If you take a poll of small business owners and ask them if they enjoy handling the minutia of bookkeeping, you would likely be hard-pressed to find a single entrepreneur to admit to such enjoyment.
Bookkeeping is just one of those tedious, time-consuming tasks that is very necessary, yet has very few fans. Fortunately, if you’re aware of the potential hiccups that make bookkeeping even more undesirable, you can minimize your stress over this process and make it a little easier on yourself.
Consider the following 7 common bookkeeping mistakes that new business owners often make and how you can avoid them.
1. Keeping disorganized records
Record keeping of personal financial matters is important, but keeping solid records as a small business owner is even more critical. If you fail to maintain an organized, up-to-date set of records and receipts for your books, you could easily lose track of key expenses and also lose out on valuable business tax deductions.
In addition, if you get that dreaded IRS tax audit notice in the mail, you won’t be panicking as much if your bookkeeping records are in good shape. That’s because the IRS generally requires taxpayers to provide proper documentation to resolve an audit.
2. Not categorizing your income and expenses appropriately
It’s imperative to always have a good handle on how profitable your business actually is from month to month or year to year. This is where bookkeeping plays a key role. You must track all income and expenditures within specific categories to help you understand the financial success – or lack thereof – of your enterprise. Plus, being aware of how each category of income or expenses is impacted by taxes can help reduce your tax bill.
If you fail to adequately measure this information, you could wind up in the red very quickly.
3. Failing to properly report sales taxes
In lots of small businesses, making the mistake of failing to account for sales taxes is quite common in bookkeeping. But if you make it a point to pay attention to your sales tax requirements, you can avoid falling into this trap.
You should know what your specific sales tax duties are depending on what types of products or services you sell and where you conduct business. There are often city, state and federal sales taxes to take into consideration. It’s up to you to collect and report sales tax payments. You could wind up incurring hefty penalties if you don’t do this, and your monthly sales figures may be skewed as well, leaving you with inaccurate records and way-too-high profit projections for the future.
4. Failing to appropriately track any reimbursable expenses
If you’re like your fellow small business owners, there’s a good chance you cover certain business expenses with money in your personal bank account. It’s easy for these expenditures to slip through the cracks. Before you know it, you have lost money and have lost out on some important tax write-offs that could reduce your bill from Uncle Sam.
This is why it’s a must to set up a tracking system for all reimbursable expenses you incur through your self-employment work.
5. Failing to maintain separate bank accounts
Failing to maintain separate bank accounts for personal and business finances is a big mistake.
That’s because it’s incredibly easy to mix up the two categories of financial activities, which should always have a solid barrier between them. Additionally, if the IRS audits your business, it is much simpler to provide information about your business expenses when you maintain a separate account for your small business. Bottom line – having separate bank accounts and statements can significantly cut down on potential errors.
6. Failing to properly protect your data
In today’s digital world, technology does wonders. But it’s not 100% reliable at all times, and errors can rear their ugly heads at the worst possible times. So, don’t make the mistake of failing to back up and secure your company’s financial data. There are plenty of affordable cloud-based solutions to safely back up your bookkeeping records and other important files.
7. Mistakes in entering data
When searching for something online or writing an e-mail to a colleague, how often do you hit the wrong key or misspell a word? We’re all guilty of it. Some websites and programs indicate when there’s an error, but you don’t have this support when it comes to inputting data into your bookkeeping system because the software doesn’t know your business.
This is why you should always triple-check your numbers and ensure they are being entered into the proper accounts and expense categories. You could easily add an extra “0” to the end of a dollar amount, and this one typo could lead to multiple miscalculations down the line. So, only work on your books when you can give them your undivided attention.
Got any other tips for bookkeeping? Share them with us in the comments below!
About the author
Brendon Pack is Vice President of Sales & Business Development at 1-800Accountant, the nation’s leading accounting firm for small-business. Brendon has worked with thousands of entrepreneurs, which has provided him unique insight into why some businesses succeed while others fail. He has leveraged those insights to scale several start-ups. At 1-800Accountant, he has developed an innovative line-up of products to assist business owners with their tax and accounting needs. Mr. Pack also has a decade of experience building sales teams from scratch and developing innovative partnerships with numerous national brands and cutting-edge start-ups. He is dedicated to the goal of making accounting easy, accessible, and affordable for small-business owners everywhere.