29 August 2012

19 MOST COMMON BOOKKEEPING MISTAKES

Statistics reveal that about half of all new small businesses fail within the first five years. What is the main cause of small business failure? Poor financial management. For the small business owner bookkeeping is often a chore. It can often take many hours of time, which is why many owners do not keep their finances up to date on a monthly basis. Bookkeeping is your biggest weapon when it comes to business management and growth. Bookkeeping is essential for on-going record keeping, legal protection and accurate tax filing.

1) NO BOOKKEEPING SYSTEM
The biggest mistake made early on in a small business is not using a proper bookkeeping system. The business owner usually places the paperwork in a box, or uses Excel to make lists of income and expenses. It is easy to lose receipts or forget about small expenses. Unfortunately, before your tax returns can be done, someone has to draw up reports by sorting out this makeshift system. Maintaining accurate records on a monthly basis, along with a proper filing system, saves you time and money on your taxes. It can also provide the necessary documentation in the event that you are audited. With these reports only available at such a late stage, you cannot make fully-informed decisions in running your business in the best possible manner.

2) LACK OF KNOWLEDGE
Some business owners try to do the bookkeeping themselves, or they get their partner / family member / friend to do the books. Doing this is not always as cost-effective as you think. Accounting software promises proficiency with just a few clicks. However, unless you are familiar with general accounting principles, any accounting software can be frustrating. You often end up spending a lot of time trying to figure out where you went wrong. A bookkeeper with the knowledge and skills necessary to complete your books quickly and accurately is crucial to small business success. Although we all know that time is money, many business owners do not put enough value on their time. Leave the time-consuming task of bookkeeping to a bookkeeper. This saves you time, freeing you up to focus on growing your business.

3) IMPROPERLY CATERGORISED EXPENSES
Without knowledge of formal bookkeeping practices, this can become a problem. Accurately tracking income and expenses in the correct categories ensures proper measurement of profitability. Use general bookkeeping guidelines for standard categorisation. Follow generally accepted accounting practices. The Chart of Accounts is intended as a road map of all in and out transactions. Separate registers for each bank account and credit card, as well as properly classifying categories and sub-categories, make a big difference.

4) NOT RECONCILING ACCOUNTS
One of the key elements of good bookkeeping is to consistently reconcile the books with the bank statements, credit card statements and any other statements. Many businesses either fail to or improperly reconcile on a regular basis. A major benefit of reconciling the bank statement is ensuring that the cash on a company’s books equals the amount of cash shown by the bank. Reconciling your accounts every month also helps to minimise errors and identify potential issues.

5) SEPARATE BANK ACCOUNTS
It's critical that personal and business finances be kept separate at all times, regardless of size. If you are audited, you will need to provide complete records of business-related activities, separate from your personal expenses.

6) NO BACK-UPS
The heavy dependence on technology brings with it the chance that something could happen to your data. Data needs to be backed-up, and keep in different locations, to avoid potential losses. This is even more important if you are operating in a paperless environment.

7) SALES TAX
With many businesses not accounting correctly for sales tax is a common error in bookkeeping. Oversight in collection and reporting of sales taxes can result in significant fines and penalties. Incorrect data entry may result in a higher total sales amount and over-stated sales taxes due.

8) PETTY CASH MANAGEMENT
Business owners often operate with a small amount of petty cash, and many have little knowledge of how to track it. You need to have a system which allows you to track the cash kept on hand and what it is being used for. Keeping a petty cash lock box and obtaining receipts for all disbursements is necessary.

9) REIMBURSABLE EXPENSES
Many small business owners pay for expenses out of their personal funds. Failure to account for these reimbursable expenses can result in lost money and lost tax deductions.

10) ACCOUNTING METHOD
There are two accounting methods - cash and accrual. Cash accounting is based on the actual flow of cash in and out of a business, and is mostly used by sole proprietors and businesses with no inventory. Accrual accounting records income and expenses as they happen, and makes it easier to accurately match revenue to expenses. With cash accounting, the business might look profitable during months with few expenses and unprofitable during months with large expenses, with no way of really knowing the difference.

11) CREDIT CARDS AS AN EXPENSE
Making a payment to a credit card and recording it in an account called a credit card expense, is a very common error seen in small businesses. The proper way to record this is to set up the credit card as a liability account in your bookkeeping system and then record the payment from your bank account to the credit card. You should also record all the individual credit card transactions and reconcile the account. By entering the transactions from your credit card, you will always know how much you owe on your credit card, and you reconciling the account helps ensure all the charges were processed correctly.

12) PAYROLL
Another common mistake is recording payroll transactions as payroll expenses, and only the nett instead of gross. There are both tax liabilities and expenses with payroll transactions. By recording only the nett, you are producing inaccurate financial statements. The gross pay amount needs to be recorded as an expense and the employee payroll taxes as payroll tax liabilities. The distribution of payroll taxes consists of both liabilities (employee payroll taxes withheld from pay) and expenses (employer payroll taxes). If you are using a payroll service, those costs should be recorded as an expense.

13) DRAWINGS
Many business owners draw money out of the company in addition to their regular pay. Owners also often pay for personal items with their business accounts. These transactions are sometimes recorded as expenses, which again produce inaccurate financial statements. These should be set up in an equity account called Owners Drawings. If there are multiple owners, create an account for each one. Record all owner transactions into this account - owner contributions, owner drawings and personal transactions. Your accountant will thank you and you won't be affecting the profit and loss statement.

14) UNAPPLIED CREDITS
Paying twice is a common problem, particularly when a business has a large number of suppliers or more than one person is involved with the accounting function.

15) NEGATIVE INVENTORY
Not all businesses have inventory. A common mistake for those that do, is recording the sale of inventory to a customer before it’s received - the inventory is on the shelf but hasn’t been recorded in the accounting system.

16) INCORRECT BALANCES
Asset accounts should have debit balances, while liability accounts should have credit balances. Revenue accounts should have credit balances, while expense accounts should have debit balances. The most common causes of an incorrect balance is posting entries to the incorrect account, misclassifying accounts, and duplicating adjusting entries.

17) DATA ENTRY ERRORS
It’s easy to wreak havoc on your accounts by entering a R500 payment as R50, or transposing numbers. Double-check every entry. Little errors don’t go away, they just become bigger problems.

18) FILING
Establish, and use, a filing system for all paperwork. Establish a daily or weekly filing schedule.

19) COMMUNICATION WITH YOUR BOOKKEEPER
Keep your bookkeeper informed of finances. If you get a loan, provide the documentation. If you buy equipment, provide the documentation. If you take money from the petty cash box to go out to lunch, provide the documentation. A bookkeeper needs to know where the money goes, in order to record the information correctly.