When you run a small business, many things are outside of your control. Although you can’t control the economy or consumer buying trends, you can limit costly accounting mistakes from wreaking havoc on your business’s bottom line.
I know how devastating clerical errors can be for a small business. Whether they cost your business money, take up time, or lead to an audit, accounting mistakes are a hassle. Save yourself a headache by avoiding common accounting errors.
6 Tips to prevent accounting mistakes
Accounting mistakes can happen to anybody. Use the following tips to reduce the number of accounting errors you make.
1. Update your accounting books
This tip is pretty straightforward. If you want to avoid accounting mistakes, you need to update your accounting books to show each transaction that takes place between your business and another party. When you update your books depends on whether you use cash-basis or accrual accounting.
If you use cash-basis accounting, create a journal entry when you receive money or make a payment. If you use accrual accounting, record transactions when your business incurs them, even if you don’t receive money or make the payment.
Regardless of the accounting method you use, you must update your accounting books. Unrecorded transactions are known as errors of omission. Errors of omission throw off your accounting books, which may cause you to file your taxes incorrectly, create false financial statements, and spend more money than you have.
To avoid errors of omission, update your accounting books by recording all transactions.
2. Save receipts and other documents
It might be tempting to throw out documents like receipts and bank statements when you declutter. But, saving receipts and related documents act as proof for the numbers in your books. These documents are essential if the IRS audits you. And, they are also necessary for reconciling your books, explained in the next section.
Hang onto records for at least three years to protect your business. Secure records in a locked filing cabinet. You can also store digital documents on your computer to act as a backup in case something happens to paper records.
3. Check your records
Mistakes happen. Even accountants make mistakes from time to time! Chances are, you’ll likely make mistakes, too. But if you can catch mistakes before they cause problems, you’re in good shape.
One way to catch small errors before they become devastating accounting mistakes is to reconcile your accounts. Account reconciliation is when you compare the numbers in your books to an external record, such as a bank statement. After reconciling your accounts, you might discover an error in your accounting books. You can create a new journal entry to add or remove money.
4. Separate personal and business funds
Do you have one bank account that mixes your personal and business funds? If so, you should open a new business bank account. Even if you aren’t required to separate funds (i.e., sole proprietors and partners without DBAs), doing so is a good idea.
Combining your business funds with your personal funds is a recipe for disorganization and confusion. Not to mention, mixing funds could cause you to file your taxes incorrectly.
Creating a separate business bank account has many positives for your small company. You know how much money your business has, which can decrease overspending. And, you won’t be tempted to allocate some of your business funds for personal spending. Instead, you can use the money in your business bank account to grow your business.
5. Use software
Maintaining accounting books by hand takes up a lot of time. When you run a small business, it can be easy to spend hours managing your books. Or, you might decide to hire an accountant to take care of all your accounting responsibilities for you, which can be expensive.
Instead of managing books by hand or relying solely on an accountant, shop around for accounting software. With accounting software, you can record transactions quickly, making it easy to track incoming and outgoing funds. And by automating your accounting responsibilities, you can quickly generate reports, create and send invoices, calculate balances, and more.
6. Create budgets
Are your finances on track with your goals? If you don’t create budgets, you have no way of knowing whether you are overspending.
Creating a small business budget helps you plan for expenses and make wise purchasing decisions. You can also project incoming revenue, which lets you determine if you reach your goals.
You can create a budget by forecasting your business’s revenue, expenses, and profits. Use past data when making your budget to increase accuracy.
Throughout the year, compare your projected profits to your budget. If your business isn’t bringing in as much revenue as you predicted, come up with ways to increase sales, such as offering discounts. And if your expenses are higher than you anticipated, find methods to cut back costs.