Here are 10 of the most common accounting errors small businesses owners make:
1. Neglecting to save receipts under $75.
Although they are not required by the IRS, receipts less than $75 provide proof of many of the deductions you can claim. You can still store them in a folder or box for audit purposes. If you prefer to keep your receipts separate from one another, there are add-on applications that allow you to take a picture of your receipt and attach it to the entry in the register.
2. Failing to track reimbursable expenses.
It’s like flushing money down the toilet if you need to keep track of your reimbursed expenses. You can also lose tax breaks, which is the same thing. Apps and programs facilitate this process and consistency of tracking expenses. You should be in the habit of tracking them so they don’t go unnoticed as time passes. Keeping track of reimbursable expenses is just as important. It gives you a paper trail and allows you to track your business’s financial health.
3. Failing to classify employees properly.
It can sometimes be difficult to determine who are employees and who are independent contractors.
If you misclassify employees or contractors, you can have significant consequences, sometimes tax penalties and lawsuits.
4. Not communicating.
Whether you hire a part-time bookkeeper or outsource the work to a professional, communication is the key to effective bookkeeping. It minimizes errors. The biggest mistake you can make is paying someone a bonus and having no advice for your bookkeeper or buying supplies but not providing them with receipts.
5. Neglecting to reconcile.
A key aspect of determining financial health is reconciling your books and bank statements. Ensuring that this is done right and in a consistent manner is crucial. The reconciliation of books allows you to understand the amount of money in your account at any given time, and it can also reveal bank errors before they become a major problem. Hiring an experienced bookkeeper is highly recommended.
6. Not having a paper backup.
The paperless office can also be a significant liability in the context of audits, especially if there are technical difficulties. Usually, the IRS wants to see a paper trail. It should include visible documentation and a well-organized system of paper backups. Even when saving your receipts, keeping a backup of your financials for at least seven years is important.
7. Failing to collect or deduct the appropriate sales tax.
Sales tax has become a difficult issue for many small businesses over the past 10 years when e-commerce began to take off. Historically, the most common mistake they’ve made is not deducting sales tax from total sales, which would result in a lump of surprises at tax time. Your bookkeeper needs to be aware of the latest rule changes to federal law so that you can remain in compliance and limit your overall tax liability.
8. Petty cash nonchalance.
You should have a designated person in charge of managing and approving the purchase if you are using small cash. This ensures accountability so that potential fraud, theft, and abuse are reduced. If this type of policy when handling petty cash is not adhered to, it can create headaches for your bookkeeper and may result in serious problems when taxes are filed.
9. Mis-categorization or overcategorization.
It’s vital that you keep a detailed and organized chart of your accounts. Many entrepreneurs make the mistake of setting up duplicate categories or not entering expenditures according to the relevant category.
Use general bookkeeping guidelines for standard categorizations and create as few new categories as possible. A professional bookkeeper can help you clean up your books and ensure your chart of accounts is accurate.
10. Trying to do it yourself.
Most small business owners hate doing their own books yet insist on doing it themselves. The necessary skills to perform this task are possessed by qualified, experienced bookkeepers. quickly and efficiently.
They’re equipped with the expertise to detect small mistakes that may otherwise have been missed. Tax changes are also being taken into account by professionals.
In the long run, having a second set of eyes on your financial records is extremely beneficial and will save you time and money.