Here are some accounting mistakes we see small business owners make. Under the right circumstances, these mistakes can cost you your business. So, you should have an accounting professional review your accounting regularly.
Using a DIY Method of Bookkeeping
The DIY method is when you do your bookkeeping without regard for GAAP accounting. It’s apparent when accounting mistakes from previous years or startup costs are allocated incorrectly. Or, when the business owner thinks that since they are good with their personal spending, they make the best bookkeeper for their business is another.
Remember for your business to grow, you must learn to delegate. The earlier you learn this skill the sooner your business will begin growing.
Accounting Mistake #2: Treating Accounting as an After-the-Fact Practice
This accounting mistake can prove catastrophic, and you don’t see it until it’s too late! For example, when you need a loan or to pay your taxes and cannot produce a meaningful profit & loss statement and balance sheet.
As a small business owner, you need to record all your spending and investments. But the process does not just stop there. You need accurately reflect the flow of income and expenses to show an accurate picture of the health and wealth of your business. Lacking this critical information will impact your ability to grow the business.
Not Fully Understanding How to Read Your Financial Reports
Your business success correlates directly to what your financial reports are telling you about the health of your business. Contained within your financial reports are hints as to your business profitability. Learning to use these reports will help you make better decisions that increase your bottom line and move you toward growing a self-sustaining business (absentee owner).
Accounting Mistakes Can Bite You at Tax Time: Poor Petty Cash Procedure
Not all businesses need petty cash. But, if yours does then, you need proper procedures for handling cash. This is not just for accounting purposes. Improper petty cash records can cause deducted expenses to be disallowed resulting in you paying more taxes than you need to.
Improper Controls for Capital Expenditures is Another Tax Accounting Mistake
It’s always a good practice to keep accurate records, but it’s especially true when it comes to capital expenditure. Capital purchases require:
- a record of the cost for the item purchased
- when the item was purchased
- when the item was put into service in the business.
This is important for tax reasons if you want to depreciate these items or your CPA/Bookkeeper might advise that you take an expense under the IRS Publication 179 rule for tax purposes.
6. Combining Personal and Business Finances: The Biggest Accounting Mistakes
As a rule of thumb, the best accounting practice for a business is to only utilize business funds for business spending. However, if you must put money into the business, then make sure it is placed on the books as a loan to the business. When the loan is properly recorded and then repaid in your accounting system it keeps the separation clear between personal and business funds and keeps you out of trouble down the road.
7. Misclassifying Employees in Your Business
For accounting purposes, this is only a classification issue. However, from a legal standpoint the IRS, Federal & State Labor Boards, and sometimes your general liability carrier, require employees to be classified correctly. If not, you can face significant fines and penalties, causing a serious cash flow issue, as well as legal issues.