Bookkeeping can be defined as the action of maintaining the financial records of a business. This seemingly simple work is very complicated and highly prone to errors.
Small businesses experience challenging situations now and again due to the volume of their business. Apart from the lack of liquidity and tough competition, poor bookkeeping is another factor. Many financial issues root in poor maintenance of the books of accounts.
To find solutions, one must understand the problem first. Here are some of the top bookkeeping mistakes made by small businesses.
1. Losing track of the small stuff
Everyone notes down the big-ticket items right away. However, the smaller expenditures are hard to track, and people often become careless with them. Eventually, you may end up with thousands of dollars spending with no details.
It will be a problem in case you have a tax audit. Even if that does not happen, you will still have spent money on business with no record, leading to unwanted losses.
2. Mingling personal and business expenses
Mixing personal and business accounts is the one bookkeeping mistake that destroys small businesses. Once you start a business, open a separate bank account for business purposes. Set rules for cash withdrawals for personal expenses and for retaining earnings to be reinvested into the businesses.
Your accountant can best guide you on the matter. Be sure to come up with an empirical formula that can work in the longer run.
3. Not reconciling accounts consistently
You must reconcile your bank accounts every month. If the monthly statements and your books of accounts have differences, make sure you get to the bottom of the problem. Most issues can be resolved with a few minutes of investigation.
However, if you’re reconciling once every few months, the task will become monstrous and nearly impossible to complete. Get it done every month rather than when guilt forces you to.
4. Missing out on tax deductibles
You can miss out on tax deductibles due to poor bookkeeping. A rim of printing paper is an expense, but the printer you bought is an asset. The latter can be depreciated in the books, and it can lower your tax owed.
Similarly, minor expenses that can be tax-deductible may be missed due to simple bookkeeping mistakes. Often these small expenses run into thousands of dollars. Such an amount can lower the tax owed by quite a bit.
5. Misclassifying employees
Incorrect classification of employees can lead to tax-related trouble. Some businesses misreport employees as contractors for their convenience. However, if the tax authorities find that out, they come down pretty hard on the company.
6. Mishandling sales tax reporting
Most businesses need to report sales taxes. Any error in calculating or reporting sales tax can lead to penalties and loss in overpayments to the tax authorities. If someone is collecting it but not reporting it, the tax department is generally pretty harsh in that situation.
Similarly, without proper care, the tax may be misreported. A small business concern may end up paying money out of the pocket in such a case.
7. Overly dependent on accounting software
There is much high-quality accounting software available in the market. Accounting software helps a lot with bookkeeping. However, one can not entirely rely on these. Even with the help of software, humans still make errors.
It is essential to carry out periodic manual audits and fix any oversights or minor errors. The quicker they’re found, the easier they’re to rectify.
8. The jack of all trades
Running a business is a tough job. For a small business owner, running daily operations can be a handful, and the last thing they need is to take over bookkeeping as well. Considering the issues mentioned above, there is a lot that can go wrong with a super busy person trying to take care of the accounts as well.
Hire a professional bookkeeper and ensure that your accounts are in order. Such an appointment may feel like an extra cost, but it will help remove the errors and possibly save you thousands of dollars a year that the mistakes can cost in taxes. It is a worthwhile expenditure.
We can conclude that bookkeeping is a tough job and should be performed by professionals. The little extra cost will save you from many headaches and, most likely, financial losses.
You should also ensure that all matters relating to employees, taxes, and bank accounts are in order. Otherwise, the tax department can come down on your small business with severe penalties.
About the Author: Carole Anne is the bubbly head honcho of Key Admin. She’s BAS Agent Member of the Institute of Certified Bookkeepers, a Certified Xero Advisor, Advanced QuickBooks Online Advisor and has an Advanced Diploma in Business and Finance.