There are some common mistakes that business owners run into when it comes to doing their bookkeeping. If you’re a small business owner and you’re currently doing your bookkeeping, here’s 10 mistakes you need to avoid in order to make sure your business is running smoothly!
Not Backing Up Your Data.
You should ensure that you have a copy of all your data backed up on a regular basis, preferably at least once a week. If something happens to your computer or the internet connection breaks, meaning you are unable to access any copies stored online in the cloud, you need to have an offline option ready and waiting so that you don’t lose any of your information. This includes invoices and receipts as well as bank statements and financial reports.
Not Keeping Your Receipts.
It’s important to keep all your receipts, regardless of whether you are doing bookkeeping yourself or not. You never know when an auditor is going to come knocking and inquire about the expenses you have claimed in your tax return.
If you don’t have a receipt for every expense you plan on claiming, the auditor has the right to disallow that deduction from your taxes, which will result in a larger bill at the end of it all.
Skipping the Bank Reconciliation.
When it comes to reconciling your bank accounts, consider the following:
- As much as possible, avoid doing things manually. The most efficient way to reconcile is by using accounting software with bank integration features—transactions are automatically downloaded from your financial institutions and allow you to match them up with what you’ve already recorded in your books.
- If something doesn’t match up, find out why. Sometimes a transaction might appear twice on your bank statement, but only once in your books. It could be that a customer paid you twice for the same invoice, or that someone stole their credit card and used it to pay one of yours—if this happens, get in touch with the customer right away!
Missing Out on Tax Deductions.
If you’re a small business owner, there are numerous tax deductions available to help you save money.
Based on what type of business you run, you could be eligible for tax deductions on things like:
- Advertising costs
- Automobile expenses
- Business insurance premiums
- Commissions and fees paid to contractors (like bookkeepers)
- Computer expenses (software and hardware)
- Entertainment expenses (dinners with clients)
- Home office expenses (if you run your business from home)
- Interest payments on loans from banks or other financial institutions related to your business operation. This includes interest payments for both start-up costs and ongoing operating costs. For example, interest payments on credit cards or bank lines of credit taken out for the purpose of purchasing inventory would qualify as a tax deduction. Interest payments made on personal lines of credit should not be claimed as a tax deduction. You can consult with an accountant to help determine this distinction.
Not Updating the Chart of Accounts.
Your chart of accounts is a list of all your bank and credit card accounts, as well as your liabilities, assets, income and expenses. If you’re not sure what it is or how to set it up, don’t worry. With a bit of research (or with the help of an accountant), you can set up a chart of accounts in no time.
Once you understand the basics, keeping your chart updated should be something that’s done regularly. You might not have thought about why updating this would be so important—after all, it’s just a list—but here are four excellent reasons to keep your chart of accounts current:
- It will help you see where things are going wrong (or right!). Are there any areas that need improvement? You won’t know until you take note and see where the banks are telling you money is coming from and going to!
- It will save time when preparing for tax season. When it comes time for taxes, it can be hard trying to pull up that info on short notice! Be prepared by making sure everything is organized in advance.
It helps clarify information for stakeholders and investors if they want access to view reports at any given moment—which they might if they’re watching over the company’s finances closely enough!
Not Tracking Time and/or Mileage.
If you’re a freelancer and don’t track your time, you may be losing money at tax time. Tracking time spent on business projects will allow you to have a more accurate picture of what constitutes as business expenses. This can also help you set rates for future work. The IRS requires that employees keep track of miles driven for business, medical and moving purposes; so if you’re an independent contractor with clients in different cities, tracking mileage is important to ensure that the mileage deductions are eligible and legitimate. Even though there’s no government regulation requiring it (besides the requirement mentioned above), it’s still a good practice and necessary for accurate bookkeeping.
Tracking time requires invoicing software or keeping detailed notes about the amount of time spent on each client project or activity. To keep this information organized, use Xero Projects to bill by fixed fee, hourly rate or retainer. You can also use TSheets timesheet software by QuickBooks Online to simplify employee timesheets and eliminate manual data entry errors when payroll taxes are calculated. Mileage should be tracked through your smartphone—a mileage tracker app allows you to record start point, end point and distance traveled for a particular trip automatically by using GPS coordinates from your phone.
Not Classifying All Expenses Correctly.
Classifying expenses for bookkeeping and tax reporting can be confusing. Expenses are typically classified by type (business or personal) and category (operating, cost of goods sold, capital expenditures). But after being categorized, they may also be further categorized in order to separate them into the proper accounting accounts.
Expense types and categories must be classified correctly to make sure they’re reported on the proper federal income tax return forms. If you don’t classify them correctly, you could end up paying more taxes than necessary.
Missing Deposits or Bill Payments.
This is one of the most common bookkeeping mistakes, and it’s not hard to see why. Many times there isn’t a clear process in place to ensure that deposits and bill payments are recorded.
The solution? Make sure you have a process for recording these things. Reminders for deposits and bill payments can also be helpful, as well as having someone assigned to follow up on them.
Cutting Corners by Entering Incomplete Information.
It’s tempting to cut corners by entering incomplete information into your online bookkeeping. After all, who will know? Well, for one thing, you’ll know. The information in your books is only as good as the information you enter into them. You can end up with some pretty big problems if this is insufficient or incorrect. Incomplete transactions that go uncorrected can lead to incorrect balances in your checking account and can cause any number of issues for both you and your accountant during tax season.
When you are entering a transaction into an online bookkeeping system, it’s important that the information is complete and accurate. For example, if you purchased $50 worth of supplies from an office supply store, don’t just enter “Office Supplies.” Be sure to also say which office supply store received the money and what exactly the supplies were used for (lunchroom utensils or kitchen supplies?). If possible, add a note in which you provide more details about why this purchase was necessary; this will help justify it to Uncle Sam later on.
Choosing the Wrong Bookkeeping Software.
- Software should be easy to use. If you have trouble understanding how to use your software, it can create a lot of lost time and money.
- Your software should be secure. You want to be sure that only authorized users are able to access sensitive information about your business’s finances and operations.
- The software you choose should fit the size of your business. Some accounting programs may not be designed for small businesses, or they may not offer the kind of functionality required for larger companies.
- Software should grow with your business. If you’re using an entry-level accounting program and your startup is suddenly growing by leaps and bounds, you’ll need to make sure that your software can keep pace with your company’s growth so you don’t end up running into roadblocks along the way.
- If you’re looking for help on the right bookkeeping software for you – read this.
Following a few simple rules goes a long way in avoiding common bookkeeping mistakes and ensuring the accuracy of your books all year long.
There is one easy way to avoid all these mistakes!
Bookkeeping is what we do. We can help you not only avoid mistakes but save time, money, and get you focuses on the future of your business