Home General 7 Common Bookkeeping Mistakes and How to Avoid Them

7 Common Bookkeeping Mistakes and How to Avoid Them

by Olufisayo
Common Bookkeeping Mistakes

Starting a business can be exciting but it can also feel like an uphill battle. Accounting is certainly one of the hard parts. And when you’re wearing multiple hats, it can be difficult to remember every detail, especially when you’re dealing with a lot of numbers.

Even though bookkeeping is not the most exhilarating task one can do, it directly influences your business. Here, we will talk about the mistakes that most startups and entrepreneurs make while handling bookkeeping, and how to avoid them.

1.  Mixing business and personal expenses

You might think that having one checking account for both personal and business spending would be convenient, but it’s actually not a good idea. This mix-up can cause problems later on when tax time rolls around.

By failing to keep good records of your tax-deductible expenses, you run the risk that some or all of those deductions will be disallowed by the IRS.

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The best way to avoid this mistake is have separate accounts – one for personal expenses and one for business expenses – so you can easily keep track of what was spent where. This will also help you in avoiding a lot of hassles and keeping your finances in order.

If you do mix up accounts, it’s best to separate them as quickly as possible. If you can’t do this right away, keep a detailed record of all the transactions in both accounts so that you can properly categorize them later on.

2.  Not tracking capital purchases properly

A capital purchase is money spent on something that will last more than one year – for example, an office chair, computer system or other essential assets for your business.

Many small businesses don’t do a good job of tracking the purchase of these capital assets.

This can lead to problems when it comes time for taxes. If you don’t track your capital purchases property, you will have the risk of up paying more than you should have or miss out on tax credits that are available for certain purchases.

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You need to track these purchases– not just what you spent on them but also when they were made and how much they cost, so that they don’t show up as an expense in the current year but instead are depreciated over time.

This information will help you make future investment decisions as well as plan budgets and projections for tax purposes.

3.  Not keeping receipts for business expenses

The most common way that people lose money is by not keeping their receipts.

The IRS requires that all businesses keep detailed records of their expenses, so if you don’t keep good records and don’t get reimbursed for everything that you spend, you could end up paying taxes on money that should be exempt from taxation or worse– having to pay penalties and interest on the money that was never taxed in the first place.

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Receipts are important because they provide proof of purchase for tax purposes and can help you track how much money you’re spending on each item. It’s important to have a clear system of organizing and storing your receipts.

The IRS has strict rules about how long they’ll accept receipts as evidence when filing taxes– three years after the date they were issued or two years after the end of the tax year in question, whichever comes first– so it’s important to keep them organized and accessible at all times.

The digital versions of receipts are also legal and acceptable as long as it is legible and contains important details such as the name and address of the vendor, amount paid, and the transaction date. You should also ensure that it is properly backed or can accessed reliably in the event of an IRS audit.

4.  Choosing the wrong accounting method

Often, startups and small businesses don’t know which accounting method to use. This is a common mistake because there are two main types of accounting methods: cash-basis accounting and accrual-basis accounting.

The major difference between these two methods is the timing of when you record income and expenses.

Cash-basis accounting records income when it’s received and records expenses when they’re paid.
Accrual accounting records income when it’s earned and expenses when they’re incurred (or expected).

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You need to choose a method that allows you to accurately track your financial position, but also reflects how your business operates.

For example, if cash is king in your business and you pay vendors quickly, then cash basis accounting might be best for you. On the other hand, if you sell products on credit and take 30 days or more from order placement until payment is received from customers, then accrual basis accounting may be better for you because it recognizes revenue when earned (when billed) instead of when collected (when paid).

Accrual-basis accounting helps prevent errors because it more accurately matches revenue and expenses to actual events such as sales and purchases (instead of just matching them to when cash might come in or go out).

5.  Not automating your accounting processes as the business grows

As a startup, you may be able to get away with using a spreadsheet. However, as soon as your business starts to grow, this will become a problem. If you do not have any kind of accounting software and tools in place at this stage, then it can lead to all sorts of problems down the line.

It will become very difficult for you to track everything manually because there is simply too much data being generated. You might also run into issues with accuracy because there is room for human error when it comes to manual bookkeeping. This means that there could be mistakes made in your accounts which could end up costing you money in the long run.

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Your business is constantly evolving and growing. As you expand your operations, it’s important to find ways to simplify the accounting process. You can do this by automating as many tasks as possible and using software programs that allow you to access financial data from anywhere in the world via the internet.

Automating your accounting process can help you save time and make it easier to keep track of your financial data. You’ll also be able to focus on growing your business rather than spending hours each week on bookkeeping tasks.

6.  Not reviewing your financial reports

Many businesses overlook the importance of reviewing their financial reports. If you don’t know where your money is coming from or going, it’s impossible to know if you’re making a profit or losing money.

You also won’t know what adjustments you need to make in order to increase your income or reduce expenses. Without reviewing your financial reports and comparing them against your budget, it’s easy for mistakes to happen that can put your business at risk.

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Reviewing your financial reports on a regular basis is essential to staying on top of your business finances and making sure everything is running smoothly.

You should be reviewing them at least once per month, but ideally, you’ll want to review them every week or two. This way, if there is an issue with any part of your business (e.g., low sales numbers), you’ll see it right away and be able to act quickly before it becomes an even bigger problem.

You can also meet with your accountant or bookkeeper every month to go over the reports together. This will help you learn what each report means so that next time you can look at them yourself and ask questions if there are any numbers that seem off or confusing.

7.  Trying to do everything yourself

One of the biggest mistakes that startup or small businesses make is trying to do everything themselves and not hiring a professional bookkeeper or accountant.

Learning how to do your own bookkeeping might seem like a good idea, especially if you’re just starting out and don’t have a lot of cash to throw around on office staff.

However, if you’re not able to keep track of all the numbers in your books, it will be harder for you to know what’s going on in your company – and it might come back to bite you in the long run.

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Consider hiring a bookkeeper or accountant to help you set up your system and stay on top of things. The financial aspect of a business is the most critical part and should be taken care of with utmost expertise and precision.

It’s much easier to identify mistakes when someone else is doing the work, which means you’ll get more accurate data and be able to fix your problems faster.
Hiring a professional bookkeeper or accountant can give you a lot of benefits. Here are just a few:

  • Keeps your business in order
  • Ensures that your finances are transparent and accurate
  • Offers guidance in making financial decisions
  • Helps prevent mistakes and fraud

The most important thing to keep in mind is that bookkeeping mistakes are preventable.

By recognizing common business mistakes and how to avoid them, you can steer your company in a way that will ensure its long-term viability.

Photo by Myriam Jessier on Unsplash

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