Top 10 Bookkeeping Mistakes - and How to Avoid Them
1) Mixing Business and Personal Expenses
One of the most common bookkeeping mistakes is co-mingling your business and personal expenses. Not only does this make your bookkeeping more complex, but you also increase the likelihood that someone could hold you personally liable for business debts and lawsuits.
Be sure to open separate business bank and credit card accounts, and ensure you only use them for business-related transactions.
2) Too many accounts in the Chart of Accounts
Finding the right level of detail for your Chart of Accounts can be tricky. Accounting software often suggests too many accounts for the Chart of Accounts. There is also a tendency to add new accounts when uncertain how to code a transaction. Over time, your reports become challenging to understand.
Don’t create a separate account for every transaction. It’s best to group similar transactions.
3) Neglecting to Save Receipts
The IRS requires a record of all business transactions over $75.00. Be sure to save all business-related receipts. Note the date, place, person, and business purpose for meals. If you don’t receive a receipt, create a written record of the payment, date, and purpose.
I recommend keeping a copy of the receipt in DropBox, OneDrive, or Google Drive. Scan your receipts. Create a folder for each year and a sub-folder for each month. Keeping a backup of your records ensures they are safe from physical damage or loss.
4) Failing to Reconcile Bank and Credit Card Accounts
Remember to reconcile your Bank and Credit Card Statements each month – it’s the best way to catch errors early on. Record interest income and bank service charges in your books. Notify your bank or credit card company of any unusual or suspicious transactions.
5) Missing out on Tax Deductions
Take advantage of valuable tax deductions! Make to record ALL expenses – even ones made with personal funds.
6) Not Planning for Taxes
Is your business subject to Sales Tax? Be sure you are calculating it correctly and collecting and submitting the payments on time. Likewise, you must pay your Quarterly Estimated Taxes by the deadlines.
Set aside the funds for your tax payments as you incur them. That way, you’ll have the money when it is time to pay.
7) Failing to Track Petty Cash
Many businesses keep a small supply of Cash on hand for small, unplanned purchases.
I recommend requesting a receipt for every cash purchase – regardless of the amount. Small expenditures add up over time. Be sure you’re taking advantage of every valid tax deduction!
8) Failure to Properly Classify Employees
As a business owner, you need to determine whether the people providing services for your business are employees or independent contractors.
In general, an employee is anyone who performs services if the business can control what will be done and how it will be done. Employees must be paid through payroll and receive a W2.
An independent contractor is a self-employed person in an independent trade or profession offering their services to the public. Independent contractors submit an invoice for payment. Depending on the amount and method of payment, you may be required to provide a Form 1099 to an independent contractor.
Click here for more information from the IRS about Worker Classifications.
9) Failing to Back Up Your Records
Unfortunately, many of us have encountered computer breakdowns and failures. Be prepared. Be sure to back up all your records to a cloud storage service.
10) Trying to Do It Yourself
Most entrepreneurs are required to wear many different hats. Often, owners try to manage their bookkeeping on their own. Lack of training and experience can result in inaccurate financial records, missed tax deadlines, and messy books. For your business’s health, investing in professional bookkeeping services is crucial. You’ll free up valuable time and spend it doing what you do best: serving your customers and growing your business.