Here’s the thing: Handling your own bookkeeping is a risky, tricky idea unless you have training in how to deal with numbers. But don’t let potential bookkeeping mistakes or snafus hold you back. Instead, get someone on your side who knows bookkeeping so you can spend your time focusing on the things you’re good at.
Don’t believe bookkeeping is really all that complicated? Here are 5 common bookkeeping mistakes that serve as examples of how difficult dealing with business numbers can be – along with tips on how to resolve those errors if you decide to tackle them yourself:
- Labeling payments to the owner as an expense.
If your company is a sole proprietorship or one-person LLC, it’s crucial that you don’t categorize payments that you make to yourself as a business expense. This simple but incorrect act lowers your profit and muddies the waters about how much tax you need to pay. You should instead record payments to yourself to an equity account that you label “Owner’s Draw” or something similar.
If your company is an S-corporation, then you do indeed report wages that you pay yourself for salary as an expense.
- Failing to reconcile your accounts every month.
Just like not reconciling your personal checkbook, failing to reconciling business accounts is a really bad idea. Done properly, the process involves going line by line through each transaction to ensure that the data in your bookkeeping software matches precisely what your bank statement says. If there’s a discrepancy, you have to figure out the reason. It could be a data entry mistake, an import error or many other things.
Today, bookkeeping software and cloud-based solutions include tools to make reconciliation easy. You can also print out your bank statement and go through your accounts by hand. Simply look at the screen, then mark off each transaction you see on the paper statement. If you see that something on the screen and on the paper don’t match, it’s time for some investigation.
- Considering transfers as income.
Let’s say that your business has both a PayPal account and a checking account. Sometimes, you may transfer funds from PayPal into your checking account. Your accounting software may record this transfer as income. It looks like you made a deposit since your checking account ends up with more money than it had before. But all you did was move the money, not make it.
Accurate bookkeeping means you will need to see if this error is happening in your software, then manually correct it so that it’s categorized as a transfer – something that doesn’t impact your overall business income or have any impact on taxes you owe. While bookkeeping software is the way to go, it’s not perfect, and the choices it makes need to be carefully considered and verified.
- Not bothering to save receipts.
No matter whether a purchase costs a couple dollars or thousands, if it could qualify as a business deduction, you need to keep the receipt. If you purchase online, the digital version of a receipt is fine. There’s no reason to print it out. You can also take photos of paper receipts and save them digitally.
In fact, many modern bookkeeping software choices allow you to capture an image of a receipt with your phone and link it to the expense. While it doesn’t get any easier than that, many people still fail to store receipts. However you choose to do it, you need those receipts stored in an organized fashion so you can access them easily if you happen to be audited. Although advice varies on how long to keep receipts, if you use a paper system aim for at least 3 years and preferably 7 years.
- Making personal purchases from your business account.
This is an easy mistake to make, especially if your business bank card looks just like your personal one. If you accidentally use your business account for a personal purchase, you can deal with the error in one of two ways: Either reimburse your business account for the purchase and properly record this – or record the purchase as an Owner’s Draw.
Using your business card for personal purchases may seem like a good way to avoid the hassle of having to make a transfer, but all those small personal transactions make for messy and bad bookkeeping and can cause you to begin blurring the line between your business and personal assets – a very bad business decision.
A Bookkeeper Can Help
If you find that you’re making one or more of these mistakes, please keep in mind this top 5 list includes only some of the most obvious business bookkeeping errors. Instead of worrying or stressing out about mistakes you may be making, you have two choices: Study and learn proper bookkeeping procedures and correct your business books – or put your business finances in the hands of a professional bookkeeper.
A bookkeeping service costs less than you might think and is responsible for recording all transactions, reconciling all accounts and providing you reports about where you stand. The best bookkeepers also offer advice and information to help you plan for the future. And when tax time comes, there are no worries when you have a bookkeeping service handling your books because the numbers are mostly prepared and ready to plug into your taxes.
You could say that not having a bookkeeper is actually the most frequent business bookkeeping error.