8 Common Small Business Accounting Mistakes And How To Avoid Them
Updated: Aug 10, 2022
As a new entrepreneur, you may be tempted to handle your own accounting and bookkeeping. However, it's important to avoid making these common DIY accounting mistakes.
When entrepreneurs first start out, they typically try to handle their own accounting to save money. However, even small businesses need a professional accountant to track income, expenses, taxes, and vendor payments to avoid costly mistakes.
Here are some of the most common accounting mistakes business owners make, and how you can prevent them:
1. Data is not backed up
What would happen if the device on which you stored your business’s financial information was lost, hacked, stolen, or your computer or accounting server crashes — and you did not have it backed up anywhere? Restoring your books can be an arduous process, and you should consider taking preventive measures. Fortunately, cloud accounting solutions such as Xero or QuickBooks Online saves all your work online and they are backed up in servers for you automatically.
2. Not using accounting software
Not using an accounting software can have a serious effect on your business for several reasons:
You won't be able to track your income and expenses properly, which will make it difficult to manage your finances and make informed decisions about where to invest your money.
You'll miss out on valuable insights into how much money you're making (or not making), what areas of your business are most profitable, etc.
Tax time will be a nightmare without proper records of all your transactions.
Therefore, using cloud accounting software can help you avoid mistakes, streamline your workflow and make it easier to handle your finances.
Cloud accounting software is designed to eliminate the need for manual data entry by integrating with your bank account and allowing you to back up your data. Additionally, having a centralized accounting system will make it easier for accountants to access your company's historical data for managing bookkeeping, payroll, and taxes.
3. Forgetting to record small transactions
How your business manages its petty cash is an important matter. Each transaction must be recorded so that you have an accurate record of your spending.
For example, retailers should keep track of all their cash transactions, as well as small payments like charges for deliveries.
Keeping a record of small transactions will make it easier to manage your books as your company grows and its number of transactions increases.
4. Not adhering to regular accounting schedules
As a business owner, you’re likely to have many responsibilities. Updating your books might fall to the bottom of your to-do list. However, you should set a regular schedule for adding in recent income and expenses. Daily updates are ideal, but weekly is better than nothing.
5. Not paying enough attention to bookkeeping
Recording everything is an important part of effective accounting. Small transactions and large payments should be recorded and categorized to ensure that your accounts are accurate.
For any company, whether small or large, taking accounting seriously allows you to consistently assess your company’s overall health, allowing you to determine exactly how well you’ve performed in each period.
A serious bookkeeping and accounting system is the key to keeping your business financially secure. When you categorize your assets and liabilities correctly, as well as perform monthly checks of your books and accounts, you are more likely to achieve this goal.
6. Mixing your personal and business finances
There are some reasons to keep your personal and business finances separate:
It can be difficult to track expenses when they're mixed.
You may be missing out on tax deductions if you don't have separate accounts.
It can be harder to get approved for loans if your personal and business finances are mixed.
Therefore, you must separate business and personal credit cards and bank accounts to simplify the process of keeping track of profits, expenses, losses, and tax-related items.
7. Calculate profit as cash flow
To start a business, you must make investments in product, supplies, and other necessary items. However, you should make sure that you are not spending more than you are making. Otherwise, this could lead to debt.
When you're developing a product, it's important to know how much money you're spending on development compared with how much money you are bringing in. If your company is making money on paper but not turning a profit, you might be miscalculating expenses versus earnings.
Hire our professional accountants can help you monitor profits, expenses, and losses so that you always know where your business stands. Before embarking on an expansion, carefully review financial plans to ensure that your business will make back its investment within a reasonable time frame.
8. Failure to reconcile accounts in a timely manner
After you have completed your monthly accounting sessions, check and review all your statements to make sure that your records are in line with what’s reflected in your bank accounts.
Even a small error requires your immediate attention. This will prevent it from turning into a bigger problem in the future.
It's important to regularly check your business bank account against your records. This will allow you to catch erroneous entries and inaccurate records sooner, thus preventing fraudulent activity from going undetected.
The impact of accounting errors on your business
No business is perfect, and sometimes mistakes happen. But when it comes to accounting, even a small error can have a big impact on your business. That's why it's so important to make sure your financial records are accurate and up to date.
Accounting software and other digital tools can help businesses manage data, analyze it and report on it. To minimize the risk of losing data or being defrauded, implement well-placed safety and precautionary measures.
Acc Pro (Singapore) offers professional accounting and consulting services to small businesses looking to reach financial success. Also, we have compliance services such as bookkeeping and payroll, financial review and statements, taxation, corporate secretary, Goods and Services Tax (GST). We can help you make informed decisions about your business's financial future by giving you sound advice based on your finances and requirements.
If you have any questions about accounting and taxes, please don’t hesitate to contact us.