Bookkeeping is a crucial component of every business venture, from sole proprietorships to large organizations. Even though bookkeeping isn’t traditionally one of the more attractive positions, mistakes can greatly impact a company’s bottom line. Ten of the most typical mistakes that you should avoid are listed below.
Every business, from one-person operations to Fortune 500 corporations, must perform the arduous work of bookkeeping. Although bookkeeping is undoubtedly not one of the more attractive aspects of the work, it is essential to small business success. Therefore mistakes may be disastrous.
If you are familiar with the best bookkeeping methods, bookkeeping may initially appear to be an easy task. On the surface, handling the accounts yourself is a good way to save money. The sad reality is that there is a lot of room for error. Additionally, many small business owners are prone to making errors in bookkeeping that might harm their chances of success.
It’s crucial first to be aware of the traps that can trap you if you want to escape the financial troubles that come with poor bookkeeping management.
The top 10 bookkeeping errors that small business owners make when handling their company’s accounts are listed below:
1. Not Keeping Receipts Under $75:
Receipts under $75 offer support documentation for many of the deductions you might claim, even though the IRS may not require them. Most online and digital accounting solutions offer companion apps that enable you to take a picture of your receipt and correlate it with the proper register entry, even though maintaining them in a folder or box is still required in the case of an audit. Many third-party apps are available if you’d prefer to keep your receipts separate.
2. Failing To Keep Track Of Reimbursements:
The costs you incur on your client’s behalf are eligible for reimbursement. Most business owners forget to record them in their expense log because they can be charged back to the customer.
The source of this charge should be found in the record books, just like other expenses should be. Money could be lost if this is not done. Additionally, you’ll lose out on tax deductions.
It’s like throwing money down the drain if you don’t keep track of your reimbursable charges. You may also lose tax deductions, which is the same as losing money. Again, several apps and solutions for spending tracking can make this procedure simple and reliable.
As you incur expenses, try to develop the practice of keeping track of them; the longer you go without doing so, the more probable you will forget about them. To establish a paper trail in the event of an audit and to monitor your company’s financial health, tracking reimbursable expenses is just as crucial as keeping your smaller receipts.
3. Incorrect Employee Classification:
These days, there are a lot of independent contractors, consultants, and freelancers, making it sometimes challenging to tell who is an employee and who is not. But don’t forget to do this. Misclassifying workers and contractors can have serious repercussions, such as tax fines and legal action.
4. Incorrect Employee Classification:
Businesses today employ a wide variety of people to work on numerous initiatives. Even independent contractors and freelancers are employable by you. You could face legal repercussions and perhaps face tax penalties if you incorrectly identify them as employees.
So, do not disregard this! And make sure you seek assistance from a qualified bookkeeper who can inform you of the distinctions between the various types of employees.
These days, there are a lot of independent contractors, consultants, and freelancers, making it sometimes challenging to tell who is an employee and who is not. But don’t forget to do this. Misclassifying workers and contractors can have serious repercussions, such as tax fines and legal action.
5. Neglecting To Make Amends.
One of the most important aspects of assessing your financial situation is reconciling your books and bank accounts. It’s crucial to ensure that it is carried out correctly and consistently. You can determine how much money you have on hand at any one time by reconciling your books, and you can also find bank errors before they become serious issues. However, reconciliation can be challenging, so it’s strongly advised to work with a knowledgeable bookkeeper.
6. Absence Of A Paper Backup:
A paperless office can potentially be a big liability for auditors, especially if there are technical issues. Taxing authorities like the IRS prefer a paper trail with easily accessible records and a well-organized system of paper backups. Even though apps that preserve your receipts can simplify daily tasks, it’s still crucial to maintain a backup of your financial records for at least seven years.
7. Not Obtaining Or Withholding The Proper Sales Tax:
Sales tax has become a complicated problem for many small businesses due to the explosion of eCommerce over the past ten years. In the past, they made the most frequent error by simply forgetting to subtract the sales tax from the total sales, which resulted in lump-sum tax surprises.
That remains the case, but recent modifications to federal law have made sales tax collection more challenging when it comes to state-to-state fulfillment conducted online. To stay compliant and reduce your overall tax liability, ensure you and your bookkeeper are aware of the most recent rule changes.
8. Petty Cash Indifference:
Petty cash should be managed and purchases approved by a designated custodian who should be assigned to each small firm that uses it. By doing this, accountability is ensured, and the likelihood of fraud, theft, and abuse is reduced. Businesses should have clear policies surrounding petty cash transactions to keep clear documentation for deductions at tax time.
Every purchase with petty cash should have an accompanying receipt for the expense. The original dollar amount specified to the fund should equal the receipts plus any residual cash. Once the fund is depleted, a check can be issued to cash to replenish the entire amount. Lack of a petty cash policy, custodian, or receipts can cause complications for your bookkeeper and lead to significant issues when filing taxes.
9. Over- Or Incorrect Classification:
For your bookkeeping, preserving a clean, well-organized chart of accounts is essential. While most expense categories are pretty common and simple, many business owners who do their bookkeeping make the error of establishing the same categories or forgetting to record expenses properly.
For standard categorizations, use general bookkeeping principles and also add a new category if possible. Your books may be organized, and your chart of accounts can be made lean and clean with the aid of a professional bookkeeper.
10. Doing It On Your Own:
Even though most small business owners detest doing their books, they insisted on doing so. Professional bookkeepers with the requisite abilities can complete the task swiftly and effectively and know to spot minor faults that could otherwise go undetected. They will be knowledgeable about the tax changes that may impact your regular financial activities because they are specialists. Having a second pair of eyes review your financial documents will save you time and money in the long run.
Conclusion
Contact Profit Jets immediately if you want to improve your financial record keeping or have a question about your bookkeeping procedures.
