As a small business owner, one of the most important parts of keeping your business healthy is keeping good financial records. Many small businesses choose to handle their accounting themselves. That is fine if you know what you are doing, or have some background in bookkeeping. But what the Rules of Thumb blog from MoneyThumb often discovers is that small business owners who take care of their accounting personally make mistakes. It is really better to have a professional accountant or even a CPA take care of your accounting. However, if you are just starting out, you may not be ready to shell out the money for a professional accountant. In that case, beware of the following top ten accounting mistakes small business owners make:
Top Ten Accounting Mistakes Small Business Owners Make
- Not saving receipts--Even though receipts may not be required by the IRS, they provide backup documentation for the many deductions you may claim. It is very simple to have a folder for such receipts, which can prove valuable at tax time. We suggest always saving receipts. It just makes good sense.
- Doing it yourself--As we stated above, many small business owners insist upon handling their finances and keeping their books themselves. Having a competent bookkeeper coming in to handle the books can be extremely beneficial in that they have the skills to do the job quickly and efficiently and will provide a second pair of eyes to find errors and make suggestions.
- Forgetting to track reimbursable expenses--Small business owners often pay for expenses out of pocket or with their own personal credit card then make the mistakes of failing to track these expenses. They then fail to submit the expenses to the company for reimbursement.
- Not properly classifying employees--The use of independent contractors, consultants, and freelancers you may use to help build your small business has made it difficult to determine who is on staff and who is not. This results in misfiling when it comes to filing taxes since there are different rules and regulations for employees and non-employees.
- Lack of communication--Having someone handling bookkeeping is only effective if they are filled in and kept up to date on all financial transactions. A frequent mistake is paying someone a bonus and not reporting it or buying supplies and not providing the bookkeeper with the information or receipts.
- Not reconciling the books with the bank statement each month--One of the fundamental aspects of bookkeeping is reconciling the books and bank statements every month. Nonetheless, there are businesses that do not do this and others where errors are made by not doing it properly. Again, this is a good reason for hiring an experienced bookkeeper. MoneyThumb provides the perfect tools for small businesses to quickly and easily reconcile bank statements.
- Not backing up online data with proof--The paperless office does not exist in the real world, where audits do still exist. A paper trail, documentation or verification in the form of backup documents should be available, especially if all files are on the computer system, which could be prone to technical problems.
- Not deducting sales tax--A common mistake in retail businesses is not deducting the sales tax from the total sales. This results in a higher total sales amount and does not lower the amount of taxes due.
- Carelessness with petty cash--A system should be set up whereby a set amount of money is in petty cash and each time money is taken out for any purpose, a petty cash slip is filled out. When the fund is exhausted, the slips will total the original amount and a check can be written to cash to set up the full amount again. Many offices are nonchalant about using the petty cash fund without keeping accurate records.
- Miscategorization or overcategorization--There are fairly standard categories for expenses. However, often expenses are entered into the wrong categories or too many categories are created. Use general bookkeeping guidelines for standard categorization and create a few new categories as possible. Try to follow generally accepted accounting practices.
As a small business owner, if you are going to keep your books yourself and not hire a professional accountant, we strongly suggest you take advantage of the above list of accounting mistakes small business owners make. This way, you can avoid making the same mistakes other small business owners have, and keep your small business healthy and thriving.