Correct accounting is important to your enterprise’s success. With out correct accounting:
You gained’t have the data essential to steer your enterprise towards worthwhile progress.
Appropriately submitting your annual tax returns can turn into cumbersome and rife with errors.
Your corporation might be left weak to fraud.
One of the best ways to make sure your accounting is correct is to know the frequent accounting errors and how one can keep away from them. On this article, we’ll share the ten commonest accounting errors — and the easy steps you possibly can take to be sure you don’t make them.
Not all accounting errors are created equal. Many of the errors addressed listed below are technical errors, however there are two frequent administrative errors we’ll tackle first.
1. Improper record-keeping
We get it, nobody likes submitting. Digital applied sciences have nearly eradicated piles of paper you will need to kind into folders in submitting cupboards, however that doesn’t imply recordkeeping and data administration are out of date. You have to handle your digital data with as a lot care as you’d paper data.
Why that is vital: In a tax audit, you is perhaps referred to as upon to offer receipts or different data to show the legitimacy of a enterprise expense. However the significance of correct recordkeeping goes past tax ramifications. Must you determine to promote your enterprise, the customer will probably request an exterior audit of your organization’s financials or a proper valuation of the enterprise. In each instances, receipts and different documentation shall be required to confirm the accuracy of your monetary statements.
Correct recordkeeping additionally prevents worker fraud. When workers know they must submit receipts for purchases, they’re much less probably to make use of enterprise funds for private bills.
2. Insufficient checks and balances
It’s frequent for one individual to deal with all monetary issues in a small enterprise. In any case, there’s solely a lot work to do, and it doesn’t make sense to rent further employees only for the aim of getting checks and balances. Sadly, insufficient checks and balances can spell massive hassle for your enterprise.
Why that is vital: If somebody aside from you, the enterprise proprietor, is dealing with all of the monetary affairs for your enterprise, your enterprise is weak to fraud. Even when your workers are like household — or even when they really are household — nobody individual within the enterprise (other than the enterprise proprietor) ought to deal with enterprise funds with out oversight.
The right way to keep away from: Implement checks and balances as a lot as potential in your enterprise. At a minimal, guarantee the one who does the bookkeeping in your enterprise isn’t the identical individual making deposits for the enterprise. Keep away from giving workers signing authority on your enterprise financial institution accounts. And be sure you overview your enterprise’s financial institution statements — together with photos of canceled checks — on a month-to-month foundation.
3. Altering a closed interval
Modifications to a closed accounting interval can throw off your monetary statements, inflicting you to make enterprise choices primarily based on defective data. In case you change the data in a interval for which a tax return has been filed, you may also must file an amended tax return. These errors in your books are simple to keep away from however could be expensive to repair.
Why that is vital: An accounting interval is taken into account to be closed as soon as all the info for the interval has been entered, financial institution and legal responsibility accounts have been reconciled, and the studies have been deemed appropriate. Any modifications to a closed accounting interval require you to finish the closing course of once more.
Sadly, it’s very simple to unintentionally submit transactions to a closed accounting interval. All it takes is incorrectly keying within the date of the transaction. However there’s excellent news: One easy step on the finish of your accounting interval can forestall this error.
The right way to keep away from: Most accounting software program lets you set a closing password in your books on the finish of every accounting interval. But many enterprise house owners — and bookkeepers — don’t use this function.
In case your accounting software program permits for a closing password, begin utilizing it. The eight-digit date for the tip of the interval — for instance, 06302020 for the interval ending June 30, 2020 — is simple to recollect when you do want to alter a closed interval. In case you attempt to submit or change a transaction in a closed interval, you need to get a popup warning you of the change, stopping you from making a change in error.
4. Skipping financial institution reconciliations
Financial institution feeds synced with accounting software program have allowed for streamlined information entry and real-time matching of the account balances in your books to the steadiness proven by your financial institution. Nevertheless, this doesn’t preclude the necessity to reconcile your financial institution and bank card statements each month.
Why that is vital: If you reconcile your accounts on the finish of the month, you validate the data in your books in opposition to an exterior doc (the financial institution or bank card assertion). Doing this not solely helps you detect and tackle errors, nevertheless it additionally helps you forestall fraud.
The right way to keep away from: Make it a apply to reconcile your financial institution and bank card accounts each month. Put a word in your calendar to make sure that is achieved inside a couple of days of receiving your statements. In case you’re utilizing financial institution feeds, reconciliation ought to solely take a couple of minutes.
5. Not reconciling mortgage accounts
Financial institution and bank card accounts aren’t the one accounts you want to reconcile. You must also reconcile your mortgage accounts every time you obtain your mortgage assertion.
Why that is vital: Reconciling your mortgage accounts is the best approach to verify the liabilities portion of your steadiness sheet is correct. It additionally ensures you report the curiosity portion of your mortgage funds appropriately. Too typically, the complete mortgage fee is posted in opposition to the principal steadiness in your books, which suggests your liabilities and your curiosity bills shall be understated.
The right way to keep away from: As together with your financial institution reconciliations, put a word in your calendar to make sure your mortgage accounts are reconciled frequently. At a minimal, you need to reconcile your mortgage accounts previous to submitting your tax returns every year.
That is an particularly frequent accounting error for firms that subject invoices to their clients for fee later and in addition use financial institution feeds for information entry functions. With out correct workflows in place, a enterprise can simply present practically double its precise income on its revenue and loss assertion.
Why that is vital: Overstated income can value you 1000’s in taxes you don’t actually owe. What’s worse, although, is you may suppose your enterprise is having a banner 12 months, solely to find revenues are literally down.
The right way to keep away from: This error is simple to keep away from by organising correct workflows. Ensure that your bookkeeper is aware of all incoming funds must be entered into the accounting software program appropriately and posted in opposition to open invoices as a substitute of posted straight to income. A month-to-month overview of your accounts receivable will shortly present you whether or not or not this course of is being adopted.
7. Undeposited funds on the books
Just like Quantity 6, this error happens largely in firms that use financial institution feeds for information entry functions. And, as with overstated income, this error could be averted with correct workflows. When there are undeposited funds on the books, it means the fee has been posted into the bookkeeping software program, however the deposit hasn’t been posted.
Why that is vital: Undeposited funds on the books is one other approach income could be overstated. As talked about above, this will trigger you to overpay your taxes and make incorrect assumptions about your enterprise’s progress.
The right way to keep away from: Make precisely getting into deposits a part of your accounting course of. You may confirm the method is being adopted by in search of the undeposited funds line in your steadiness sheet every month. The steadiness on this account ought to be $0 (it may not seem in your steadiness sheet in any respect if there’s no steadiness within the account). If there’s a steadiness on this account, examine. It’s potential you had been holding a deposit on the finish of the month that has since been taken to the financial institution, but when there are very previous transactions within the undeposited funds account, you will have an accounting error in your palms.
8. Steadiness sheet objects on the revenue and loss assertion
This accounting error most regularly occurs when a bookkeeper with out accounting data is sustaining the books. On this error, asset purchases, legal responsibility funds and proprietor’s attracts or shareholder distributions are recorded as bills, and loans is perhaps recorded as earnings.
Why that is vital: Your revenue and loss assertion ought to present the revenues and bills for an outlined time frame. Your steadiness sheet is a abstract of what you personal (property and fairness) and what you owe (liabilities) at a second in time. The 2 monetary statements serve totally different functions and “ought to” be reviewed individually.
That stated, typically a bookkeeper will make the strategic resolution to incorporate steadiness sheet objects on the revenue and loss assertion with a purpose to present the enterprise proprietor their enterprise’s money place, with out the necessity to use the money move assertion. Though that is technically incorrect, we advocate doing no matter is critical to assist the enterprise proprietor perceive their enterprise funds higher.
The right way to keep away from: Guarantee your bookkeeper understands accounting fundamentals, or have them work together with your accountant to ascertain good bookkeeping practices. Additionally, ask your accountant to overview your monetary statements on at the very least a quarterly foundation. Lastly, if steadiness sheet objects are included on the revenue and loss assertion for administration functions, make certain the statements are corrected previous to submitting your tax return or utilizing your statements to use for financing or funding.
9. Over-relying on automation
Automation has simplified a lot of the bookkeeping and accounting course of, nevertheless it’s not infallible. The commonest points we see related to this error are incorrect payee names on transactions, transactions being posted to the fallacious expense accounts, and proprietor’s attracts or distributions posted as transfers to asset accounts.
Why that is vital: Accounting software program that makes use of synthetic or augmented intelligence is continually “studying.” It makes solutions and assumptions primarily based on related transactions in your enterprise’s historical past. It could additionally use combination information collected from different companies.
This studying course of means the automation is just not infallible. Of the three errors talked about right here, the wrong payee title on transactions is the one more likely to trigger essentially the most hassle. This error can result in incorrect reporting on Kind 1099, which might trigger your vendor to be taxed on earnings they didn’t really obtain.
The right way to keep away from: Once more, a workflow and a predetermined course of will help keep away from this error. Ensure that the individual doing all of your bookkeeping is aware of to not merely settle for transactions within the financial institution feed with out first ensuring the solutions for the transaction are appropriate. Doing information entry upfront after which utilizing the financial institution feed to match the transaction is a greatest apply that may additionally assist you to keep away from this error.
10. Not utilizing your accounting software program correctly
Right now’s accounting software program is extraordinarily highly effective. It might produce very particular and detailed studies so that you can use to make enterprise choices. The caveat is that the software program have to be used correctly.
Why that is vital: Accountants and old-school bookkeepers are very keen on journal entries. Bookkeeping utilizing journal entries solely, or fixing accounting errors with journal entries, offers you appropriate monetary statements. Nevertheless, it’s going to wreak havoc on the subsidiary studies you may wish to use in your enterprise.
The right way to keep away from: Ensure that the individual doing all of your bookkeeping is aware of how one can use the software program correctly. Most fashionable accounting software program is form-based, making journal entries a type of “final resort” for information entry.
A model of this text was first revealed on Fundera, a subsidiary of NerdWallet