As a small business, there are many bookkeeping mistakes you just can't afford to make.
A small mistake can mean a minor setback in your operations. Some larger ones can have you overpay taxes. There is not a company anywhere that wants to pay more tax than they legally have to.
That is why it is so important to make sure that bookkeeping mistakes are not resulting in overpaid taxes.
Furthermore, a big mistake could put you out of business. Here are seven fatal bookkeeping mistakes will have you overpay taxes and that flat out you can't afford to make.
7 Fatal Bookkeeping Mistakes That Will Have You Overpay Taxes And That You Can't Afford To Make:
1. Mistakes in Payroll Reporting
Payroll reporting can be a problem if your bookkeeper does not understand how to enter the data correctly. The gross wages need to be on the income statement not the net paid out. Often this is missed when a non-trained person handles the books.
Fixed assets need to be appropriately recorded. Depreciation is only correct if the asset has not been expensed in error.
2. Improper Reconciliation
Balance sheet accounts need to be reconciled monthly. By year-end, it takes a lot of work to go back through twelve months to find out a double posting was made or that the cash account has not been reconciled. Duplicate entries will throw tax calculations off.
Any account that has a statement beginning and ending balance can be reconciled. This includes bank accounts, credit cards, loans, lines of credit etc.
Many businesses not only fail to reconcile all of their accounts, but they don't even reconcile the key business accounts such as the general checking account.
Reconciling your accounts is the only way to be sure you have accounted for all of your business activity. It also can help to ensure you have not overstated or understated your income or expenses. Accurate financial statements are crucial to the future success of your business.
3. Hiring Untrained Bookkeepers
Untrained bookkeepers often do not understand how an entry can cause so much time and trouble. Trained bookkeepers know that a prior year adjustment is not something to consider lightly. These kinds of changes can cause significant tax problems and are not easy to find and fix.
Small business can sometimes have a bookkeeper that is not fully trained. There are many reasons this happens.
When small businesses first get started, they may not think they need bookkeeping help. This means that the owner or the office manager may well be doing the accounting along with their other jobs. This puts additional work on someone who already has a full-time job.
4. Misreporting of income or expenses
When a small business owner takes on the task of bookkeeping on their own, mistakes are frequent. One of the biggest and most common mistakes is over-reporting or underreporting of income or expenses.
It really is not that difficult to make a huge mistake if you are not 100% sure of what you are doing. As an example, if you don't know how to handle the procedures of invoicing and accurately recording payments in QuickBooks, you will most likely overstate your income.
Likewise, we often see businesses miscode transactions which will either overstate or understate your expenses. The most common example is the owner draws being recorded as an expense which is incorrect.
5. Not having a CPA in place.
Your bookkeeper should intimately understand the day to day operations of your accounting. However, they are most likely not a tax expert.
A CPA will communicate with your bookkeeper to confirm that your bookkeeping reporting is accurate. They will also thoroughly go through your financial records to make sure everything matches your tax return.
Your CPA should work closely with both the business owner and bookkeeper to prepare an accurate tax return that also ensures you are getting all the tax deductions you are entitled to.
6. Not using a reputable bookkeeping software.
All too often a business handles their bookkeeping in some offline system.
Although spreadsheets can work for a simple bookkeeping system, it does not support growth for your company.
At SLC Bookkeeping, we highly recommend using and learning QuickBooks, as it is a great bookkeeping software for the business owner that does not necessarily understand everything about accounting.
7. Not using checks and balances.
Many business owners are too trusting, and unfortunately, this often leads to bookkeeper theft.
By installing the proper checks and balances into your bookkeeping system, you can be sure your bookkeeper is not stealing from you. A few simple tips are that a bookkeeper should never have the authority to sign checks, use online bill pay or handle cash.
As you can see, bookkeeping mistakes can bring on penalties and interest during the tax season. Even more, they can really put your business at risk.
Are you making any of these fatal bookkeeping mistakes or are you are, but you don't even know it? Maybe it is time to tighten your bookkeeping system up. Are you ready to do it? Get your free consultation call today and let's find out.