping Employee Categories Separate
With increased dependence on contractual employees, it is essential that separate records are maintained for different employee categories. With accurate classifications and cost allocations, workers’ compensation, insurance payments and tax payments will not be wrongly computed.
Petty Cash Mismanagement
All businesses have small amounts of cash that have no ‘attached’ explanations. This petty cash can be properly managed when there is a system in place to keep track of cash transactions.
Losing track of Reimbursable Expenses
Sometimes, business owners pay for certain expenses out of their personal funds but fail to record them because of a lack of such a system. This can accumulate to profit losses and tax deductions that would otherwise have not happened. With a proper company policy to keep track of legitimate business expense claims, these expense claims can be reimbursed.
Find a bookkeeper who can prevent such mistakes so that you can effectively and successfully manage your business.
Anthony Azevedo, CPA is the managing member of EZCFO a bookkeeping company specializing in human resource, payroll, and employer solutions.
- Proper Bookkeeping for a Solid Business Future (2008taxes.org)
Common Bookkeeping Mistakes That Weigh Down On Business Profits