Most business owners understand that they’ll face accounting errors at some point. Yet, those errors can come with a meaningful financial or labor cost.
When quarterly tax filing time rolls around, accounting errors can make you overpay. That deprives your business of networking capital that can always go to better use.
When the errors cause discrepancies in the paperwork, it can take a lot of hours for your bookkeeper or accountant to find and fix the problem.
Keep reading for seven accounting errors you should avoid if at all possible.
1. Flawed Recordkeeping
Maintaining good financial health begins with maintaining good records. Even with technology that streamlines recordkeeping by digitizing receipts and documents, you still need records management.
For example, does anyone follow up with employees about their digital receipts? Maybe they lost one before they could record it on that last business trip. Then, by the time they get back, they don’t remember the lost receipt.
Without that receipt in the records, any third-party audit will show variance between your supposed expenses and expenses you can back up.
Small variances won’t necessarily create a major problem. However, such variance can escalate into a real problem if flawed recordkeeping is the norm.
2. Not Reconciling
It’s easy for a business owner to fall into the habit of assuming in-house information matches up with bank or credit card statements. If you keep flawless books with everything applied correctly, that might even prove true. Unfortunately, flawless books are a very rare bird.
Reconciling acts as a sanity check and early warning system. If everything matches up, it’s a good sign that all is well with your finances. If things don’t match up, it means a problem exists that you must address.
Finding and fixing that problem sooner will spare you a lot of headaches in the long run.
3. No Redundancy
Maintaining multiple copies of your data is one of the critical elements of business disaster recovery plans. It lets your business restart quickly.
Of course, most business owners interpret this as meaning things like customer data or digital products. It should also include your financial records.
Let’s say that you keep your financial records stored on the computer in your office at work and nowhere else. That can feel safer because your computer is password protected and in a locked building.
What happens if someone breaks in and takes all the computers in the place? You get stuck trying to reconstruct weeks or months of recent financial data. Plus, you lose all of your historic data.
With encrypted cloud storage an easy option, there is no reason not to maintain a backup copy that updates daily.
4. Insufficient Oversight
Another hallmark of good financial management is good oversight. Even in a small business, it’s never a good idea for anyone other than the owner to get unrestricted control of the finances. It’s an open invitation for fraud.
If you’re not excellent with numbers, there are a couple of steps you can take. Separate the person who keeps the books from ever handling actual deposits. Do the deposits yourself and then, as mentioned above, reconcile your statements.
You can also bring someone in for a periodic audit. Knowing that you run audits on the books encourages good recordkeeping. It also discourages fraud.
5. Incorrect Revenue on the Books
Do you issue invoices? Do you give customers thirty or sixty days to pay those invoices?
Neither of these things presents a problem in themselves. They’re common business practices after all.
The trouble shows up in how they get recorded. Accounts receivable isn’t the same thing as revenue, although it is an asset. Until you get actual money from your customer, it’s just an open invoice.
If your bookkeeper applies open invoices as revenue, it can dramatically throw off your books. These kinds of errors are how you end up overpaying on your quarterly taxes.
6. Undeposited Payments as Revenue
Some small businesses, such as consulting, might only work with a handful of clients. Those clients send checks to your office.
Let’s assume you don’t empower anyone else to make deposits, but you do have a bookkeeper on staff. Whoever goes through the mail hands the checks off to the bookkeeper. The bookkeeper diligently enters the checks into records… as revenue.
Let’s also assume that you’re out of town for two weeks on a consulting gig. For those two weeks, you’ve got those checks on your books as revenue and not as undeposited payments.
Until you get back into town and take those checks to the bank, they’re not revenue. If this coincides with tax filing, you can overpay for the money you don’t actually have yet.
7. Not Updating Your Books
This problem is common in small businesses where the owner handles the books. Business owners get busy writing schedules, meeting with customers, and negotiating with vendors.
Updating the books with daily transactions is just a bridge too far for many of them. Yet, it’s all too easy for a day to turn into a week, and then for a week to turn into a month. All of a sudden, you face days of bookkeeping instead of hours.
You need a firm schedule for updating your books at least once a week. This keeps the books mostly current. It also prevents stress-filled weekends of trying to catch up.
Minimizing Accounting Errors
Minimizing accounting errors doesn’t boil down to any single action. It’s about adopting a set of actions that support sound financial management.
Updating your books on a regular basis keeps your information current. Good recordkeeping avoids variances and encourages accountability. Reconciling accounts helps expose errors promptly.
Make sure undeposited payments and open invoices don’t get recorded as revenue, so you don’t overpay on taxes. Keep backup records so you don’t need to reconstruct the records after a disaster. Apply some oversight to your accounting process with periodic audits.
Struggling with the accounting for your California business? White Nelson Diehl Evans specializes in business accounting services. Contact WNDE today for questions or more information.
audit and advisory services to local governmentsand non-profit organizations. He specializes in the preparation of comprehensive annual financial reports (CAFR), state controller’s reports and in conducting federal compliance audits in accordance with Uniform Guidance. He is also experienced in providing audit and advisory services to local governments and non-profit organizations.
David works with privately held businesses, high net-worth individuals, trusts and estates. His experience includes preparation and review of individual, partnership, corporate, trust, gift and estate tax returns. He has clients involved in various industries including manufacturing, distribution, professional and service-oriented businesses. He has worked in the accounting field since 1990, including 10 years in Honolulu.
Rex served as an audit director at a firm which performed audits of publicly traded companies. His experience has allowed him to acquire technical expertise in handling complex financial reporting matters, including business combinations, complex debt and equity transactions and share-based compensation. In addition to performing financial statement audits and reviews, he is also active in providing consulting services, including assessments on internal controls.