5 Common Bookkeeping Mistakes Business Owners Make

Introduction - 5 common bookkeeping mistakes

Managing bookkeeping for a small business can be overwhelming and time-consuming. However, it's essential to stay organized and comply with the regulations established by your tax agency. By highlighting these 5 common bookkeeping mistakes, I aim to make the process more approachable and efficient for your hectic schedule.

1. Mixing Business and Personal Finances

Let's begin by addressing a common error many business owners make when starting their venture. Combining personal and business transactions in one account leads to confusing and challenging record-keeping. It's crucial to maintain a clear distinction between your business and personal finances, even if you're a sole proprietor.

Mixing business and personal transactions inevitably results in inaccuracies in your financial records, making reconciliation difficult.

How can we resolve this? Ideally, you would travel back in time to when you started your business and set up a separate account or credit card for it. However, since that's not possible, the best approach is to start now.

Ensure you use those accounts exclusively for business transactions, payments, and income. Think of your business as a separate "person" from yourself; it needs its own bank accounts.

2. Not Keeping Receipts

Receipts, invoices, and statements serve as your "evidence" in record keeping. Typically, if you are audited, your tax agency will require you to explain some, if not all, of your business transactions. Therefore, it is crucial to be proactive and maintain this evidence to present to them and remind yourself of the reasons behind your business transactions to support your case.

If the tax agent discovers that you lack the records to substantiate certain transactions, it may result in additional taxes owed. Saving on taxes is one of the reasons we enter business in the first place.

To address this, we employ a digital receipt tracking system. This usually involves taking a photo of the receipt/invoice/bank statement and storing it:

• on your computer

• in an app

• or on QuickBooks Online

This simple adjustment in your routine will ensure less hassle and stress in the future if you face an audit situation.

3. Not Reconciling Accounts

Reconciling your accounts, including credit card statements, is essential for assessing the health of your business finances. Neglecting this task increases the risk of fraud, errors, and accounting discrepancies, which can lead a business into financial trouble.

This is why your bookkeeper will regularly reconcile your accounts, typically on a monthly basis. This involves comparing your transactions with your bank statement to ensure everything is accounted for, with no duplicates or errors, and that everything balances.

If reconciling your accounts seems overwhelming, consider reaching out to a trusted bookkeeper to ensure this step is not overlooked. We save our clients time, stress and money in the long run.

4. Avoiding Expense Misclassification

Failing to track or categorize your expenses accurately is a frequently overlooked mistake. Labeling an expense as uncategorized or miscellaneous can result in neglected expenses, potentially leading to business overspending and financial issues.

Misclassifications often involve personal expenses that are difficult to justify as business expenses. Your tax agency and accountant can provide a list of suitable business expense categories for guidance if you're uncertain. Another common reason for misclassification is human or software error. It's important to have a certified professional managing your books who stays updated on regulations and can organize your transactions correctly. This ensures precise budgeting and monthly reports, allowing you to understand your business's performance in real time.

5. Stalling Bookkeeping

You would not believe, or maybe you would, the amount of sole proprietors I come across who wait until the very last minute to gather up their receipts and income and present it all to their accounting office right before the deadline. Now, this is understandable of course, you are busy. And busy is a great problem to have when you are self-employed.

Let me provide some solutions for you going forward to avoid the extra stress at tax time.

Daily:

• gather receipts and write the business expense and any other notes on them.

• Put them in a safe place OR better yet! take a picture of it and store them on your laptop or in QuickBooks.

  
  

Weekly:

• Put receipts into categories.

• Put transactions into a spreadsheet. Keep income and expenses separate.

Monthly:

• Gather bank statements of business accounts and store them with the receipts for that month.

• Review bank statements and ensure all receipts and income are accounted for.

This may seem like a small list, but we all know these things take time and patience that you may not have. That is okay, that is why a bookkeeper is such an amazing tool to have in your arsenal.

Conclusion

Small businesses must prioritize bookkeeping and accuracy. For many, this is their livelihood and how they support their families. Therefore, it is essential to take the time to avoid common mistakes that could lead to financial losses. Many business owners can prevent these errors by hiring a reliable bookkeeper to manage their records regularly.

A bookkeeper can properly categorize and tailor these categories to your specific business activities and local regulations. They will reconcile your accounts monthly and provide reports to ensure you stay within budget. Deadlines will be met, and records will be accurate, saving valuable time and money for the busy entrepreneur you are.

With that in mind, I hope you found this helpful and remember these key takeaways.

Key Takeaways

• Establish separate accounts for business and personal finances to enhance clarity.

• Keep digital copies of all receipts to ensure proper expense tracking and tax compliance.

• Regularly reconcile accounts to identify discrepancies early.

• Review expense classifications consistently to avoid costly errors.

• Develop a consistent bookkeeping schedule to avoid procrastination.

Wishing you and your loved ones all the best. May you succeed in both your personal and professional endeavors. Follow us for more similar blog posts.