Small business bookkeeping is a major element. In so doing, you will keep track of all your sales, expenses and payments. For this reason, correct bookkeeping helps to make the right decisions in the operation of the business as well as adherence to tax laws.
Nevertheless, it can be intimidating for bookkeeping especially when an entrepreneur has no training or background in accounting. Consequently, many small businesses commit common errors in bookkeeping that have grave consequences.
In this article we will discuss 7 common mistakes that small businesses make about their books which may lead to inaccurate financial statements and complications with IRS.
Mistake #1: Failure to Record All Transactions
The leading mistake people make is not recording all transactions made by their companies. This can be due to the forgetfulness of a transaction by owner while under pressure or lack of proper way of tracking costs at home.
To avoid committing this error, it is vital to have a system set up where every deal should be recorded either in a physical ledger or digital accounting software. Habits are formed of entering transactions as they take place and reading regularly through your records to ensure completeness.
Mistake #2: Commingle Personal and Business Finances
It is one of the most common mistakes for small business owners to mingle their personal accounts with those of their businesses. This makes it hard to properly account for business expenses or monitor any business incomes hence leading into confusion.
To avoid this trap, make sure you open separate bank accounts and credit cards for your personal needs as well as for your business purposes. This way, you could keep track of your enterprise’s expenditures more easily avoiding the commingling of private costs.
Mistake #3: Failure to Reconcile Bank Statements
Reconciliation of bank statements is a bookkeeping requirement. The process involves comparing your records against the bank statements to ensure that all transactions are accurate and are accounted for.
Avoidance in reconciliation of bank statements may result into errors in financial records hence making it difficult to detect discrepancies. Make it a point to regularly check on reconciliations of bank statements so that you can get the correct amount showing in your books.
Mistake #4: Neglecting Cash Transactions
In particular cases whereby small scale online traders have majorly been involved in electronic payments cash transactions tend to be overlooked. You must however ensure that all cash transactions are recorded so that your financial records remain valid at all times.
So as not to commit this error, ensure that all cash transactions are recorded in your accounting system. It covers such things as cash sales, petty cash expenses, and any other payments in the form of money.
Mistake #5: Expense Misclassification
This is very important when keeping books correctly. However, numerous small businesses often make the mistake of incorrectly classifying expenses, leading to inaccuracies in Small Business Accounting and Tax.
To avoid this mistake, make sure that you have posted expenses into right categories in your bookkeeping software. You will thus be able to monitor costs easily as well as guarantee their right presentation in financial reports.
Mistake #6: Failing to Monitor Invoices & Payments
In many cases, small business owners have challenges associated with tracking invoices and payments leading to poor records of finances and operational problems too. In addition, non-monitoring of invoices and payments can make it impossible to follow up on the unremunerated bills or claim for payment.
To avoid this mistake; make sure you have a procedure for tracking invoices and payments. It can be straightforward like using an Excel document or involve purchasing an accounting software package that does the job for you by maintaining a record of all invoices and receipts.
Mistake #7: No professional help was sought.
Bookkeeping can be a complicated and time-consuming task, especially for small business owners who don’t have an accounting background. A lot of small businesses make the mistake of doing their own bookkeeping which may lead to errors and missed tax deductions.
To avoid this mistake, think about seeking out professional help from a bookkeeper or accountant. They will be able to assist you in setting up an appropriate bookkeeping system, maintain accurate financial records as well provide invaluable advice to your company.
Conclusion
It is important to note that keeping books is difficult when running a small company. You can ensure that your financial records are accurate and you do not run afoul of IRS rules by steering clear of these common bookkeeping mistakes. Make sure you record all transactions, separate personal and business finances, reconcile bank statements, track cash transactions, classify expenses accurately, keep track of invoices and payments and obtain professional assistance when necessary.
With proper bookkeeping practices in place, you will be able to make informed decisions for your company thereby ensuring its successful growth.
Frequently Asked Questions
1. Must there be separate bank accounts for personal and business finances?
Yes, it is necessary to keep one’s own financial life separate from the one of his or her business. It simplifies their record keeping concerning the revenues and expenses and avoids any confusion during tax season.
2. How regularly should I reconcile my bank statements?
It is advisable that you do this at least on a monthly basis to identify errors in your records.
3. What is the most effective way of tracking cash transactions?
Come up with a way for recording all cash sales made through your accounting software such as; keeping receipts or having a petty cash log.
4. How can I stay on top of invoices and payments?
There are several options available including:
- Use accounting software that has invoicing capabilities.
- Create a spreadsheet that tracks unpaid invoices as well as due dates for payment.
- Set up reminders for forthcoming payments.
5. When should I consider hiring a professional bookkeeper?
If bookkeeping feels overwhelming, time-consuming, or confusing, consider engaging the services of a professional accounting and bookkeeping firm for small businesses. They can assist in maintaining accurate financial records and offer valuable financial advice tailored to your company’s needs.
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