As an outsourced bookkeeping service we see lots of different bookkeeping systems. We are constantly consulting individuals and businesses on their bookkeeping. We are also taking over bookkeeping systems from other bookkeepers. There are always mistakes...always. Here are the most common bookkeeping mistakes we have seen and how to avoid them or fix them.
Mistake # 1 Setting up a credit card as an expense
This one kills us. We will be cranking along transitioning a business to our bookkeeping services. All of a sudden we see a payment to a credit card and the payment is coded to an account called credit card expense. This is just flat out wrong.
Solution: The proper way to handle this is to set up the credit card as a liability account. You should set up a credit card account in your bookkeeping system and then record the payment from your bank account to the credit card. You should also record all the individual credit card transactions and reconcile the account like any other account.
Mistake # 2 Recording payroll expenses as net and not gross
Another common mistake we often see is coding all payroll transactions as payroll expenses. There are a couple of issues here. First, there are both tax liabilities and expenses that go along with all payroll transactions. By recording only what hits the checking account you may be overstating or understating the expenses and therefore producing inaccurate financial statements.
Solution: For paychecks record the gross pay amount as an expense and the employee payroll taxes as payroll tax liabilities. The distribution of payroll taxes consists of both liabilities (employee payroll taxes withheld from paychecks) and expenses (employer payroll taxes). The payroll fee (assuming you are using an outsourced payroll company) should be recorded as an expense.
Mistake # 3 Trying to handle work that requires help/feedback from your CPA
More often than not a bookkeeper will record transactions even if they are not sure how to handle them or if they are beyond their accounting knowledge or area of expertise. This causes more work for your CPA come tax time and therefore more cost to your business.
Solution: Set up an expense account called "Ask My Accountant." QuickBooks now has this as a default account although I implemented this procedure years ago using an account I called "to be coded." The end result is that you put all questionable transactions in this account to review with your CPA. It keeps everything more organized and your CPA will be much happier with you.
Mistake # 4 Improper coding of owner draws
Depending on the type of business you are dealing with many business owners draw money out of the company in addition to their regular paycheck. Also, many owners will pay for personal items with their business accounts (even though we plead with them not to). Often bookkeepers mistake these transactions and code them as an expense, which again will produce inaccurate financial statements.
Solution: Set up an equity account called Owners Draw. If there are multiple owners call the account Owner #1 or Owner - (name of owner). Put all owner transactions into this account; owner contributions, owner draws and personal transactions. Again your CPA will thank you and you won't be affecting the profit & loss statement of the business.
Mistake # 5 Not automating the bookkeeping system
When I take over a new account from an existing bookkeeper and get to meet them to review the accounting system it is always invaluable to me. I ask a lot of questions about the current bookkeeping procedures. More often than not the current bookkeeper does not have the most efficient bookkeeping procedures in place. Sometimes this is due to being "old school", lack of caring or just lack of knowledge.
Solution: Get a good bookkeeper or bookkeeping service to come in and do a consultation on your current bookkeeping procedures. Many accounting software programs have great ways to automate and make your bookkeeping system more efficient.
These are just a few of the most common bookkeeping mistakes we often see. Another way to work on your bookkeeping system is to read our article on Do It Yourself Bookkeeping. We are also always available for a free bookkeeping consultation at your office or ours...just reach out to us.