For part II of this series, please see this post.
In this, our third and final post of our series, we will wrap up our look at bookkeeping mistakes that small businesses can make.
Using the Wrong Accounting Method: In accounting, there are two basic methods of financial reporting – cash and accrual. Wikipedia defines these two methods as:
“Cash method of accounting: The cash method of accounting records revenue when cash is received, and records expenses when cash is paid. For a business invoicing for an item sold, or work done, the corresponding amount will not appear in the books until payment is received – and similarly, debts owed by the business will not appear until they have been paid.
“Accrual method of accounting: is the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These types of accounts include, among others, accounts payable, accounts receivable, goodwill, deferred tax liability and future interest expense.”
The type of business you are running should determine which method is the correct one for you to use. Sometimes is not obvious. If you rely on cash accounting, your business might look profitable during months with few expenses and then unprofitable during months with large expenses, with no way of really knowing the difference. If this sounds confusing you really should consider getting some outside bookkeeping service to assist you.
Not Backing Up Financial Data: If you are like most small businesses you use a computer for many things, and it is quite likely that your financial data is on that computer as well. While this makes things easier than carrying around ledgers full of financial information, it also brings some risks. What happens if your computer gets lost or stolen? What happens if your computer gets damaged? What happens if the hard disk in your computer crashes? Then answer is, you are in trouble. Make sure that you regularly backup copies of your data, and keep those backups in an “off-site” location in case of flood, fire, etc. at your place of business.
Paying for Reimbursements from the Wrong Account: If you are in the habit of paying for business expenses out of your own personal funds – stop it now. All too often these expenses get “forgotten” and they are never correctly accounted for in your financial data. Not tracking these expenses (which are reimbursable to you personally) will result in lost money and lost tax deductions for you.
Incorrect Accounting for Sales Tax: Many businesses do not accounting correctly for sales tax. While it is a common error it can cause you major problems down the road. Mistakes in both the collection of and the reporting of sales taxes can result in significant fines and penalties from both state and federal tax collection agencies. One of the big benefits of hiring a outsourced bookkeeping service is that they have the expertise to understand complex tax law and can help you to avoid these problems before they ever happen.