bookkeeping mistakes, business owner recording sales invoice with calculator and laptop
bookkeeping mistakes, business owner recording sales invoice with calculator and laptop

The 10 most common bookkeeping mistakes we fix for our clients

For small business owners, bookkeeping can be a struggle. Many aren’t in a position to add accounting staff, or they see bookkeeping as an area to cut costs by doing it themselves. Almost inevitably, whether it’s because the business grows or there’s just too much else to do, the books fall behind. 

Below are the 10 biggest mistakes we see that can wreak real havoc on a small business. If you’re making one (or more) of these mistakes, there’s good news: you can take steps to remedy the issues before they morph into real nightmares.

1. Not reconciling bank and credit card statements

Reconciling your business bank and credit card statements is an essential part of determining your business’ well-being. Reconciling your books helps you identify how much money your business has on hand at any given moment while also allowing you to identify any bank errors. Reconciling should be done accurately and regularly—ideally at the end of each month.

2. Failing to understand bookkeeping and accounting practices

Most of the time, business owners want to know the bottom line of how the business is doing. They tend to ask for that number and leave all the details up to a bookkeeper, office manager, or accountant. It’s when the business owner isn’t happy with the bottom line that he or she starts to dig into the accounting. If you’re working with an outside accountant, bookkeeper, or other financial expert, that person should have the ability to explain complex accounting concepts in a way that resonates with the business owner. But a little financial savvy on your part can go a long way to not only understanding your books, but also being aware of problems before they hit the bottom line.

3. Using virtual payments platforms, like Venmo or Cash App

Virtual payments are becoming more popular for personal and business use, and many business owners use them for speed and convenience. The problem with apps like Venmo or Cash App is that they don’t offer buyer/seller protection for business transactions. Because these apps have direct access to your bank account, they can leave you vulnerable to chargebacks in the event of a dispute. They’re really better suited for sending funds between friends and family.

There are plenty of payment platforms designed with small businesses in mind that will help you send and receive payments securely. We love for paying bills. When it comes to receiving payments, we have a variety of recommendations depending upon the nature of your business. Ideally, any payments app should sync with your bookkeeping platform to ensure you’re not doing double duty on data entry.

4. Lack of a process to account for outstanding checks

Another reason business owners should regularly reconcile bank accounts is to track outstanding checks. Having outstanding checks on the books for weeks or months can give the impression that the account has an artificially inflated balance. Business owners who spend based on cash in the bank run the risk of overspending, resulting in overdrawn bank accounts and bounced checks.

5. Improper tracking of accounts receivable (AR) and accounts payable (AP)

It can be challenging for small business owners to keep track of their AR and AP, but it’s an essential task—particularly as the business grows and the tracking becomes more complex. Cloud-based accounting software can help you track AR and AP, as well as enable an approval process for invoices submitted by vendors. 

You also need to stay on top of past-due client invoices and ensure other functions in the business are aware when a customer stops paying bills. These communication issues can easily be resolved with the right software.

6. Waiting until tax season to collect W-9s from vendors

Tax season can be stressful, even when everything goes perfectly. As a CPA firm with decades of experience, we see it every year: business owners waste a lot of time in January tracking down W-9s from vendors in order to issue 1099s. You can prevent this problem by requesting a W-9 every time you contract with a new vendor.

7. Commingling business and personal expenses

One of the most common—and potentially costly—errors business owners make is commingling business and personal expenses. Doing so may not seem like a big deal at first, particularly if the owner isn’t drawing a salary. However, in the event of a lawsuit, mixing your personal and business funds can void the liability protection of your business formation.

To keep your funds separate, there are two key steps business owners should take. First, open a separate bank account for the business. Ensure it’s a business checking account and includes the business name. Second, if you do pay for a personal expense from your business account, ensure your bookkeeping accurately reflects the transaction. You can either reimburse your business for the expense or record the expense as an owner’s draw.

8. Reporting transfers as income

Business owners sometimes transfer funds into the business account, and the accounting software will automatically code those funds as income. These funds should be coded as an owner’s investment, and you may need to make that change manually on the books. Failing to do so will overstate your revenue.

9. Paying the owner of an LLC as an employee

Owners of LLCs, sole proprietorships, and partnerships often make the mistake of adding themselves to the payroll. However, in the case of an LLC, owners are not permitted to be W-2 employees. Instead, they should be paid via an owner draw or distributive share.

Corporations, on the other hand, can choose to pay the owners on the payroll as regular W-2 employees. If you own an LLC and need to be on the payroll, you can solve this problem by making a one-time change to your business formation.

FURTHER READING: Learn about additional details on tax implications and procedures of business legal structures.

10. Poor communication between the business owner and the finance team

Whether you have one person keeping your books or a team handling the accounting, business owners must communicate clearly and regularly with everyone involved in finance. Communication is fundamental to adequate bookkeeping because it keeps everyone on the same page. If you’re making the shift from doing the books yourself to working with a bookkeeper, realize that these functions must work like a well-oiled machine to keep the business healthy.

BONUS: 3 common tax mistakes 

1. Not filing electronically
When filing electronically, you will receive an automated notification that the IRS has received your return. When filing by mail, taxpayers do not receive notice of receipt, leaving you wondering if your documents have arrived safely and in a timely manner. Taxpayers who mail in their returns are also exposing themselves to potential data theft, as well as data entry errors as the IRS must enter their information into the system. 

What if you owe the IRS? You can still file electronically, requesting that the IRS withdraw the money. Taxpayers can also decide when they would like the payment to be withdrawn, choosing a date up to the filing deadline. 

2. Entering incorrect information
Simple errors or typos can lead to delays, possible penalties, and missed opportunities. It is crucial to double-check all information to ensure accuracy before filing. Areas where we most frequently see this mistake include individuals who are filing self-employment documents and businesses that file 1099s. These mistakes can easily be avoided by double-checking every entry, understanding what boxes to check, and what credits and deductions truly apply to you. 

When in doubt, consult with an experienced CPA for assistance filing taxes and other related documents. While you do have the option to amend your return after filing, amended returns have created extreme frustration for many taxpayers over the past couple of years as the IRS backlog continues to mount. When possible, it’s ideal to get your return right the first time.

3. Misunderstanding business expenses 
Here are some of the most common misunderstandings when it comes to business expenses:
– All business meals and entertainment expenses are 100% tax deductible.
Asset is just another word for something the company purchases and uses to do business.
– Loan payments are part of monthly expenses.
– The business owner can go on payroll like all the rest of the employees.

Did you read any of the four statements above and think, “What’s wrong with that?” If so, we recommend downloading our free guide to business expenses.

Don’t let your business be derailed by simple bookkeeping mistakes that are easy to prevent

We know most business owners don’t want to be caught up in the weeds with accounting and legal requirements—you started a business because you’re passionate about your product, service, or a major problem you want to solve. If bookkeeping isn’t high on your list of priorities and preferences, let our cloud accounting team help you save time, work smarter, and shift your focus out of the back office and onto what really matters to you.

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