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When a business owner’s mind is focused on running a business, acceptable accounting practices can often be overlooked or forgotten. Of course, mistakes are bound to happen; but for businesses that could mean a negative impact to the bottom line. Accounting can be time-consuming for businesses, so the urge to push through and complete the task quickly can lead to mistakes. Having clean and accurate books will not only provide peace of mind, but could save you money and time. We have compiled a list of five common accounting mistakes for you to consider and avoid.
Mixing personal expenses with business expenses.
It is best to keep separate bank accounts and credit cards for business transactions. Comingling business and personal transactions can lead to several mistakes in record keeping and reporting. Not keeping personal and business transactions separate could result in penalties if audited or even missed opportunities for tax deductions. It would also be difficult to rely on accounting records if the two are mixed.
Not regularly reconciling your bank and credit card accounts.
Checking your bank account or credit card balance is important; but reconciling them at least monthly, is even more important. Reconciling allows you to review any outstanding transactions, detect fraudulent charges, or pick up any unrecorded bank fees. If you have outstanding checks as far back as six months, do they need to be voided or reissued? Do you have any outstanding deposits? You should only have outstanding deposits if you are holding cash or checks at your office. Since most credit card transactions post immediately, they should clear by the end of each statement. If you have transactions that have not cleared and were recorded earlier in the month, look into them. The transaction may not have processed correctly or it was recorded in error.
Not recording business transactions correctly.
Accounting records are only as reliable as the information placed into your accounting system. Understanding how certain transactions need to be recorded is very important. It is best for you to generally understand the basic accounting categories when recording transactions. If transactions are recorded incorrectly throughout the year, your accountant may have to do clean-up work during your tax return preparation. This extra work may cost you more money on your tax return preparation bill. Not having accurate accounting information can also have an impact on any future planning. If things are not recorded correctly it would be difficult to rely on the information provided on your financial statements.
Not regularly reviewing or understanding your financial position.
Do you regularly review your balance sheet or your income statement? If not, you may want to take a look at least quarterly. Reviewing financial statements can tell you a lot about how a business is operating. If your cash flow is good you may think you do not need to take a look. This is not always true. There could be areas of your business which are more profitable than others and currently being overlooked. There also may be an area that was once thriving, but for some reason is now struggling. Regularly reviewing financial statements can answer questions such as; are your collections on receivables timely, have certain expenses increased over time, can some expenses be eliminated and are you operating as efficiently as you once were or could be?
Not consulting with your CPA or accountant.
If you are unsure on how to read your financial statements, reach out to your CPA or accountant for guidance. They can point out certain areas on your financial statements that may be beneficial in making business decisions. Your accountant will often be inquisitive to make sure they have all of the facts so they can guide you in the right direction. The more communication, the better the outcome. You should also reach out to your CPA or accountant before the end of the year for tax planning. Planning ahead for your tax return is always better than being hit with a tax bill you were not expecting. Tax planning may also help with year-end decisions.
For some business owners accounting can be a cumbersome task. Knowing some of the common mistakes will hopefully be beneficial to your business. If you are not comfortable with the task, reach out for help. CPAs and accountants are here to assist with accounting so you focus on what you do best, running your business.
-Jason Douglas, jdouglas@smecpa.com