If you run a small business, you need to do bookkeeping. It helps you keep track of your money, what you spend, what you owe, and how your business is doing. It also helps you make smart choices and plan ahead. But bookkeeping can be hard and boring, especially if you don’t know what you’re doing or have the right tools. And if you mess up, you can get into a lot of trouble, like paying extra fees, getting audited, or even having legal problems.
That’s why you should watch out for some of the common bookkeeping mistakes that small businesses make. In this post, we’ll tell you 5 of them and how you can stop them from happening. By following these tips, you’ll save time, money, and stress, and make your bookkeeping better and easier.
1- Wrong Choice of Accounting Method
When you start your own small business, you have to decide how to do your accounting. There are two main ways: cash basis and accrual basis. Cash basis means you only record money when it comes in or goes out, while accrual basis means you record money when you earn it or owe it, no matter when you actually get or pay it. Each way has its good and bad points, and you have to pick the one that works for your kind of business, how big it is, and how it affects your taxes.
Table: comparison of accounting methods.
| Accounting Method | Description |
|---|---|
| Cash Basis | Records transactions when cash changes hands. Simple and straightforward, ideal for small businesses with straightforward financial transactions. |
| Accrual Basis | Recognizes income and expenses when earned or incurred, not when received or paid. Provides a more accurate financial picture, suitable for larger businesses. |
| Hybrid Method | A mix of cash and accrual basis. It allows flexibility in managing finances and can be tailored to specific business needs. |
Each method has its own merits and can be chosen based on the complexity of your business transactions and reporting requirements.
If you pick the wrong way, you can mess up your financial reports, your taxes, and your cash flow. For example, if you use cash basis and you bill a customer in December but get paid in January, you won’t show the income in the same year as the expense, which can make your profit and loss look wrong. Or if you use accrual basis and you buy inventory ahead of time but sell it later, you’ll have to show the expense before the income, which can make your cash flow tight.
To avoid this mistake, you should talk to a professional accountant or bookkeeper who can help you pick the best way to do your accounting and tell you what it means for your business. You also need to be consistent and use the same way all year, unless the IRS lets you change it.
2 – Single or Double-entry accounting system
You also have to decide if you want to use a single-entry or a double-entry accounting system. A single-entry system is easier and simpler, but it only records one part of each transaction, like income or expense. A double-entry system is harder and needs more skills, but it records both parts of each transaction, like debit and credit, and makes sure the accounts are balanced at the end of each period.
A single-entry system might be enough for very small businesses that don’t have a lot of transactions and are easy to run. But it can also be risky and wrong, as it doesn’t show you the whole picture of your money situation, doesn’t keep track of your assets and debts, and doesn’t stop mistakes or cheating. A double-entry system might be better for most small businesses, as it gives you more information, accuracy, and control over your money, and helps you make financial statements and tax returns.
To dodge this mistake, you need to figure out what your business needs and can do, and pick the accounting system that works best for you. You also need to use a good bookkeeping software or service that can help you do your accounting faster and easier and make sure your records are right and up to date.
According to the document: Here’s a more casual and bullet-pointed version of the text:
- You gotta choose between single-entry or double-entry accounting.
- Single-entry is simple, but only records one side of a transaction.
- Double-entry is more complex, but records both sides and balances accounts.
- Single-entry can work for very small businesses, but can be risky and inaccurate.
- Double-entry is usually better for small businesses, providing more info and accuracy.
- To avoid mistakes, evaluate your business needs and choose the best system for you.
- Use reliable bookkeeping software or service to help automate and simplify your accounting.
To help you understand the differences between single-entry and double-entry bookkeeping, here is a table that summarizes the main features and advantages of each system:
| Aspect | Single-entry | Double-entry |
| Definition | A simple method of recording transactions in one account, either as income or expense. | A complex method of recording transactions in two accounts, one as debit and one as credit, following the accounting equation. |
| Suitability | Best for small businesses with low transaction volume and simple financial structure. | Best for large businesses with high transaction volume and complex financial structure. |
| Accuracy | Less accurate and prone to errors, as there is no way to check the balance of the accounts. | More accurate and reliable, as the balance of the accounts can be verified by the double-entry rule. |
| Information | Provides less information and insight into the financial performance and position of the business. | Provides more information and insight into the financial performance and position of the business. |
| Financial statements | Only allows the preparation of an income statement, showing the net income or loss of the business. | Allows the preparation of a balance sheet, a cash flow statement, and an income statement, showing the assets, liabilities, equity, cash flows, and net income or loss of the business. |
3 – Not maintaining transaction documentation
Don’t let paperwork pileups become a costly mistake. Here’s the lowdown on keeping your transactions in check:
- Keep track of every transaction—that’s money in and out. You’ll need receipts, invoices, bills, contracts, bank statements, and more.
- Why? These documents prove your transactions are legit and help you stay on the right side of tax laws.
Neglecting this can lead to a heap of issues:
- You might lose track of your cash flow.
- You could miss out on tax deductions.
- You risk paying more taxes than necessary.
- The IRS might come knocking if things don’t add up.
To dodge these troubles:
- Organize your documents in an easily accessible spot, like a folder or digitally.
- Regularly cross-check your records with your bookkeeping.
- Ensure everything matches up and is complete.
- Stay updated on IRS guidelines for document retention—they vary by document type and purpose.
Stay sharp and keep those papers in order to save yourself from a world of tax pain!
4 – Improper recording or incomplete books
Watch out for these bookkeeping blunders that can really set you back:
- Mistakes in recording—like typos, duplicates, or wrong categories—can mess up your financial reports.
- Incomplete books mean missing transactions or accounts that haven’t been reconciled, leading to inaccurate financials.
These slip-ups can cause:
- Wonky financial statements.
- Tax calculation errors.
- Cash flow confusion.
- Potential audit red flags.
Here’s how to keep it tight:
- Be meticulous with your bookkeeping entries.
- Use the right categories and accounts for each transaction.
- Regularly reconcile and adjust your accounts.
- Close your books properly at each period’s end.
And hey, why not make life easier? Use bookkeeping software to automate and minimize errors. Keep your financial game strong!Show learn more suggestions
5 In-house accountant or Bookkeeping services or accounting software
Deciding on how to manage your bookkeeping is a big deal when you’re running a small business. Here’s the lowdown on your options:
- In-house Accountant: Great for complex businesses needing lots of bookkeeping and direct access to an accountant. But, it’s pricey and a bit of a hassle with salaries, benefits, and all that HR stuff.
- Outsourcing: You can hand off the work to a bookkeeping service. It’s cost-effective and less of a headache management-wise.
- Accounting Software: Tech-savvy? Go for software. It’s efficient and scales with your biz.
Think about what’s best for your wallet, needs, and how you like to work. Choose wisely!
FAQs
Q: What are the benefits of outsourcing to a bookkeeping service?
A: Outsourcing to a bookkeeping service can save you money, time, and hassle, as you don’t have to hire, train, or manage an in-house accountant. You can also get access to professional and experienced bookkeepers who can handle your books efficiently and accurately, and provide you with timely and reliable reports and advice.
Q: What are the drawbacks of outsourcing to a bookkeeping service?
A: Outsourcing to a bookkeeping service can also pose some challenges, such as communication issues, security risks, and lack of control. You may not be able to communicate with your bookkeeper as easily and frequently as you would with an in-house accountant, and you may have to share sensitive financial information with a third party. You may also have less control over how your books are done and when you receive your reports and statements.
Q: What are the benefits of using an accounting software?
A: Using an accounting software can give you more flexibility, convenience, and automation, as you can do your bookkeeping tasks yourself or with minimal assistance, and access your financial data anytime and anywhere. You can also benefit from the features and functions of the software, such as invoicing, billing, tax preparation, budgeting, and reporting, that can make your bookkeeping easier and faster.
Q: What are the drawbacks of using an accounting software?
A: Using an accounting software can also have some disadvantages, such as learning curve, technical issues, and human errors. You may need to spend some time and money to learn how to use the software and set it up for your business, and you may encounter some technical problems or glitches that can affect your bookkeeping operations. You may also make some mistakes or oversights if you are not familiar or careful with the software, and you may still need some professional guidance or support from time to time.
Q: How do I choose the best option for my small business?
A: There is no one-size-fits-all answer to this question, as different businesses have different bookkeeping needs and preferences. You need to consider several factors, such as your budget, your bookkeeping workload and complexity, your desired level of involvement and control, your business goals and plans, and your personal comfort and confidence. You may also want to compare the features, prices, and reviews of different bookkeeping services and accounting software, and consult with other small business owners or experts for recommendations and advice.
Q: Can I switch between options or combine them?
A: Yes, you can switch between options or combine them, depending on your changing bookkeeping needs and circumstances. For example, you may start with using an accounting software when your business is small and simple, and then outsource to a bookkeeping service when your business grows and becomes more complex. Or you may use a bookkeeping service for some aspects of your bookkeeping, such as payroll and taxes, and use an accounting software for others, such as invoicing and reporting. However, you need to make sure that you communicate well with your bookkeeper or software provider, and keep track of your financial records and transactions, to avoid any confusion or inconsistency.
