Common Bookkeeping Mistakes to Avoid
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You've started your business and you’re to the point where your bookkeeping is seen as one of the necessary evils that you must do in order to be a successful business owner. But there are several bookkeeping mistakes that you can avoid in your business.
Most see their bookkeeping as a tedious and boring task. But when you understand what you are doing, you can do the bookkeeping correctly and it will also take you much less time than it does if you don't do it. Not to mention the money you will save by knowing where your finances are and not paying fines for late taxes.
When you avoid your bookkeeping, more mistakes happen.
To avoid making these mistakes, you can take a course to learn how to do your own bookkeeping, you could take a few college classes to learn it, you could just wing it, you could read everything you can find for free on the internet or you could just let the mistakes happen and pay for them when you get audited.
Here is a list of some common bookkeeping mistakes:
Improperly Categorizing Your Expenses
When you don't know the categories that you should be putting your expenses in, is when you really start to mess things up.
It is important that you correctly classify your expenses in order to get the right credit at tax time.
Improperly categorizing these expenses can mean that you don't get the right credits on your tax return and it can be the difference between actually making a healthy profit in your business and spending more money than you are bringing in.
Improper or Poor Recordkeeping
The main reason for improper or poor recordkeeping is because of the lack of knowledge. Not everyone is an accountant, but you don’t need to be an accountant.
When you own a business, you don't need to be an accountant, but you need to be able to understand what taking care of your business finances really means.
Every single thing that happens in your business is a part of your financial records. And you need to keep these records for a certain number of years.
For the IRS, the requirement is to keep a copy of everything for 3 years, but the recommendation is 7 years. For sales tax purposes, you should keep them for 4 years.
Not Reconciling Your Bank Accounts
Part of doing your bookkeeping is reconciling your accounts. This means verifying that all of the transactions that you put into your bookkeeping program have gone through your bank account.
If you have ever reconciled your checking account (this tends to be something that most people don't do anymore today), then this is exactly what you are doing.
You have to verify that the balance that you have in your bank account matches the balance that you have in your bookkeeping program.
You should be reconciling your accounts every month.
Commingling Your Personal and Business Expenses and Bank Accounts
Sometimes it's just so much easier to just swipe that debit or credit card than it is to transfer the money from your business bank account to your personal bank account. Don’t do it!
When you commingle your business and personal expenses, you can cause so many other problems.
Get a business bank account, use this to pay for your business expenses and when you want to pay yourself, either write yourself a check or transfer the money to your personal bank account.
Set up a regular transfer from your business bank account to your personal bank account, so you never have to worry about doing it last minute.
Not Reading Your Financial Statements
90% of people never once look at their financial statements. All they care about is how much money they made in the last month and how much money is in the bank.
When you read your financial statements, you can actually see where your money is going in your business. You will be able to see how much money your business is actually making, or your profit, which is your revenue minus your expenses.
This also allows you to plan for other things in your business, like investing in that course you always wanted to sign up for that opens next month, or being able to pay your taxes at the end of the quarter or year.
Plus you also need to read these statements to be able to plan for your quarterly taxes.
Throwing Away Your Receipts
In your personal life, you normally throw your receipts away after you've seen that they have cleared your bank or credit card account.
But in your business, you can't throw your receipts away. Don't delete them from your inbox.
You need to keep copies of these receipts for at least 3 years.
But you can keep them electronically. It is not required to keep paper copies of everything. I personally keep a folder for each year in my email inbox. Every time I buy something, or receive money, that email goes into that folder. Then on January 1, I create a new folder for the new year.
Just make sure you keep copies of your receipts.
Hiring an Inexperienced Bookkeeper
There are a lot of bookkeepers out there. But not all of them have the experience or even the same knowledge. Some of them have become bookkeepers simply because they know there is money available here.
The other thing you need to look for with a bookkeeper is that they fully understand small businesses. If the bookkeeper or even accountant hasn’t worked with a small, I'm going to guess that they don't quite understand all of the expenses that a small business has.
When it comes time to hiring a bookkeeper, make sure you vet them and ask the right questions so that you know they understand your business and what you do, as well as understand bookkeeping.
Reporting Bank Transfers as Income
When you have both a PayPal account and a bank account, you will normally transfer your money from your PayPal account to your bank account.
Most people report the money as income when they receive it in their PayPal account. And then when the money is transferred to your bank account, it gets counted as income again.
But it shouldn't be counted as income again. It should just be counted as a bank transfer.
Recording Payments to Yourself as an Expense
If you are a sole proprietor or a single member LLC (which many small businesses are), you should be classifying your payments to yourself as owner's draw, which is a capital account.
They should not be counted as an expense.
If you are an LLC that reports as an S Corp or an S Corporation or C Corporation, then you should be paying yourself through payroll, as well as paying quarterly employee taxes. And the payroll will count as an expense, not an owner's draw.
Neglecting Your Taxes
All businesses have to pay taxes, whether this is payroll taxes, income taxes or sales tax.
When you aren't clear on the taxes that you need to be paying, then you are most likely going to be neglecting them.
To make sure you are paying taxes correctly and planning for them, make sure to contact an accountant that can set everything up for you and even guide you on doing things correctly.
Not Staying Up-to-date
At a minimum, you should do your bookkeeping once a month. It's better if you do it once a week. I even know people who do it daily.
But going months without managing your books just makes it harder to get caught back up. You don't always remember what certain expenses are for. Or where that money came from.
If you do nothing else on this list, at least keep your bookkeeping up-to-date in your business.
How can you avoid these bookkeeping mistakes in your business?
You can do everything you can to learn all about the requirements that are available to you. The more you know, the better you'll be, and in the end, the better your business finances will be. There are usually free resources available for small businesses within your community.
You can hire a bookkeeper. But make sure you get an experienced bookkeeper who knows what they are doing and also who understands small businesses. There are many accountants and bookkeepers out there that do not know how to do bookkeeping for small businesses because we have expenses that are so much different than brick and mortar businesses.
Or you can take a course that will teach you everything you need to know about your business finances. And with a course, you can most likely get access to an accountant that will be able to answer your questions.
Tell me, how are you going to avoid these bookkeeping mistakes in your business?
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