Small Business Bookkeeping Blunders: How to Avoid Them












As the end of year approaches, many
small business CPAs and bookkeepers
find their stress levels rising.

In only a few short weeks, these accountants know they'll see silly bookkeeping errors
in many of their small business clients' books -- errors that have meant the business
owners have paid too little or too much in taxes. Errors that mean the business owner
hasn't really been able to effectively manage the finances of the business.

Fortunately, these common bookkeeping blunders are easy enough to fix -- if you
know what they are and if you know the simple steps you can take to avoid making
them.

Bookkeeping Blunder #1: Pretending No Accounting System is Needed

The first -- and perhaps most serious blunder -- is especially common with new
business owners. Sometimes, sadly, the new business owner pretends he or she can get
away without a real accounting system.

In place of a real accounting system -- something like QuickBooks or Quicken -- the
business owner simply collects receipts or manually maintains a check register. Or
maybe the business creates the illusion of an accounting system by using something
like Microsoft Excel to, at least, add up some of the numbers.

Unfortunately, the "no accounting system" doesn't work. Before you have your tax
return prepared, someone (perhaps your tax preparer) will need to cobble together
some sort of makeshift system. And that's too bad, really. Such a system will allow
your tax return to be prepared. But such a system almost surely won't capture all your
tax deductions. And the information that this crude "system" provides will be too late
to help you better run your business.

Bookkeeping Blunder #2: Slow Entry of Accounting Data

Another common blunder? Taking too long to enter the accounting data into your
system. Which is surprising, in a way...

You would think that people who've gone to the modest effort and expense of having
a real accounting system set up would keep the system up to date. But often they don't.

The problem with poky data entry is that any useful insights that come from your
accounting system, come too late.

Whoever is doing your accounting should keep up to date on the data entry. Within a
few days of some transaction actually occurring, the accounting system should reflect
the activity.

Bookkeeping Blunder #3: Skipping Account Reality Checks

An important yet simple point: Of course people make errors in using their accounting
systems. But the nature of double-entry bookkeeping means that it's usually relatively
easy to catch errors. How? You need to reconcile your bank accounts at the end of each
month when the bank statement arrives.

Furthermore, if you hold other valuable assets -- like inventory -- you need to
periodically compare what the accounting records say to an actual physical count.

Regularly performing reality checks on key accounts (especially cash) cleans up all
sort of easy-to-miss errors.

Bookkeeping Blunder #4: Financial Complexity Beyond Bookkeeping Skill Levels

One common bookkeeping blunder makes for awkward conversations between
accountants and their small business clients. But you deserve to know what the
blunder is...

Unfortunately, accountants commonly see clients in businesses that are too complex
for their bookkeepers to handle. And that's a huge problem. If the business gets too
complicated for the in-house bookkeeper (often the owner's spouse), the accounting
system slowly becomes more and more unreliable. And this accounting unreliability
usually means the business will shortly get into big trouble. (How can someone
successfully manage a business if they don't know when they're making or losing
money or how much cash they have in the bank?)

By the way, you'll easily be able to determine if the accountant or bookkeeper is
overwhelmed. She will be falling further and further behind on the data entry. She will
be producing reports that make less and less sense. And, often items, the profit and
loss statement or the balance sheet will include a suspicious catch-all account named
something like , "Ask the Accountant," "Suspense," or "Intercompany Transactions" that
keeps increasing in size.

Only two true solutions exist for the "too much complexity" problem. You can simplify
the business (probably the best idea). Or you can find a smarter (and probably more
expensive) accountant.

Bookkeeping Blunder #5: Co-mingling Personal and Business Assets and Liabilities

One final bookkeeping blunder should be mentioned given the approaching tax
season.

Many small businesses don't clearly separate their business finances from their
personal finances. For example, the businesses may use a single checking account for
both personal and business banking. The business may regularly borrow personally to
pay for business expenditures -- and vice versa. And the business owner may too
frequently mislabel personal expenses as business deductions.

Not surprisingly, such co-mingling of finances makes the bookkeeping records nearly
useless for tax preparation and for use in managing the business's finances.

Seattle accounting firm Stephen L. Nelson, CPA serves small businesses and publishes the
popular small business web sites:
Steven Nelson CPA and LLCs Explained.

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Marcia Passos Duffy, Publisher & Editor
Author of
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