Common Bookkeeping Mistakes That Weigh Down On Business Profits

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.

Some Weird Small Business Deductions

So, the holidays are over and you’re adding up your books (you’d BETTER be adding up your books-tax time is coming!). You know full well to add up your monthly income and common deductions like EI and CPP for your employees. But what are some deductions that you may have missed that could be costing hundreds of dollars? Here are some weird small business/self employed deductions that may never have occurred to you.

  • Cost of replacing materials. If you’re a writer/artist/photographer, etc and you need to buy new equipment, you can claim the new piece as a tax deduction. Even repairs can be deducted! Feel a little better about that new laptop now? (I know I do!)
  • Utilities/Telephone. If you work at home, you can claim a small percentage of your utility bills as business expenses (after all, you need power, heat and phone or internet to work!) Keep track of each bill because you may see a bit of it coming back to you.
  • Pet food. Did you know that if your animal is a service animal or are outdoor animals which guard your livelihood in some way, you may be able to deduct the cost of feeding the animals?
  • Child care. Even if you work at home and farm out the little monkey to a daycare or babysitter, you may be able to deduct the costs as a business expense so long as you worked while the kid was away.
  • Trips. If you headed off to a convention on entrepreneurship or on something related to your business, you may be able to deduct a good portion of your costs.
  • Transit passes. Don’t drive to see your clients but take the bus instead? Buy monthly passes, keep the receipts and claim them. Anyone can take advantage of this green friendly deductions, not just business owners.
  • Charity. Donating to others not only feels good, but can give you a good deduction come tax time.
  • Home maintenance. If you put in a new office for your business, new furniture, new plumbing, new power or something else that improves your business, you will be able to claim the expenses on your taxes. Neat huh?
  • Moving. If you’re moving to get closer to business opportunities, you can claim the move as a deduction. And don’t forget your pets! You can also claim expenses related to them such as pet carriers, vaccinations and having to pay deposits on hotel rooms
  • Erm… enhancements. That’s right, if you work in the… entertainment… business, you may be able to deduct a fairly busty amount from your taxes. But you have to show that the enhancements actually helped your work.

In short, keep receipts from anything even remotely related to your small or self-employed because you just never know when a small pile of minor expenses can add up to a solid deduction on your taxes this spring!  If you’re unsure, you could always ask a qualified Canadian accountant or even get more specialized and search through specialty regional websites for the exact thing you want such as Halifax tax planning.

Tips For Small Business Owners

For many sole traders or small businesses it can be difficult to find the time to maintain all paperwork on a regular basis, meaning a large amount of admin is left until it is absolutely necessary to sort out.

If this sounds like you, then you will need to make some changes to the way you work because the Inland Revenue  is set to investigate two million small businesses – slapping many with big fines if records have not been kept in order. Here are 5 tips to help your business in 2012…

Receipt
Receipt (Photo credit: BreakfastPirate)

1) Get organised, get in a routine and get sorted

Under the HM Revenue and Customs initiative ‘Business Records Checks’, small businesses and sole traders will be subject to inspection to ensure all paperwork and bookkeeping is up-to-date and correct. If they find that your business isn’t hitting their standards, you’ll be fined £3,000. And as the HMRC have been given a target of £600 million to hit over the next four years, you can be sure they won’t be taking a lenient approach when it comes to handing out fines.

Getting organised seems like an obvious first step, but if you’ve set your admin duties to one side for quite some time, you’ll have your work cut out! Admin is part of your business, so set some time aside either at the start or end of the week (or whenever your quiet period is) and focus on your paperwork and bookkeeping.

Consistency and routine are key to ensuring you stay on top of this task.

2) Keep all receipts

It is essential you keep all receipts so that you can back up business expenses. You could get 12 envelopes and write the name of each month on them and store your receipts according to when you purchased goods / paid bills. Alternatively, you could separate receipts according to source, for example ‘rent’, ‘tools and supplies’ ‘stationery’ ‘miscellaneous’.

This also applies to documentation for purchases you want to claim the VAT back on.

3) Bank and building society documentation

It’s easy to see a letter or statement from a bank or building society and think ‘I know what that is, I’ll open it later’ and before you know it, you have a stack of unopened letters to sort through. This is a habit you need to break – open the letter, check payment transactions are correct and file it away. It only takes a few minutes at the most and means you’ll save yourself a great deal of time and effort later on.

4) File your tax return on time

If you’ve kept paperwork up-to-date as outlined in the points above, you’ll find that filing your tax return will be much more straightforward to complete on time – helping you to avoid fines for being late.

5) Don’t throw anything away!

We’re not suggesting that you become a compulsive hoarder and never throw anything away; we simply mean that at the end of every tax year, you box away important financial documents like receipts, invoices and bank statements, and keep them safe in case you need them in the future. You should keep documentation of this sort for at least six years.

Dealing with Social Security Uncertainty

Recent reports published in Daily Finance suggest that the Social Security trust fund is going to begin its collapse around the year 2036. This means that you have about 24 years to adjust your planning and savings to compensate for this problem. This really is adequate time for most people to figure out how to make up the difference between what Social Security promises and what it will be able to deliver.

Tip #1 – Understand the Predictions

Before you panic you need to understand what the predictions about the Social Security trust fund are and how they will impact your retirement. First of all Social Security will still be paying out benefits after 2036. Chances are, however, that these benefits will be only about 70 to 80% of what is promised. If you are depending solely on Social Security as your retirement income then this is a bigger concern than if you were only depending upon it as a supplement to your other retirement income options.

Talk with Your Financial Advisor Now

The more time you have to make adjustments to your retirement planning the better your results will be. The best thing you can do right now is to meet with your financial planner or the advisor for your retirement plan. Talk about what you need to do to increase your final retirement fund balance so that it will cover what Social Security will not. When you talk with your financial advisor ask about your options and do not forget to tell him or her what your retirement goals are so they have a better idea about what strategies will work best for you.

Find New Sources of Retirement Income

For many people facing an uncertain financial future because of the problems associated with Social Security the idea of retirement is a fading dream. Many people will need to continue working well past retirement age to compensate for retirement fund scandals, financial hardships and other issues that have made saving for retirement problematic. If you enjoy work then finding a post-retirement position or business opportunity is not a bad thing, but an opportunity to have a second or third career.

There are many options that older adults have to make money during their retirement years. These options include acting as consultants to corporations, starting a new business and working part-time in a field that interests them. Finding post-retirement income will be a challenge, so it is important to start thinking of what you will do right now.

Citations:
  • Saletta, C. (2012). Ponzi scheme or not, Social Security can’t keep up the pace. Daily Finance.

J.R. Budnar, the author of this article, reports about about personal finances online.

Using Your 401k to Start a Business

Starting your own business allows you flexibility and control of your financial future.  While the thought of writing yourself a check from 401k funds to start a business may sound easy, there are several steps to consider while thoroughly reviewing the process.  There are tax penalties to understand and if your business doesn’t pan out as well as you had hoped, you could lose more than your retirement funds.

The use of additional resources such as a financial planner or a retirement plan administrator will help you review options.  You may have the option to roll over 401k funds into a corporate retirement account that allows you to invest in your business.

 

Because so many start-up businesses fail, many say it is not a wise decision to use retirement monies to fund your venture.  Evaluating your risks will help you make an informed decision on using retirement funds.

Review the amount you have in your retirement account and determine whether or not to use all funds or just a portion.  For tax purposes of for your business, it may help to have a separate account to utilize your funds once you obtain them.  This also allows you to keep track of expenses. Upon requesting your 401k funds, a portion may be set aside for tax withholding before you obtain the amount you are requesting.

Your business opportunity should be something you enjoy and have plenty of knowledge about.  Starting a business may be the best opportunity to reinvent yourself and want to make sure things are executed in the best way possible to increase chances of your business being successful.  Additional tips to keep in mind when starting your business:

  • Certain aspects of starting a business may become complicated and if it does don’t be afraid to consult a lawyer or financial specialist. They can assist you throughout your business venture by making sure tax information is correct and provide additional business advice.
  • If you start a corporation using existing 401k funds, penalties fees may be waived.
  • Understand your market by conducting plenty of research, especially during a slow economy.
  • Look into courses and classes available for entrepreneurs.  The Small Business Administration has a wide range of business resources available.
  • If other people are involved in your business that is employees, make sure they are aware of changes during the process.  Make sure you have good communication before and after the business gets up and going.

Andrew writes frequently about personal finance as well as issues effecting both consumers and small businesses, covering everything from credit cards to mortgages to tax reduction.