Worried you messed up your books? Don't sweat it. Almost every entrepreneur makes at least one bookkeeping blunder while they're learning the ropes. Thankfully, bookkeeping errors are easily fixed if you catch them early on.
Here's a list of common bookkeeping mistakes we see (and fix) time and time again, along with our best advice on how to avoid them.
Entrepreneurs tend to guess their way through bookkeeping when they aren't fully sure what they're doing. Problem is, guesswork compounds over time, potentially leaving a year's worth of books that you need to fix at tax time.
Some examples include:
Don't stress if any of the above sounds familiar. We're going to explain how you can avoid these errors below. For now, trust that taking a "best guess" approach to doing your books will come back to bite you in the butt.
If you're new to bookkeeping (or just completely lost), brush up on the fundamentals with our step-by-step guide: The Beginner's Guide to Bookkeeping.
When it makes sense to outsource the task to a pro, check out our tips on how to hire a bookkeeper before you start your search.
If your bookkeeping system isn't tailored for your business, you'll spend way more time doing the books than you should. Thankfully, this situation is easily avoided. Setting up a customized chart of accounts from day one is key.
If you don't know how to do this yourself, an accountant or bookkeeper can:
Nobody actually enjoys bookkeeping (except us, of course). But if you wait until your shoebox is overflowing with receipts, and your guilt forces you into a bookkeeping binge, there are some serious consequences.
Our advice? Do your books monthly at the very least. Weekly at most. Daily if your bookkeeping needs are insane (if you really need to reconcile daily, you're at the point where you should hire a bookkeeper).
So you take a client for lunch, but you forgot your business credit card. Not to worry. You can just pay for it with your personal debit card, right?
In the heat of the moment, it might seem easy to pay for a business expense with personal funds. But in the long run, commingling your finances makes bookkeeping (and taxes) a bit of a maze. It can even remove a layer of legal protection in the event that your business is audited or sued.
To avoid this pitfall, get into the habit of never using your own money to cover business expenses (and vice versa).
Here are some tips to help you keep everything kosher:
Of course, if you accidentally pay for a personal expense with your business card (or vice versa) it's not the end of the world. You can reimburse your business account for the purchase, or record the purchase as an "Owner's Draw." But why bother if you can avoid the hassle in the first place?
Financial statements are a direct window into your business's financial performance. If you don't read them regularly (or you don't know how to read them at all), you're missing out on some big-time opportunities to generate revenue and avoid financial disaster.
Financial statements can help you:
Not sure how to find any of the above in your financials? Learn how to read financial statements and ask your CPA for guidance. You'll be armed with better financial insights, and your business will benefit in the long run.
If receipts get lost (or you throw them in the trash), you won't be able to back up the deductions you made on your tax return during an audit. You may also be slugged with a fine.
A few things to note about keeping receipts:
Take a picture of receipts on your phone and store them in Google Drive, Dropbox, or Evernote. Whatever's easiest. Alternatively, upload photos of your receipts to the accounting software you're using. (If you make the switch to getting Accracy to do your bookkeeping for you, you can also upload and store all the documents you want in the Accracy app.)
Also, be sure to record the details of every expense (especially for meals and entertainment). This will help you find your receipts easily and justify the deduction during an audit.
If you're new to recordkeeping, grab a coffee and spend some time with our guide: Small Business Recordkeeping: Tax Records You Need to Keep.
When it comes to hiring a bookkeeper, you get what you pay for. That bookkeeper you found on Craigslist for $8/hour is worth, well"¦ $8/hour.
Hire someone who has bookkeeping experience in your niche. They'll have bookkeeping tips and tricks up their sleeve, specific to your industry. And they should be able to get your books done faster.
Speed up the search for the perfect bookkeeper with our guide: How to Hire the Right Bookkeeper for Your Small Business.
If you're serious about growing your business, you need to hire a CPA.
A great CPA will:
Unless you're able to do all of the above with confidence, invest the money and hire a pro.
Oh, and while we're at it: don't outsource your bookkeeping to your CPA. Accounting fees are much higher than a bookkeeper's hourly rate.
We're getting into the nitty gritty here, but we see this bookkeeping mistake quite often.
Sole proprietors and single-member LLCs: when you pay yourself, don't categorize the payments as an expense. It's an easy mistake to make. But it will lower your overall profit, and display a false total for the income you need to pay tax on.
Instead, record these payments to an equity account called "Owner's Draw."
Does your business receive money via multiple accounts? For example, do you receive payments in a PayPal account or a TransferWise account?
At some point you'll probably transfer that money across to your business checking account. When you do, be aware that accounting software will generally record that transfer as income (because the total cash in your checking account increases).
Whenever this occurs you'll need to log in and update the transaction so that it appears in your books as a "transfer" (income moving from one account to the other), not "income" (new income being deposited into your checking account).
Frankly, the tax office doesn't care if you know your sales tax obligations or not. They just care that you pay the sales tax you owe"”whether you've been been collecting the sales tax from your customers or not.
Our best advice is to get your CPA to determine and explain your sales tax responsibilities before you start business. If you haven't consulted with a CPA yet, it's never too late to schedule a check-in.
A good CPA can help you:
Sales tax can be hard to wrap your head around at first, but it gets easier over time. Learn the basics with our guides: Sales Tax Basics: A Guide for New Entrepreneurs (US) and How to Calculate GST, PST, and HST (Canada).
Understanding your sales tax obligations will help you avoid owing a surprise lump sum come tax time.
Is that worker you hired an independent contractor or an employee? Get it wrong and you won't just mess up your books. You'll risk steep fines from the IRS.
The IRS is hawkish about this rule because some business owners knowingly misclassify "employees" as "contractors" to skip out on taxes and paperwork.
Learn how to distinguish contractors and employees with our guide: Employee vs Independent Contractor: How to Classify Your Employees.
Avoiding these common bookkeeping mistakes is essential to maintaining the financial health of your business. At Accracy, we provide the tools and expertise to ensure your bookkeeping is accurate and efficient. Our team of experienced professionals can help you set up a customized chart of accounts, stay on top of your expenses, and keep your financial statements in order. With Accracy, you can focus on growing your business while we take care of the details, helping you avoid costly errors and ensure your financial success. Get started with a free trial today.
"
We are offering free 1 Month Basic Bookkeeping to all new customers so you can experience Accracy's seemless and professional services.
Black business owners and entrepreneurs face unique challenges in growing their businesses. Learn how Black business networking and mentoring groups help.
What are the signs that your small business needs an accountant, and how do you recruit one who's a good fit?
Accounting software can be your secret weapon when it comes to managing your small business finances. But you don't have to spend big for features you won't use.
