Accounting errors can be costly, if you are audited and you are found to have understated your income, you will probably end up paying significant penalties and interest. In this article we review some of the most common QuickBooks and Bookkeeping mistakes we have encountered, and how to fix them.
Mistake 1 – Not placing value in Bookkeeping:
Maintaining good accounting records for your business is not sexy, spending time reconciling bank and credit card transactions and categorizing entries might not be your definition of fun. However, it is important to realize that good bookkeeping is the foundation for running an efficient and effective business. Without good accounting records you will not be able to:
- understand your business cash flow needs.
- easily see if your business is achieving your profitability goals.
- prepare ahead of tax season by submitting estimated tax payments based on your projected income.
- implement tax reduction strategies before tax season, so that you are paying the least amount of taxes legally possible.
In our article: Bookkeeping Services for Small Business we explore some major benefits of outsourcing your business bookkeeping.
How to fix this: Approach Bookkeeping as an essential part of your business, consider bookkeeping just as important as sales.
Mistake 2 – Not outsourcing your Bookkeeping when needed:
When you first start a business, you might be inclined to handle your own bookkeeping, after all, how hard can it be? QuickBooks claims that everyone can handle their own books with their software automation. The issue however, as we discussed in this article, is that you are not an accountant and you might not have a full understanding of basic accounting rules needed in order to have clean books for your business. This can result in costly mistakes; you can end up paying more for an accountant to fix your accounting errors than to handle your books on a regular basis.
How to fix this: Know your limitations, if you are not an accountant, don’t try to be one. Consider engaging with an accountant that can provide advisory services beyond just maintaining your day to day business bookkeeping. You can learn about the benefits of working with a Trusted Advisor in this article.
Mistake 3 – Relying on Bank Feeds:
One of the major advances in QuickBooks is the ease of setting up a bank feed so that all bank transactions are automatically imported in your QuickBooks business accounts. While bank feeds are great, they are not always accurate. There are times when we see duplications in transactions imported, or perhaps transactions are missing completely. This can cause havoc in your financials and can easily become a compounding issues that can distort your financial records.
How to fix this: Always check your Business Account Balances with the information imported from QuickBooks. If the two do not match, there is a discrepancy that will need to be identified.
Mistake 4 – Not updating records daily:
In this article we discussed the importance of updating accounting records on a daily basis. If you are updating records on a Monthly or even worst on a sporadic basis, you are unable to really manage your business effectively. Without records updated on a daily basis, you cannot understand your cash flow needs and could be left with a significant cash shortfall.
How to fix it: Consider implementing a process where you are updating your accounting records daily. This can be very challenging, especially if you are handling many other tasks in your business. Therefore, consider outsourcing your bookkeeping needs.
Mistake 5 – Not having a good Chart of Accounts:
Think about the Chart of Accounts as the foundation of your business bookkeeping, without a good Chart of Accounts in place you might be categorizing transactions incorrectly that could result in costly mistakes.
How to fix it: Don’t just accept the QuickBooks default Chart of Accounts, take the time to research how you want to capture and categorize transactions for your unique business. If you are unsure how to establish a Chart of Accounts, consider hiring an accountant to assist you with the setup process.
Mistake 6 – Generating Reports in Accrual rather than Cash-Basis:
Most businesses usually will report financial information using the Cash-Basis Method, where Revenue and Expenses are reported when received and paid. The Accrual Method of accounting instead, recognized revenue and expenses when they are incurred. QuickBooks can switch the financial reports from cash to accrual with a simple click of a button. If you report financial information using the incorrect method, you could be overstating or understating your overall Tax Liability, this can be a very costly issue to resolve.
How to fix it: Carefully make sure that all reports generated in QuickBooks reflect the correct method, Cash or Accrual. If QuickBooks automatically generates reports in Accrual, make sure that you manually switch the reports to Cash before reporting the information to the IRS.
Mistake 7 – Recording Principal Loan Payments as an Expense:
When you obtain a loan for your business, you should record the original loan balance in the Balance Sheet as a short or long term liability depending on the loan type. When monthly payments are made to the lender, each payment should be broken down between interest and principal payment.
How to fix it: Only record Interest payment on a loan as a business expense in the Income Statement, principal loan balance repayments should decrease the loan balance and should be listed in the Balance Sheet.
If you are feeling overwhelmed, you are not alone. Consider working with an Accountant in order to optimize and assist you with your day to day bookkeeping needs for your business.