Many small business owners are working on the countless chores necessary to pay bills, invoice clients, write checks to staff, and manage past-due accounts, among other accounting tasks.
While it might be effective for very small organisations, it frequently leads companies to make accounting errors that stunt their growth and divert valuable time and attention away from other crucial parts of their business.
Here are a few accounting mistakes that small firms should watch out for to prevent slowing down growth.
Not Accurately Tracking Business Expenditures
Inaccurate record-keeping lowers the efficiency of accounting and bookkeeping.
When you do that, your business is left vulnerable to financial losses, missed payments on important invoices, hassles around tax time, and other problems that could impede its growth.
Not just by omitting to record a bill payment or when entering transactional data into a spreadsheet.
Inaccurate financial tracking hinders planning for the upcoming month or beyond and ultimately costs your firm money.
Your accounting system must record each transaction in order for you to evaluate the state of your business accurately.
1. Not Scheduled For Tax Season
Small businesses may find it enticing to utilise do-it-yourself tax software to create a simple tax return in order to save money on an accountant or other tax specialist.
If the proper steps aren't followed to appropriately record their corporation's financial information along the way, even those choosing a DIY technique to file their small business taxes may run into problems.
2. Combining Personal And Professional Costs
Mixing personal and corporate costs is another common accounting error small business owners make. The inability to accurately track business spending as a result of this error may result in mistakes in financial reporting and tax filings. Small business operators should maintain separate bank accounts for personal and business expenses and use different credit cards for each in order to avoid making this error.
3. Neglecting Account Reconciliation
Another common accounting error that small businesses make is failing to reconcile accounts. This inaccuracy might result in inaccurate financial reporting and make it more challenging to find financial statement issues. Small business owners should periodically reconcile their finances, ideally once a month, to prevent making this error.
Nobody likes having to work so hard to compile the many receipts and paperwork needed to make a correct tax return in April because they made the error of not being organised throughout the other 11 months of the year.
Delaying the preparation of financial data is one of the most frequent accounting errors made by small business owners. It might be quite tempting to put off accounting when tax season is still months away, but doing so is a bad idea. Errors in accounting may cause more harm to your company the longer they go undiscovered.
5. Procedures For Documenting Are Missing
An audit will eventually be necessary for a business. Most nations have laws requiring this. Auditors will closely examine a company's financial data during an audit to see if the financial statements accurately and completely depict the company.
Businesses will need to be able to offer documentary proof to back the financial statements in order to help auditors with their job. A corporation runs the risk of non-compliance in the case of an audit if it does not have a mechanism in place to appropriately record and file documents.
A company could be asked to provide documentation in support of a transaction. They may be subject to fines and penalties if they are unable to do so.
6. Refusing Professional Assistance
Many business owners would like to handle their accounting duties internally to cut costs. This is particularly valid when a business is first established. While it might initially be beneficial, this approach loses its potency as a corporation expands.
A company's accounting needs will increase proportionally as it grows. This could become expensive if a business decides against outsourcing its accounting operations.
Businesses that choose to take this route will discover that the infrastructure needed to support accountants in their duties could be used more efficiently to hire an outside service provider.
7. Data Backups Not Being Secured
Bookkeepers can use a manual method or a digital one. However, maintaining a backup of your company's data is still crucial.
It's wise to be ready in case an unexpected problem renders your data inaccessible. Your firm needs backups (both for your digital and paper assets) if you want to recover from a loss more quickly.
8. Lack Of Inventory Keeping
For small firms, not tracking inventory can be a significant financial strain. Assessing whether there is enough stock for consumers or whether further purchases will be required by tracking the products that enter and leave its facilities is simpler. Accurate financial accounts may be difficult to produce due to poor tracking.
Tracking is critical for small businesses since it is necessary for assessing a company's profitability.
Fortunately, with the aid of suitable accounting software and bookkeeping services, tracking inventory is a simple operation.
Small business owners may make more educated judgments about their profit and loss statements if they maintain good tracking. This will provide them with more visibility into their product supply and sales numbers.
Not Making A Difference Between Contractors And Employees
Your taxes are considerably impacted by whether a person is a contractor or a permanent employee.
It influences the amount of taxes you should withhold, the sorts of taxes, and any additional overhead costs your company may incur.
The disparities between the two employment types must also be taken into account because they are different. If you don't do this, the IRS might flag your company.
1. Petty Money Indifference.
Petty cash should be managed and purchases approved by a designated custodian who should be assigned to each small firm that uses it.
This ensures accountability, and the likelihood of fraud, theft, and abuse is reduced. In order to keep clear documentation for deductions at tax time, businesses should have clear policies surrounding petty cash transactions and every purchase done with petty cash should have an accompanying receipt for the expense.
Once the fund is depleted, a check can be issued to cash to replenish the entire amount. Lack of a petty cash policy, custodian, or receipts can cause complications for your bookkeeper and could have major consequences when it comes time to file taxes.
2. Lack of communication.
Communication is the key to efficient bookkeeping, whether you decide to hire a part-time bookkeeper or outsource the task to a professional, as it keeps everyone on the same page and reduces errors.
Paying a bonus to someone without telling the bookkeeper about it is one of the most frequent blunders. Another is making purchases of supplies without informing the bookkeeper or producing receipts.
3. Not Verifying Information A Second Time In Automated Systems
There is automation everywhere. You might not even be aware of its significance in your accounting and financials because it has become such a commonplace tool in the financial industry.
For money counting, sorting, and withdrawal, banks rely on automation. CPAs also use it to calculate numbers and double-check balances.
Incorrect payee names on transactions are typically the cause of automated errors. Transactions may potentially be posted to the incorrect accounts.
The transaction can be reversed within a week if the beneficiary agrees with the wrong payee name. Otherwise, the bank manager needs to be contacted for a solution.
4. Failing To Utilise The Software To Its Greatest Potential
If you employ software from a respected company with years of industry expertise, the program will be created to duplicate best practices and assist you in conducting business legally.
Even if the greatest software is simple to use, take the time to read the instructions or do some online training.
It might prevent costly blunders from developing and spare you hours of later brain-wracking.
It's usually a good idea to contact your software source for assistance. Additionally, you might discover that they offer training to assist you in becoming familiar with your products.
Tips to Avoid Common Accounting Mistakes
- Before your budget review meeting, make a list of the high-value expenses you wish to prioritise. To help them better prepare and offer more insights during the session, you may also let the delegates know about these points before the review.
- Thankfully, numerous cloud backup and storage options are made expressly for financial data. Experts advise purchasing one with easy import and export capabilities, robust cybersecurity features, and many accessibility levels.
- Flexibility is essential. It would be best if you thought about the different recording and backup technologies you want to use. Additionally, you must be prepared to change meeting times and timelines.
Accounting error types
Accounting mistakes can be divided into two categories: those that obtrusively influence the trial balance and are simple to spot, and those that are more subtle and call for a closer inspection.
The trial balance is an accounting report generated as part of the financial close process. It displays each account's final debit or credit balance in a business's general ledger.
The debit and credit balances should be added to equal amounts in the trial balance, though not necessary for each balance.
A clear out-of-balance trial balance due to errors. For instance, recording a single-entry journal entry or an unbalanced journal entry can result in the overall trial balance being off.
Accounting software rules that stop transactions with unequal debits and credits from being recorded in the first place generally catch these simple mistakes.
Errors that do not have a visible influence on a trial balance might nonetheless cause issues.
For instance, a transaction might be entered incorrectly or twice in the general ledger accounts, but a trial balance would not reveal this because the debits and credits would still appear to be equal.
The majority of accounting errors do not result in an imbalanced trial balance. Hence additional methods must be used to detect them.
Summing It Up
Your accounts provide you with all the data you need to make wise business decisions. The accounting techniques used to impact the company's overall financial situation.
While some mistakes may be minor and have little impact, some might have significant long-term costs if made.
Risk is a necessary component of every business. No matter how meticulous one is, reporting is never error-free.
Sometimes seemingly minor accounting errors can significantly affect a company's health, development, and longevity. Therefore, accurate accounting practices are necessary for a profitable business.
How can accounting mistakes impact your company?
Accounting errors can range in size from minor to major. In either case, they may result in detrimental effects:
- Incorrect income disclosure. Inaccurate expense reporting has the potential to overstate profits or skew a company's operating profit margin calculations.
- Incorrect data on cash flow. If things are not recorded accurately, the amount of cash available to pay bills may be overstated or misrepresented.
What are the most typical accounting mistakes?
- Data entry errors occur when items are entered incorrectly or incorrectly into your accounting system.
- Failure to record something is known as an error of omission. It was just overlooked; it wasn't done on purpose.
- A commission error is when something is handled improperly by being placed in the incorrect location.