For many small business owners, efficient cash management may become a challenging task. Among the critical reasons for companies to fail are bookkeeping and accounting mistakes. Thus, if you have no experience working with an accountant or bookkeeper, there is one crucial thing to know. Accountants and bookkeepers are different roles that require performing relevant tasks and holding relevant responsibilities.
Although people often consider these terms interchangeable, accounting vs bookkeeping are separate professional categories. Therefore, each of them offers specific financial management services.
- Bookkeepers are responsible for tracking day-to-day transactions, including sales, purchases, payroll, taxes, etc.
- Meanwhile, accountants use financial information to help business owners or executives with decision-making. They deal with the big picture concepts for generating reports, forecasting trends, or recommending best practices.
At the same time, the presence of accountants in your business does not mean the exclusion of bookkeepers. Modern companies show significant results by cooperation between accountants and bookkeepers who share information and have common goals. But to achieve such results, both roles should avoid making various mistakes and follow the best industry practices.
What Are the Common Bookkeeping Mistakes?
Many small businesses consider bookkeeping a simple process and do not pay the appropriate attention it deserves. So do bookkeepers make mistakes in such companies? The answer is yes. Poor bookkeeping practices may affect an organization’s financial health. Below, you can find five of the most typical bookkeeping mistakes business owners should keep an eye on.
Applying the DIY method
Business owners feel proud of being able to wear different hats. That often involves dealing with bookkeeping and accounting operations. But the particular scope of work must be performed by professionals. Nowadays, both bookkeeping and accounting are incredibly technical and complex. It means that investing in skilled employees, even part-time, helps avoid errors and provides multiple advantages.
Failing to back up the company’s books and software
Each business lives in a world of technologies like cloud computing or big data analytics. Thus, all companies depending on technology should be prepared for various problems and failures regarding tech innovations. The lack of data backup may result in a potential information loss. Having data backup, especially thanks to using the cloud, allows staying on the safe side.
Not tracking small purchases
Often, even the most experienced executives forget about tracking every company transaction. The number of different small purchases may increase if ignored constantly. Besides, it can become a significant issue if you have no evidence to justify claimed expenses for tax authorities. After all, taking small transactions into account allows dealing with bigger ones better.
Failing to conduct fundamental account reconciliation
Among the critical responsibilities for businesses is to set their books with the bank statement each month. But account reconciliation is considered a simple process. That requires comparing your books with bank statements to ensure the absence of any disparity. If you find a mistake, you should contact the bank to address the problem. Performing this process regularly eliminates various bookkeeping mistakes at the early stages.
Not understanding the difference between cash flow and profits
No doubt that each business owner wants to obtain a clear view of the company's true financial conditions. So you need a professional bookkeeper or accountant for preparing regular financial statements. Such statements may include balance sheets, profit and loss statements, or income statements. Meanwhile, the mentioned professionals must present these statements at least quarterly.
How Do Accounting Errors Impact Business?
Like in other business-related operations, accounting errors can go from minor to substantial. So what are the most common types of errors? How do they occur? And what consequences do they cause?
- Incorrect income reports. The particular error may distort the organization’s computed operating profit margins and lead to over-reporting its income.
- Incorrect cash flow data. If you cannot provide the correct reports on items, you will obtain the overstated cash amount to pay bills.
- Incorrect expense reports. The inadequate expense qualification or failure to involve business expenses can lead to reporting a deductible expense. In turn, that results in overpaying taxes.
- Increase in labor costs. Employees, who already deal with year-end reports, find it incredibly time-consuming to correct classification mistakes on the back end.
- Late payment fees. Your accountants may discover misclassification mistakes later in the accounting cycle. Therefore, the invoices can be past due, which leads to additional fees and interest.
- Inappropriate matching of income and expenses. Misclassifying expenses can result in incorrect reports for organizations that use accrual accounting. After all, you have to match expenses properly with the generated income.
- Fraud detection. Unfortunately, employee fraud, along with embezzlement, may occur at any company. If you cannot match up items, it means that something goes wrong. In this case, you should require more investigation.
How Can Bookkeeping Avoid Errors?
Classifying items properly and entering them correctly in books is essential for any business. Be careful with your financial data. There are several critical steps necessary for facilitating sound accounting entries.
Train employees on information entry accuracy
Staff members who enter expenses into your accounting system must understand all books and descriptions correctly. Take time to onboard that person properly and explain the nuances of your system. Besides, you can establish the organization’s policies on documentation procedures to promote appropriate and accurate data entry.
Do not overload your team
If your employees are overloaded, they are more likely to make mistakes. This situation may be fixed by wise planning of responsibilities and tasks. But, it is crucial to work with an up-to-date accounting or invoicing system and not fall behind. Also, you need to consider approaches to simplify data entry and exclude any data typos. For example, applying the expense report feature helps transfer data into a bookkeeping system smoothly.
Deploy updates to your accounting software
Updating your accounting system is essential. Numerous financial management systems work in the cloud and simplify the whole bookkeeping process. But while cloud-based products update automatically, you must purchase desktop software to keep up with the times.
Apply internal error tracking
Today, you should follow practices of detecting and correcting bookkeeping mistakes. For instance, your business can perform bank reconciliations each month that help to catch an issue. Therefore, errors do not linger on books. Besides, the same situation refers to your credit card statements. In this case, you need to review them monthly, which ensures charges are entered appropriately in your accounting system.
Check how the budget and actual expenses differ
Accounting software ensures you are on the right financial track. Your budget can show a particular sum of money that must be spent. However, the entry may not match. To compare actual expenses with budgeted amounts to discover misclassification.
Perform a regular review of books
Bookkeepers need to review your books periodically. That ensures they correctly refer to the expenses and comply with legal regulations. For example, your bookkeeping software can include a specific feature that enhances reviewing client information.
Follow bookkeeping practices and standards
Creating the standard checklists to enter and reconcile data is also a necessary practice. That way, you can find errors and correct errors faster. Employees must understand bookkeeping standards and get knowledge of how to get an advantage from them. Ultimately, your bookkeeping system should reflect the particular criteria.
9 Things Every Bookkeeper Should Know
To perform bookkeeping tasks efficiently, keep your knowledge sharp, and don’t be humiliated to refresh it from time to time. Here are some critical things a bookkeeper should know.
- Cash. A particular account is a place where all company’s transactions are passed. Here, bookkeepers track activities using two journals, cash receipts, or cash disbursements.
- Accounts receivable. If your company sells products or provides services and cannot obtain money immediately, you get receivables. Such an account helps track the money due from clients. Thus, you need to keep it up-to-date. That makes it possible to send accurate invoices on time.
- Inventory. Bookkeepers use it for accounting for all available products in stock. Also, they have to do physical counts of inventory for testing the numbers in books.
- Accounts payable. Such an account shows what amount of money is leaving or already left the company and when it was done. Accounts payable bring a clear view of everything you must pay.
- Loans payable. It tracks and breaks down everything that your business owes. Also, it informs you about paying for everything you have borrowed.
- Sales. As one of the key accounts, “sales” enables bookkeepers to track the company’s incoming revenue generated from sales transactions. The ability to record sales on time and accurately provides a clear understanding of business current conditions.
- Purchases. Here, bookkeepers can monitor all materials and items your company has previously purchased. The purchase is a feature to calculate costs sold goods. In turn, that calculates the organization’s gross profit.
- Payroll expenses. In the payroll expenses, bookkeepers monitor salaries and wages your company pays to its staff. For example, many organizations find this cost as the biggest one. Therefore, keeping payroll expenses accurate is critical for complying with tax and other legal regulations.
- Retained earnings. Bookkeepers track all organization’s profits that you have reinvested. As the earnings are cumulative, they serve as the total amount of money retained since the foundation. The particular account is an efficient tool to track the overall performance of your organization over many years.
Accounting Tips for Small Business Owners
Despite the size, all businesses should follow essential accounting practices to have strong financial management. Among the most critical accounting tips for small business owners are the following:
Separate your company’s and personal expenses
The first step for each organization to take is to open a business bank account. The particular account brings many benefits compared to the personal ones. For example, it allows tracking and substantiating business expenses to benefit from tax deductions. Also, a business bank account offers personal liability protection and provides the client with a credit line.
Keep correct business records
Accurate business records are essential for each business owner. Thanks to implementing accounting software, companies obtain an automated record-keeping process. That helps store financial records digitally and makes it easier to document necessary transaction details.
Decide what accounting method to choose
Organizations must follow a specific suite of legal regulations that determine the time to report income and expenses. That results in applying a consistent accounting method to deal with tax purposes. However, implementing a cash basis method may become a better option. This method is more straightforward since the company’s revenue is recorded after receiving a payment.
Keep your books up-to-date
Without the opportunity to keep books up-to-date, business owners and employees have no clear vision of the organization’s financial conditions. Thanks to automating receipts and capturing invoices, you can ensure your books are usually up-to-date. Ultimately, another critical practice is to link your accounting software with a business bank account.
Plan further investment
By constantly monitoring expenses and revenue, you can define the most appropriate time for further significant investments. In this case, you can establish the credit your business needs for covering the cost. With business credit cards, organizations can establish a required credit history. That brings better chances when qualifying for finances.
Conclusion
To succeed, you should be aware, track and fix any typical bookkeeping issues or accounting errors. Besides, the more frequently you review the financial numbers, the better your financial health is. Of course, most business owners or executives are not passionate about accounting. But regularly reviewing the critical financial metrics, you track the opportunities and ensure doing all for possible your business growing.
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