From sole proprietorships to Fortune 500 companies, no business can escape the dreaded task of accounting. While it’s definitely not one of the most glamorous parts of the job, accounting is at the heart of small business success, which means mistakes can be invalidating.
To avoid the financial headaches that come with poor accounting management, it is important to first be aware of the pitfalls that can trap you.
Here Are The Most Common Accounting Mistakes Small Business Owners Make When Dealing With Their Company Finances:
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Do not keep receipts for less than $ 75.
While they may not be required by the IRS, receipts under $ 75 provide supporting documentation for many of the deductions you can claim. Although storing them in a folder or box is still necessary for the event of an audit, most online and digital accounting programs have add-on applications that allow you to take a photo of your receipt and associate it with the corresponding record entry. If you prefer to save your receipts separately, there are also many third-party applications that you can choose from.
Reimbursable expenses cannot be tracked.
Neglecting to keep track of reimbursable expenses is like flushing money down the toilet. Not only can the money be lost, but tax deductions can also be lost, which is essentially the same thing. Again, there are many expenses tracking apps and programs available to make this process easy and consistent.
Try to get into the habit of tracking your expenses as you accumulate them – the longer you go without tracking, the more likely your expenses will be overlooked. Tracking reimbursable expenses is just as important as keeping your smaller receipts: one allows you to keep track on paper in the event of an audit; the other allows you to track the financial health of your business.
Failure to properly classify employees.
With so many independent contractors, consultants, and freelancers these days, it can sometimes be difficult to determine who is on staff and who is not. However, this should not be neglected. Misclassifying employees and contractors can have significant consequences, such as tax penalties and lawsuits.
Does not communicate.
Whether you decide to hire a part-time accountant or outsource the work to a professional, communication is the key to effective accounting, because it keeps everyone on the same page and minimizes errors. One of the most common mistakes, for example, is paying someone a bonus and not reporting it to the accountant. Another is buying supplies and not reporting the accountant or not providing receipts.
Refusing to reconcile.
Reconciling your books with your bank statements is critical to determining your financial health. It is important to ensure that it is done properly and consistently. Reconciling the books helps you identify how much money you have on hand at any given time and also allows you to uncover banking errors before they become major problems. However, reconciliation can be complicated, so hiring an experienced accountant is highly recommended.
Not having a paper backup.
When it comes to audits, a paperless office can be a huge liability, especially in the event of technical problems. Tax authorities like the IRS want to see a paper trail that includes clearly visible documentation and a well-organized paper backup system. Apps that save your receipts can make day-to-day operations easier, but it’s still important to keep a backup of your finances for at least seven years.
Failure to collect or deduct the applicable sales tax.
Due to the explosion of e-commerce in the last 10 years, sales tax has become a complex issue for many small businesses. Historically, the mistake they most often made was simply not deducting sales tax from total sales, resulting in lump sum surprises at tax time.
While this remains the case, recent changes to federal law have made collecting sales tax more complicated when it comes to online, state-to-state compliance. Make sure you and your accountant are familiar with the latest rule changes so that you can continue to comply and limit your overall tax liability.
Petty cash is not out of whack.
Every small business using petty cash should have a dedicated custodian who can manage it and approve purchases, ensuring accountability and limiting the chances of fraud, theft, and abuse. To that end, companies must have clear policies regarding petty cash purchases and each purchase made with it must be accompanied by a receipt for the expense to maintain clear documentation of deductions at the time of tax filing. Receipts and other cash must equal the original dollar amount designated for the fund. When the fund is depleted, a check can be written to cash to reset the full amount. Not having a petty cash policy,
Misclassification or overcategorization.
Keeping a clear and organized chart of accounts is critical to your accounting. While most expense categories are fairly standard and straightforward, the mistake many business owners make when keeping their own books is creating duplicate categories or not entering expenses into the appropriate category.
Use general accounting guidelines for standard categories and create a few new categories as possible. A professional accountant can help you clean your books and make sure your chart of accounts is nimble and clean.
Try to do it yourself.
Most small business owners hate making their own books, but they insist on doing it themselves. Professional and competent accountants have the skills to get the job done quickly and efficiently, and they have the experience to locate subtle errors that might otherwise be missed.
As professionals, you will also be aware of the tax changes that could affect your daily financial practices. In the long run, having a second set of eyes on your financial records is extremely beneficial and will save you time and money.