I bought the eraser, in the image, from Amazon. I didn't buy it to literally erase mistakes, however. I bought the eraser to remind me to keep things light-hearted when a mistake happens, and mistakes do happen. As a bookkeeper (and accountant) I have seen many mistakes due to one reason or the other. Playing with the words on the eraser, I'm going to share four mistakes often made by small businesses.
1. Doing the Bookkeeping Yourself
More often than not, bookkeeping ends up being a task that is performed at the last minute, or not at all (except for tax time). One of the many reasons for last minute bookkeeping is the business owner attempts to do the bookkeeping by him or herself, on top of everything else that needs to be done for the business. And while that is great, what makes this a mistake is the business owner often lacks the time and knowledge to do the bookkeeping. Unfortunately, the lack of time and knowledge tends to result in bookkeeping errors that could be costly to the small business.
2. Misclassifying Items and Misstatements
Here's an example: Your business just purchased insurance. Insurance premiums are usually paid in full prior to the period covered by the payment. Rather than record the insurance as a prepaid asset it has been recorded as an expense.
And then there is this example: A $150 vendor invoice was accidentally recorded as $15...or as $1,500.
Unfortunately the misclassification in the first example and the misstatement in the second can lead to inaccurate financial statements.
Inaccurate financial statements make it difficult for the business owner to understand the financial position of the business. Inaccurate financial statements could cause potential investors and lenders to lose confidence or interest in the business. Finally, inaccurate financial statements could lead to inaccurate tax payments, which could alert the IRS.
3. Not Saving Receipts and Invoices
A client of mine once said, “You don’t need to save receipts. You use the bank statements!” While bank statements are excellent (and necessary) they do not provide every detail behind the transaction for a specific event. Saving receipts make it easier to categorize items, from a bookkeeping perspective. Receipts also enable the business to take valuable deductions during tax time. And should your business happen to draw the attention of the IRS, those receipts will prove that the items are accurate and do exist.
4. Not Taking Bookkeeping Seriously
There is a wealth of information available to the small business owner (and all businesses) because of bookkeeping. For starters, the business owner would be aware of the financial health of the business. The owner would also be able to understand why the business performed well or poorly. Furthermore, important decisions can (and should) be made based on the financial position of the business.
Now the question is, how does the business owner reduce the occurrence of those four mistakes? One solution could be to outsource the bookkeeping to someone who is qualified to do the financial record keeping. If that option is not available, and there is an employee within the business that has some knowledge of bookkeeping, have that person handle that function. Finally, take advantage of accounting software such as Quickbooks and Xero. Most accounting software have functions that can be automated, and automating the bookkeeping tasks reduces the possibility for errors created by the user. The only drawback to the software is that if the user is not versed in bookkeeping, then there is still a chance for the information in the software to be inaccurate despite its automated features.
Need help with your bookkeeping? Contact The Mindful Bookkeeper!