Small Business Bookkeeping Blunders
As the end of year approaches, many small business CPAs and bookkeepers find their stress levels rising.
In only a few short weeks, these accountants know they'll see silly bookkeeping errors in many of their small business clients' books--errors that have meant the business owners have paid too little or too much in taxes. Errors that mean the business owner hasn't really been able to effectively manage the finances of the business.
Fortunately, these common bookkeeping blunders are easy enough to fix--if you know what they are and if you know the simple steps you can take to avoid making them.
Bookkeeping Blunder #1: Pretending No Accounting System is Needed
The first--and perhaps most serious blunder--is especially common with new business owners. Sometimes, sadly, the new business owner pretends he or she can get away without a real accounting system.
In place of a real accounting system--something like QuickBooks or Quicken--the business owner simply collects receipts or manually maintains a check register. Or maybe the business creates the illusion of an accounting system by using something like Microsoft Excel to, at least, add up some of the numbers.
Unfortunately, the "no accounting system" doesn't work. Before you have your tax return prepared, someone (perhaps your tax preparer) will need to cobble together some sort of makeshift system. And that's too bad, really. Such a system will allow your tax return to be prepared. But such a system almost surely won't capture all your tax deductions. And the information that this crude "system" provides will be too late to help you better run your business.
Bookkeeping Blunder #2: Slow Entry of Accounting Data
Another common blunder? Taking too long to enter the accounting data into your system. Which is surprising, in a way...
You would think that people who've gone to the modest effort and expense of having a real accounting system set up would keep the system up to date. But often they don't.
The problem with pokey data entry is that any useful insights that come from your accounting system, come too late.
Whoever is doing your accounting should keep up to date on the data entry. Within a few days of some transaction actually occurring, the accounting system should reflect the activity.
Bookkeeping Blunder #3: Skipping Account Reality Checks
An important yet simple point: Of course people make errors in using their accounting systems. But the nature of double-entry bookkeeping means that it's usually relatively easy to catch errors. How? You need to reconcile your bank accounts at the end of each month when the bank statement arrives.
Furthermore, if you hold other valuable assets--like inventory--you need to periodically compare what the accounting records say to an actual physical count.
Regularly performing reality checks on key accounts (especially cash) cleans up all sort of easy-to-miss errors.
Bookkeeping Blunder #4: Financial Complexity Beyond Bookkeeping Skill Levels
One common bookkeeping blunder makes for awkward conversations between accountants and their small business clients. But you deserve to know what the blunder is...
Unfortunately, accountants commonly see clients in businesses that are too complex for their bookkeepers to handle. And that's a huge problem. If the business gets too complicated for the in-house bookkeeper (often the owner's spouse), the accounting system slowly becomes more and more unreliable. And this accounting unreliability usually means the business will shortly get into big trouble. (How can someone successfully manage a business if they don't know when they're making or losing money or how much cash they have in the bank?)
By the way, you'll easily be able to determine if the accountant or bookkeeper is overwhelmed. She will be falling further and further behind on the data entry. She will be producing reports that make less and less sense. And, often items, the profit and loss statement or the balance sheet will include a suspicious catch-all account named something like , "Ask the Accountant," "Suspense," or "Intercompany Transactions" that keeps increasing in size.
Only two true solutions exist for the "too much complexity" problem. You can simplify the business (probably the best idea). Or you can find a smarter (and probably more expensive) accountant.
Bookkeeping Blunder #5: Co-mingling Personal and Business Assets and Liabilities
One final bookkeeping blunder should be mentioned given the approaching tax season.
Many small businesses don't clearly separate their business finances from their personal finances. For example, the businesses may use a single checking account for both personal and business banking. The business may regularly borrow personally to pay for business expenditures--and vice versa. And the business owner may too frequently mislabel personal expenses as business deductions.
Not surprisingly, such co-mingling of finances makes the bookkeeping records nearly useless for tax preparation and for use in managing the business's finances.
About the author:
Seattle tax accountant Stephen L. Nelson is the author of numerous ebooks about incorporation including: Nevada Incorporation Kit and Nevada LLC Kit. Nelson is also the author of the small business best-seller QuickBooks for Dummies.