Keeping accurate records of your business’s financial transactions is critical to ensure consistency and avoid bookkeeping mistakes. However, small business owners often make common bookkeeping errors that can lead to significant financial problems.
Did you know…
- 56% of small business owners with less than six employees do their own bookkeeping
- 60% of small business owners feel they don’t know enough about accounting/financing
- 82% of small business failures are due to cash flow/financial management
Top 5 Reasons Business Owners Make Mistakes
Not understanding your Chart of Accounts.
Chart of accounts refers to the items used to categorize every transaction in your bookkeeping, it includes two sets:
- Income Statement Accounts are summarized and presented to the income statements. Includes your overall income or profit that your business has made, your cost of goods sold (COGS), and your business expenses such as utilities, insurance, rent, and salary
- Balance Sheet Accounts – shows the net worth of your business, including assets, liabilities, or equity. You use a balance sheet to compare the relationship between assets, liabilities, and equity and determine whether a business is healthy.
Not understanding how your software works and the importance of “workflows.”
Take the time to learn how your software works, and how the actions you take may be tied to your financial statements. This will help reduce accidental mistakes. For example, when you create an invoice and send it to the customer, Quickbooks automatically adds this to your income. If you were to manually enter the payment later when you receive a check, you would be double booked the income.
Complicating the Chart of Accounts
Creating a ton of accounts and subaccounts in your Chart of Accounts increases the likelihood of not staying consistent in using them. Keep your Chart of Accounts simple – only track accounts you need information on for management reasons. If you are looking for more detailed information, most accounting software provides reports (like sales reports) that are more precise without overcomplicating your Chart of Accounts.
Not Reconciling Bank and Credit Card Statements
Reconciling your accounts means checking that your records match the bank’s records. Reconciling accounts is an essential part of bookkeeping, as it helps to ensure that all transactions are accurately recorded and accounted for. Business owners who fail to reconcile their accounts regularly are likely to make mistakes in bookkeeping, which can lead to inaccurate financial statements and tax filings.
Not Reviewing Financial Statements Regularly
As a business owner, you must review, compare and analyze your financial statements regularly. Make sure to categorize expenses accurately and consistently to avoid errors such as inaccurate financial statements, tax filings, and audits.
Specific Mistakes That We See Regularly and How to Change That by Using Quickbooks
Business owners tend to use their sales tax as an expense account rather than a liability account. However, be mindful and remember that it’s not business income or a deductible.
- Ensure you set up a balance sheet liability account called “sales tax.” Use it to record the tax you receive from customers and payments you make to the state.
Recording credit card payments as a “credit card expense” results in inaccurately tracking details on individual transactions.
- Set your credit card up as a liability account and categorize individual transactions into this account using the correct expense type. Use the account to pay down the card.
Remember that the money you use to pay yourself as an employee is not a deductible expense. Classifying it as a deductible expense may change the equity position (net worth) or the business.
- Therefore, Record the payment as an “owner draw,” which is an equity account.
Assets and Depreciation
Business owners often fail to record and depreciate assets. This requires working hand in hand with your tax accountant. Recording your annual depreciation expense can reduce your taxable profit and accurately reflect your business’s value.
- Work with an accountant to record assets. They will help you determine your year’s depreciation expense using IRS rules.
Businesses with employees typically outsource a third party to take care of the payroll. Ensure you accurately track and report your payroll costs to understand your business and match your reports.
- Work with a bookkeeper to set up a template transaction for your payroll to show essential details, including gross wages, employer FICA taxes, employee FICA and income tax withholding.
Bookkeeping is a critical function for small business owners. Accurate and consistent bookkeeping is vital to the financial success of your business, and avoiding these mistakes can help you prevent financial disasters and keep your business running smoothly. Therefore, prioritize bookkeeping and consider hiring a professional bookkeeper or using accounting software to ensure your financial records are accurate and well-maintained.
For more details, watch the full webinar from Maine SBDC Business Advisor Tina Oddleifson and Accounting Specialist Kitty Barbee, sharing helpful insights into small business owners’ most common bookkeeping errors and how to fix them.