This is Part 8 in our “All About Bookkeeping” series.
If you missed our first seven articles check them out here:
As you can see we have covered a lot of ground in this “All About Bookkeeping” series. To finish it up we have something that I think is extremely important, understanding and realizing the common mistakes business owners make, so you can avoid them!
Before getting into that, I want to forewarn you. I could do articles on bookkeeping mistakes to make up years worth of content. That would be painful for both you and me so my goal here is to give you a glimpse of some of the most common or top mistakes that we see and want you to be ware of.
Mistake # 1
Not doing bookkeeping on a regular basis and not reading and analyzing your financials.
- Do regular bookkeeping on at least a monthly basis. Continually putting it off causes you stress, anxiety, and a higher likelihood of mistakes.
- By doing bookkeeping on a regular basis you now have data available to you that you can use to improve your business. Too many business owners do the bookkeeping but then never analyze their financials. You put the time or money in, utilize the information to help both you and your business succeed.
- As part of our bookkeeping services we include a video with our client’s financials to walk them through what is going on and help them better understand.
Mistake # 2
Incorrect categorizing or over categorizing transactions.
- Rushing through and coding transactions to the incorrect account. Example: you might have a rent payment in consulting expense.
- Be sure you are paying attention and putting transactions in a category that makes sense.
- Having too many categories can also be confusing and cause a mess. Example: client comes to us with the following expense items: Travel Meals, Travel Hotel, Travel Cab, Travel Air, etc. As you can imagine this is often times more detailed than necessary. Don’t get me wrong, it may make sense for some business but for the majority of small businesses, a simple travel category with all those items combined would be fine.
- Having too many categories creates unnecessarily long financial statements, often times unreadable or not valuable. For example, seeing $45 for the year in “Travel – Cab” does not provide much value but rather more clutter when it could be wrapped into Travel.
Mistake # 3
Failing to keep receipts for purchases.
- How many times have you looked at your bank statement and saw a charge wondering what it was for? Having a receipt will make that easy for you.
- Not only does it help with coding your transactions but it backs up your expenses in the event of an audit.
- On each receipt write on it: who, what, where, when why, and how much. The more the better should you have questions about it down the road or need to prove business purpose to the IRS.
Mistake # 4
Recording personal items or payments to the owner as business expenses.
- Have a separate bank account (and credit card, if necessary) that is specific to your business. Run only business expenses through this.
- If you accidentally pay for something personal on the business account, record it as an owners draw.
- If you accidentally pay for something business related on your personal account, reimburse yourself from the business with a recording of what it is for.
- Non-payroll payments to you as the owner generally should be recorded as owner draws (NOT expenses).
- If you are setup as pass through entity, personal tax payments or estimates you make from the business account are NOT expenses, instead owner draws.
Mistake # 5
Incorrectly recording major purchases and potential corresponding loans with those purchases.
- If you purchase a major item for your business (Ex: vehicle, machinery, office equipment, usually anything asset over $2,500) these should be recorded on the balance sheet, NOT in an expense account.
- You take the expense for it through depreciation.
- If you have any type of loan, that should be recorded as a liability on your balance sheet (NOT income) with principal payments against the loan going to the liability and the interest portion being an expense.
- Often times we see clients booking auto loans to an automobile expense account. This is a red flag to us. If the vehicle is owned the proper treatment would be to add an asset for the value of the vehicle with a liability for the corresponding loan amount. The payments would be applied to the loan and the expense would come through depreciation of the vehicle.
Not recording payroll correctly.
- Payroll is more than just a take-home check. There is taxes, benefits, etc.
- Ensure that your payroll is being recorded so that it matches your payroll report from your payroll provider. If you use someone like Gusto for payroll, they integrate with most accounting software to help you with this process.
- At year-end your payroll report should match exactly to your books with the breakdown of Wages and Salaries, Payroll Tax Expenses, Benefits, etc.
Mistake # 7
Being unfamiliar or inexperienced with the entire process.
- Simply “guessing” your way through bookkeeping is not a great strategy.
- If you are unfamiliar with how to do bookkeeping, learn it or outsource it.
- Learn It: Check out our Free Bookkeeping Training Program
- Outsource It: We do this everyday for business owners across the country. Schedule an initial consultation or check out our packages.
That is it, we have made it to the end of our “All About Bookkeeping” series. As a final wrap up we are doing a panel discuss with members of our bookkeeping team on our Podcast which we will post to the blog as well once we are done.
If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.