“I should look for these accounting mistakes now?”
As an accountant to small businesses, I find myself frequently saying to clients: “Here’s some basic accounting tasks you should consider doing right away to protect your business”. They may not be eager to talk about it, but it’s an important conversation. And with a basic plan and routine, critical accounting mistakes can be fixed!
You may be an entrepreneur who has owned your own business for years or you may have just made the leap to owning your own business. Either way, there are some basic tips you can implement … and should implement … to protect your business. And the sooner, the better.
Let’s get started.
Mistake #1: Not separating personal & business records
You start a business. You start running and working many hours. Money comes in and money goes out. Why separate the expenses between business and personal? I have heard many reasons for Not separating the expenses. Here’s some of the reasons I hear alot:
- It’s my money. I can spend it for whatever I want from the business.
- Accounting takes too much time.
- I don’t have time to mess around with more detail.
But then my first question is: How will you really know how the business is doing financially?
As I start with that question, I am trying to help entrepreneurs understand that separating and isolating business information really gives them BETTER information. As an accountant who works closely with small businesses throughout the year, I know that many times before we can make better decisions, we need solid business information.
Not an Option
But then I need to bring up the tough question: Do you understand that merging personal and business information is not even an option for taxes?
You need to split them out — either now or at tax time. The tax accountant working with you at the end of year needs business information to complete the business piece of the tax return.
You may say “But my tax accountant never really asks me, he/she “just” does my tax return. Yes, they may not find all the personal items you have included, but it is your responsibility. They have you sign the tax return which states the information in the tax return is your responsibility. If you get audited, you will need to explain items to the IRS.
There are more reasons, but these are two great reasons to break out business and personal expenses.
Here’s some main ways to start separate your business from personal:
- Get Separate Bank Accounts
- Get Separate Credit Cards
- Create Separate QuickBooks files
Mistake #2: Not Keeping All Receipts
There is no way to gently say this, so here it is: Keep all receipts. OK, maybe some exceptions. But, pretty much ALL!
As you run your business, keeping receipts can be very helpful when you need additional detail. The receipt can help clarify exactly what a purchase is for.
Not an Option
And then, there is the “Protect yourself with the IRS” reason. Keep receipts so if you do get audited or questioned by the IRS, you have documentation. Check out the IRS site. To Simplify: If in doubt, keep receipts.
Here’s some starting ideas to create a system to keep receipts.
- Put receipts in one temporary place while they are waiting to be filed.
- Some receipts have items listed, but the descriptions are vague. Write notes on the receipt to clarify what the receipt is exactly for.
- File all receipts in a way that matches the categories in the accounting software. Consider scanning (which will be a topic for a later post).
Mistake #3: Not Monitoring Cash-Credit Card Accounts
This is one issue I see often: Not Monitoring cash and credit cards frequently.
In “the day”, we accountants had to wait for monthly statements. Then it was a big ordeal: we would finally be able to do bank reconciliations where we compared what was entered in the accounting records to what was on the bank statement. We tried to make sense of any information that was not already entered — and since the information was over a month old, sometimes that was difficult. I now work with clients who have bank statements that are over a year old. That can be very difficult.
We don’t have to wait
The days of waiting to receive a bank statements or credit card statements in the mail are gone. Or they could be, if we utilize tools available to us. We don’t have to wait until the middle of the next month to receive statements. We have the ability to go on-line and get timely information.
Another great reason to track information online frequently: to watch for fraud or identify theft. Keeping a pulse on bank accounts and credit card accountants will alert us quicker if there are issues.
From a tax perspective: keeping up with information throughout the year will help save frustration at year-end. If we do bank reconciliations frequently, by year-end the bank and credit card information should already be categorized and recorded. Tax time should be less stressful.
Here’s some steps to work through in order to monitor bank and credit cards:
Sign up for Online Access to banking and credit card information.
Use tools to organize and keep your passwords confidential (check out my other post).
Review bank and credit card accounts frequently.
Reconcile all statements to the accounting records.
If this makes you pause, consider Finding an an accountant to help you.
Summary: Accounting Mistakes & Fixes
These three accounting mistakes are important to fix. Not only can they help protect your business, they can help decrease your accounting frustration.
You may think accountants like accounting so much, we can figure many things out without much information. But, here’s one of my projects:
- I help a client get information in to QuickBooks. I am rocking.
- But as I review the credit card statement, there are many amounts I don’t understand.
- Hey, I will just look at the receipts. No Receipts.
- Maybe I didn’t see the detail on the credit card statement. I double-check. No, not there.
- I call the client. After a week, I am still waiting for them to get back with me.
- Will googling the companies that charged the credit card help? No, the many companies I am reviewing have many business and personal products.
- I am at a dead-end for now.
Tracking doesn’t need to be highly frustrating. But to get there, we need to plan and create routines. With a plan you can have a system to better protect your business, help make better decisions, and it can be simplified.
- Separate out Personal & Business. Don’t merge them together.
- Keep receipts. Have them available at your finger tips.
- Look at bank accounts and credit card accounts frequently. And reconcile them to the accounting software.