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.

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.

Riots Put Strain On The Finances of UK Cities

August was a time of civil unrest in cities including Manchester, Salford, Liverpool, Nottingham and Birmingham, with shops being looted and set ablaze. Victims of the riots sadly face a tough financial crisis as they try to restore the damage to their businesses and properties while at the same time trying to recover loss of earnings and stock.

The Head of Media at British Retail Consortium had expressed concern that all the damages to shops and homes caused by the rioting and looting could hit the £1 million mark. It’s feared that many will no longer want to trade again as they know the police will not be able to protect them because of the lack of control they had over the hoodlums.

The British government may have to leverage £100 million on UK taxpayers in the coming years to help restore London. At the same time London Metropolitan Police will also shoulder the insurance to people who were affected by the mayhem. The Riots (Damages) Act of 1886 specifically dictates that if the nature of the destruction is caused by riots sparked by the peoples’ resentment against the government, then the police will have to compensate the affected ones.

Local City Councils are providing the following help to those who were affected:

Local Business Support
If you operate a business in the affected area of the rioting and it sustained damages, you could be eligible to seek help from your local council. Assistance includes loans for repairs / refurbishments; this will help to shoulder expenses that may be beyond your means. Expert advice will also be available.

Rebuild Your Home Support
If your home sustained extensive damaged as a result of the riots and you do not have the funds to repair the damage, then you could be eligible for government assistance. You could receive up to £5,000; however this depends on your personal circumstances.

Riot (Damages) Act
According to The Riots (Damages) Act of 1886, you could be eligible to claim from your local police department if you do not have sufficient insurance to cover your losses.

Riot Victim Support
If you’ve sustained physical injuries or have been emotionally shaken by the disturbance, there are a number of government-funded charities that are providing emotional support and advice on taking legal action against assailants.

The Valuation Office Agency (VOA)
The Valuation Office Agency (VOA) is a counter checking agency that is visiting affected areas and making assessments on whether or not certain properties should be exempt of taxes, or at the very least, reduce the tax that has been previously imposed.

Tax Adjustments
Should the Local Council deem you worthy, they could give you tax discounts to provide support while you’re recovering from the effects of the riots.

Sharron Ellis writes about debt and offers information on debt management and bankruptcy.

Dealing with Tax Debt

Handling tax debt is different from how you handle other debts, but you need not worry because for sure you will be able to work a good plan that will reduce your balances. Here are several ways that you can start drafting out a plan:

Check your tax return documents for any corrections

The first thing that you have to do is to collect all your documents of tax return and check if all the entries are correct and that you were not overcharged for something. Nevertheless, if you do not have any idea about this type of things you may opt to get debt help from a certified public accountant of financial counsellor to help you check if there is a discrepancy between the figures.

Your financial assistant will also help you in determining which plan of action you intend to do against your debts. After doing that, he or she may suggest the following tax debt reduction strategies.

Negotiate your tax debts with the Internal Revenue Service

Once you have the total amount that you need to pay, one option that you can do is to go directly to the office of the Internal Revenue Service. Personnel from them can assist you and suggest options and plans that you can do for you to be able to pay your balances. Some of the programs they have include the following:

  1. Monthly tax debt program. This is one of the most known strategies that you can do, the internal revenue service will allow you to pay for your debts on an instalment basis payable. However, the catch about this strategy is that your current tax debt amount will accumulate interest charges over the months of paying period. Apart from the penalty and interest, you will also need to shell out a user fee amounting to $105.
  2. The internal revenue service can also offer you what they call as “hardship consideration.” This is the approach wherein they will give you a few months to save up for your debts and for your financial status to work out. However, you still need to pay interest fees, penalty charges, and application fee.
  3. Another tax debt solution is filing for bankruptcy. But, if you think that you can still do something about your balances then do so. Applying for account foreclosure can directly affect your credit score and can make future transactions with the bank difficult.