Business bookkeeping tasks can be the source of a lot of hassle for business owners. The piles of paperwork and concern over potential errors can all add up to big-time stress, all caused by common bookkeeping mistakes.
How can you reduce stress and increase productivity in your business where bookkeeping is concerned? What are the most common bookkeeping errors? What are the best and most common bookkeeping practices? Equally important: How can accounting errors be corrected?
There’s no reason your business’s bookkeeping records have to bring you stress. Some of the most common bookkeeping mistakes are easily fixed. Others need a more complex solution. We’re going to share some of the most common bookkeeping mistakes with you and show you how to ensure your business records are in proper order all year round.
How To Avoid Common Bookkeeping Mistakes
Most bookkeeping errors arise due to a simple lack of time or knowledge. When armed with the right information and the right tools, you can keep bookkeeping errors at a minimum. Learning what to do–and what not to do–with your books can help ensure your business has a stable foundation for growth and prosperity.
It’s easy to push your bookkeeping responsibilities aside–especially when you’re not confident you’re doing your books correctly. However, if you wait until year-end to start recording and organizing, you’re setting yourself up for a lot of stress–and a lot of errors. But bookkeeping is so much easier when done in real-time.
The Fix: Take some time every week to record your income, expenses, payroll information, and other important bookkeeping transactions. Set aside a designated time for bookkeeping tasks each week and make it a habit. Soon you’ll push procrastination out the window and help ensure your business bookkeeping is an easy task.
2. Using The Wrong Accounting Tools
You wouldn’t use a hammer to do a screwdriver’s job–well, at least you shouldn’t. In the same way, you want to avoid using the wrong programs and tools for handling your books. Tools like Excel work when your business is very small but eventually, you need to upgrade to real accounting software, such as Quickbooks. And then one day you may even outgrow that.
The Fix: If you aren’t sure what software to use (or how to use it) get with a professional accountant and see what they recommend. Take the trainings offered by the software company and get comfortable with the service.
If you’ve outgrown the ability to keep your own books there are hundreds of bookkeepers and accountants out there to help business owners like you make simple work of your bookkeeping efforts. But which ones are right for you and for your business?
If you are looking for someone to take over this task we here at Cloud Friday would love an opportunity to see if we are a good fit. Check out our services page for more information.
3. Throwing Away Receipts
Don’t throw away those receipts!! I know it seems tedious to manage your business expense receipts. However, you’ll sleep better knowing you keep your receipts in order–especially if you get audited. Receipts prove you spent the money and you can make notes right on the receipt about why you incurred this cost. For example, if you take a client out for dinner, write their name and topics of discussion on the back of the receipt.
The Fix: Keeping and organizing business receipts doesn’t have to be difficult or time-consuming. You can simply take a picture of the receipt and store it in Dropbox–all right from your phone. Then there are apps like Shoeboxed can help you create a simple system for managing business receipts by helping you store them electronically.
If you’d rather store them on-site, that’s okay. Simply create a filing system that works for you and makes it easy to find what you need when you need it. Sort them by date and purchase boxes, file folders, envelopes, or cabinets to make the process more streamlined. That way you’ll have no trouble finding the right receipts when you need them.
4. Mixing Personal And Business Expenses
As far as the IRS is concerned, it’s vitally important to keep personal and business expenses separate from one another. But it’s not just important to the IRS, keeping your business and personal accounts separate let’s you know exactly how your business is faring financially. It’s difficult to know if you are making money when you are spending your revenue on groceries and buying business supplies with your personal debit card.
The Fix: Separating your business expenses from personal ones means having separate bank accounts for your business. That way there’s no question about whether a purchase you made was a business purchase or a personal purchase. Income from the business goes directly into the business checking account and all expenses are paid from there as well. This makes it very clear if your business is making money or not.
Take a regular salary for yourself out of your business checking and put it into your personal checking for your personal expenses.
5. Missing Out On Deductions
It’s easy to miss out on lesser-known deductions for your business. For instance, if you work from home, you may be able to deduct part of your housing expenses on your business tax return. Inventory, depreciation, and business structure can all impact your taxes.
Specifically, how you categorize inventory can make a big difference in what your year-end tax record looks like. In fact, if your business has inventory, then you probably need an accountant.
You may not know about all of the deductions you’re entitled to as a business owner, however, a good accountant can tell you. They can make sure you are making the most of your money regarding depreciation or inventory management.
The Fix: Get a good accountant to help you wade through the IRS lingo for maximum deduction benefits and avoid all of these common bookkeeping mistakes.
6. Not Backing Up Your Books
Not backing up your books is another of the most common bookkeeping mistakes. The last thing you want to do is to work hard at keeping good records, and then have all of your data disappear with no way to get it back. The first step to properly backed up records is to find and use a good accounting software program.
The Fix: Most accounting software is cloud-based these days. If you are using a cloud-based service they are keeping up with those backups for you. However, if you are using something that is housed directly on your computer then you will need some kind of backup. And don’t back it up onto the same hard drive where it lives. Save the backup file on an external hard drive or flash drive.
Also, remember those receipts? If you are keeping paper copies keep them somewhere safe!
See this article on the best cloud storage companies for some tools and tips on record backup.
7. Improper Categorization
Not categorizing your expenses in their proper place can lead to an overall unawareness of business health. In order to properly run a business, you need to know where the money is coming in from–and where it’s going out.
For instance, you should have separate expense categories for business insurance that is meant to protect your business and health insurance for your employees. This is because business insurance is a business operating expense and health insurance for your employees’ counts as an employee benefit.
Another common categorization mistake is logging assets in the office supply category. As an example, are you correctly categorizing fixed assets and current (short-term) assets? This article from Investopedia explains how to categorize fixed assets vs. current assets if you are interested in the details.
The Fix: One fix is to hire a qualified accountant to do the categorization work for you. An accountant can help you organize your business in a way that ensures you’re operating from a categorically correct standpoint. If that’s not in the cards for you right now, set up a consultation with an accountant to make sure you are doing things properly and then carry on with their recommendations from there. Call and ask questions any time you are unsure.
8. Neglecting Sales Tax Reporting
Sales tax reporting is a necessary part of operating a business that sells items for which sales tax is charged. You might be interested to know that you have to fill out a sales tax reporting form in many states even if you haven’t had any sales for the year.
However, not all businesses sell items that require the collection of sales tax, and each state varies in what types of items they charge sales tax for. And as a business owner, you need to understand how to collect, report and pay sales tax for your business.
Failing to submit your sales tax form in a timely manner can result in fees and penalties from your state’s revenue department.
The Fix: Be sure to fully understand your state’s requirements for filing sales tax reporting. Be clear on whether or not you have to collect sales tax. If you do, be sure your accounting software is correctly accounting for this and the dates you need to submit the taxes you collected to the state. Also, have a firm handle on what forms you need to submit and when. Mark it on your calendar and don’t miss those dates!
Here’s a list of the tax departments in each state. Be sure to call and ask any questions you may have.
If you don’t want to bother with sales tax reporting, you can always get a good accounting firm to do it for you.
Here’s an article that goes into more depth on collecting and reporting sales tax.
9. Incorrect Classification Of Employees
Do you know the difference between an employee and a contractor? Many people don’t, and designating employees incorrectly can result in IRS trouble. The IRS has specific guidelines to help you determine whether you’re hiring a contractor or an employee. Check out those guidelines here.
For example, if you control what a person does and how they do it in relation to your business, you might have a tough time designating that person as an independent contractor. The same goes if you have a set schedule for a worker to work in your office.
The Fix: Review the IRS guidelines to determine if your contractors are really employees. If you are still unsure, the first step is to speak to an accountant to help you make a determination. If that isn’t possible or if you aren’t getting an answer you feel comfortable with you can file a Form SS-8. On this form, you tell the IRS about the employment arrangement and allow them to make a determination.
10. Missing Or Neglecting Tax Payments
When you are a W-2 employee taxes are taken out of your check each week and submitted to the IRS on at least a monthly basis. However, when you are self employed your income taxes are not withheld–and the government doesn’t want to wait til the end of the year for their money. Therefore, they require you to send in your tax payments quarterly.
Forgetting about or simply neglecting your quarterly tax payments can cost big money. The IRS applies penalties for late payments.
Put scheduled tax payment mailings on your calendar so you don’t forget. These dates are
- Income for Q1–April 15th
- Income for Q2–June 15th
- Income for Q3–September 15th
- Income for Q4–January 15th of next year
There are a couple of ways to estimate your quarterly tax payments. You can estimate them based on last year’s income, or you can use the current year’s income to determine your quarterly tax payment amounts. However, if you wish to estimate your quarterly tax payments based on the current year’s income, you’ll likely need an accountant’s help to ensure you’re estimating correctly.
The Fix: If you want to do this yourself, the easiest way is to work off last year’s income. When you file your taxes you will get coupons that tell you the amounts due and the due dates. This is the simplest way but it’s not perfect. Working off last year’s income is great if your income is fairly stable from year to year. However, if your income grows a lot the payments won’t cover your liability. Or if your income drops you may not have enough money to cover the payments.
If you’d rather work off your current year’s income you will likely benefit from having an accountant make these calculations for your. You will be subject to penalties if you don’t pay at least 90% of your tax liability in your quarterly payments (or 100% of last year’s tax liability). So you don’t want to make an error in your calculations.
11. Not Recording Income Properly
It’s easy to forget to record every income transaction. This is especially true when you’re dealing with smaller transactions or cash transactions. However, it’s vital to run all of your business income both through your business checking account and through your business records.
Note that you can be subject to heavy penalties by the IRS for failing to report all income transactions.
Not only will under-reporting your income be a problem with the IRS, but it will also make your financial reports inaccurate. It’s difficult enough to run a business with correct numbers, but it’s almost impossible to do so with false information.
The Fix: Use a great accounting software program like Freshbooks or Quickbooks to accurately keep track of all income, and be sure to update your records as the income transactions occur so that nothing gets lost in the day-to-day busyness of operations.
For instance, update your income (and expense) logs at the end of each day. Having a system in place that works to help you stay organized at work will help ensure you don’t forget any of your business transactions.
Related: How To Stay Organized At Work
12. Not Knowing When It’s Time To Seek Help
At the end of the day, it’s important to realize when it’s time to delegate your bookkeeping duties to a qualified professional. Sometimes a business has simply grown too big for management to handle bookkeeping on their own.
You know this is the case when you are unable to keep up with your books on a regular basis, or you are feeling unsure about what you are doing. Or maybe everything is going fine, but you are looking to free up some of your own time. Bookkeeping is an easy thing to outsource.
Other times, it’s just smarter to hand the bookkeeping responsibilities off to someone who has a thorough knowledge of business tax laws and regulations in your state. That way, you and your team can focus on growing and managing your business.
The Fix: Check out what Cloud Friday has to offer. We are trained accountants who know the ins outs of businesses of all sizes.
Bookkeeping mistakes can cause you and your business a lot of pain. From wasted time to lost money, having incorrectly managed books for your business can be a bigger detriment than you might think.
Cloud Friday offers a variety of bookkeeping service plans to fit any size or type of business. Contact us today to learn more about how we can help you run your business more efficiently.