Over my career, I’ve seen a lot of journal entries and I’ve seen what can happen to someone’s livelihood when bookkeeping mistakes are made. The fact is, that one of the most common reasons a business fails is due to poor financial management.
Your financial records will tell you where you stand:
- How much cash you have,
- Where the cash is coming from, and
- When you have to pay your bills.
If you don’t have a bookkeeping system, don’t keep it up-to-date, or don’t properly supervise your bookkeeper, you are asking for problems. If you are not careful you will need one of these companies that will help you repair your credit. Needless to say it is better to avoid that.
Here are the most common bookkeeping mistakes and how you can avoid them.
1. Shoebox Bookkeeping
Ignoring your bookkeeping is easy. Typically you toss all of your receipts into envelopes or in the proverbial “shoebox” to hand over to your accountant. I can tell you I cringe when I see these come through the door because they are difficult to assemble and costly to maintain. Often receipts are missing or the bank and credit card statements have expenses with no corresponding receipt.
2. Manual Systems & Spreadsheets
Spreadsheets are not accounting systems! They are good at creating lists and schedules of information. But when you need to track where money comes from and goes to, they are not as handy. You can’t reconcile a bank account to a spreadsheet easily, HST reporting is a difficult, and tracking payables and receivables is painful?
To give an example, assume you track all of your expenses on a spreadsheet. Perhaps you have a column to indicate you paid by credit card or through the bank. Inevitably, when it comes time to assemble the financial statements and prepare the tax return, something will be missing. Then valuable time is spent searching for the missing information, expenses are lost and shareholder loans compromised.
Forget spreadsheets and paper lists. If you are going to spend the effort on those, why not acquire bookkeeping software. Bookkeeping uses double entry accounting that indicates the source and use in each transaction.
3. Not Being Involved
Turning over your bookkeeping over to someone else may be a relief, but you still need to be involved at some level. Mistakes in bookkeeping can easily result in clients being unbilled, improper reporting of assets and liabilities, theft and fraud. Improper bookkeeping can also result in improper reports being created and you making decision on misinformation.
If you are not sure how to manage a bookkeeper, your accountant will and may offer controller services to supervise your bookkeeper and provide other support for a nominal fee.
4. Not Reconciling Bank and Credit Cards
Reconciling is a procedure where you match he transactions in your bank and credit card statement to the general ledger in your bookkeeping system. This process makes sure your accounting system reflects your cash position and helps you avoid bouncing a cheque or missing a deduction. The procedure helps ensures that all transactions related to your business flow through the reports.
5. Combining Personal and Business Funds
This can be an expensive tax issue when a corporate bank account is used as your personal bank account. If you operate your business through a corporation, you are required to keep your personal business separate. This means using only the company bank account and avoid reporting your personal credit cards on the company’s books.
If you are a sole-proprietor, use a separate bank account just for business and obtain a business credit card. Post only business transactions in these accounts. If you pay yourself, make it a regular amount.
6. Adopting a DIY Attitude
Accounting and bookkeeping are highly complex and technical, particularly when you start to involve taxes. Most bookkeeping software is easy to use, but know how to properly use it requires skill and training. A good bookkeeper will properly classify and enter your business transactions and reconcile all accounts. He or she will ensure that personal and business assets are properly accounted for.
When the bookkeeping is correct, then the accounting side flows more easily. Your accountant can prepare the statements with minimal adjustments to correct errors. The result is improved information, lower taxes, lower professional fees and piece of mind.
7. Not Implementing Internal Controls
Internal controls are important to ensure that your business is not exposed to fraud or embezzlement. One key control you can have is to separate financial duties: The bookkeeper cannot have access to cheques or cash and store level personnel cannot have access to the full bookkeeping system.
8. Not Keeping Small Receipts
Every little bit accounts to reduce your tax bill and throwing out that receipt for a postage stamp or small supplies can add up in the long-run. Even if you do record them, retain them as they will be hand in case of an audit.
9. Relying on your credit card statement as your receipt
A client of mine recently went through an audit and surprised when the CRA denied a number of expenses reported on their credit card statements because there was no receipts.
10. Not Backing Up
Lost data due to corrupt files, dropped or stolen laptops, or crashed hard drives can cause havoc in your business. Always back-up your files on a regular and systematic basis. If possible, keep the copy off site.