Maintaining accurate financial records is critical for any business. However, with the pressures of running a company, it’s easy to make minor bookkeeping mistakes that can turn into major headaches later on.
Avoiding common bookkeeping errors will save you time and ensure your records are audit-ready at any time. In those blog posts,we will share 15 mistakes to avoid.
15 Bookkeeping Mistakes to Avoid for Accurate Financial Records
- Not Recording Transactions Promptly
One of the most common bookkeeping mistakes is delaying the recording of financial transactions. Sales, purchases, receipts, and other transactions should be logged as close to real-time as possible. The longer you wait, the more likely that documentation will be misplaced or details forgotten. Strive to enter transactions within one week at the latest.
- Sloppy Source Document Management
Carelessly filed invoices, contracts, bank statements, and other financial source documents can cost hours in lost productivity. Establish a consistent naming convention and filing system so documents can be found quickly. Investing in an electronic document management system may be warranted as your business grows.
- Failing to Reconcile Accounts
Monthly account reconciliation ensures your various bookkeeping accounts match external documents such as bank statements. Put checks and balances in place by assigning the reconciliation task to someone other than the main bookkeeper. Unreconciled discrepancies can conceal growing problems.
- Inaccurate Inventory Tracking
Sloppy inventory management compromises your ability to value inventory properly for tax and accounting purposes. Perform at least an annual full physical count, then monthly cycle counts of select items to confirm quantities. Invest in software to automate reordering and provide more insight into shrinkage.
- Not Following the Matching Principle
To avoid misstating income and expenses for a period, follow the matching principle whereby revenues and their associated expenses are recorded in the same reporting period. This avoids distortions from prepaid expenses or unearned revenues. Sync related transactions meticulously.
- Mixing Personal and Business Expenses
Maintaining completely separate financial accounts for your business is a legal requirement. Never pay personal expenses from the business bank account or vice versa. Reimburse any business expenses paid with personal funds properly. This avoids tax headaches and irrational business decisions.
- Skipping Regular Bank Reconciliations
Letting bank reconciliation slide leads to avoidable frustrations down the road. Set aside time each week to compare your internal books to bank statements and research any discrepancies. Frequent reconciliations make year-end tasks much simpler with reliable records.
- Not Recording Owner’s Contributions/Withdrawals
As a business owner, carefully track any funds you inject into or remove from the business outside of payroll. Record these owner contributions and withdrawals so your income statement reflects only business activity. Sloppy records can distort the company’s real profitability.
- Avoiding Accounting Software
Spreadsheets and manual bookkeeping become unwieldy as transaction volume increases. Embrace cloud accounting software right away to automate key processes. The right platform scales easily and provides indispensable analytics on cash flow, profit drivers and more with just a few clicks.
- Posting to the Wrong Accounts
Inaccurate account coding results in financial reports that don’t reflect reality. Take time to establish a clear chart of accounts and train staff on posting transactions properly. Review coded transactions periodically to catch errors before they compound.
- Neglecting Budgets and Cash Flow Plans
Planning for peaks and troughs in cash flow is too important to wing it. Create operating budgets and cash flow forecasts based on historical data, contracts and pipeline discussions. Regularly compare projections to actuals to make adjustments.
- Not Segmenting Personal vs. Business Accounts
Blending personal and business activities within accounts distorts the business’s real performance. Break things down properly across bank accounts, credit cards and accounting software. Implement controls to keep business transactions fully separate from personal for better tracking.
- Avoiding an Audit Trail
You should be able document the source of every transaction with top-notch recordkeeping. Retain documentation trail tying transactions to specific invoices, contracts, checks, etc. An audit trail substantiates figures in case of an IRS audit or financial review.
- Postponing Professional Tax Help
Don’t wait until right before tax deadlines to work with an accountant or CPA, especially your first years in business. An experienced tax pro provides valuable input into optimal business structure, tax deductions you might miss and other planning considerations.
- Not Making Backups of Key Data
Hard drive failures, ransomware and other tech disasters happen when you least expect. Protect your sanity by implementing automated cloud backups of your accounting system, shared drives and other key data. Test recovery periodically to ensure backups were executed properly.
Final Words!
By avoiding these common bookkeeping pitfalls, you can breathe easier knowing your financial house is in order. Invest time upfront in robust processes and controls to ensure accurate records that stand the test of time. Reach out for professional support any time you have questions.
