Small Businesses: Avoid Making These 9 Bookkeeping Mistakes

With the rise in eCommerce, sales tax has become a complex issue for many small business owners. Initially, the only mistake was failing to deduct sales tax from the total sales amount. However, with the recent changes in the rules of digital goods sales, tax collection has become even more complicated. And many small business owners are prone to making bookkeeping mistakes that can cost them their success. As a small business owner, you may have to hire people as temporary help — either for a brief and finite period, or part-time on a continuing basis. It’s important to accurately record your relationship with them, for both your tax status and theirs.

You may have always claimed a standard deduction on your personal taxes. But now that you’re in business, the standard deduction may be the less lucrative option. Next, if you’re concerned you won’t have your tax return ready on time, prepare to file for a federal tax extension.

Improper Tracking of Reimbursable Expenses

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Learning what to do–and what not to do–with your books can help ensure your business has a stable foundation for growth and prosperity. It’s important to maintain good communication between the bookkeeper and company employees. Small businesses need to be extra cautious when it comes to bookkeeping. This is because many companies end up losing money while making these small mistakes.

And as a business owner, you need to understand how to collect, report and pay sales tax for your business. You may not know about all of the deductions you’re entitled to as a business owner, however, a good accountant can tell you. They can make sure you are making the most of your money regarding depreciation or inventory management. Most bookkeeping errors arise due to a simple lack of time or knowledge. When armed with the right information and the right tools, you can keep bookkeeping errors at a minimum.

Here are 10 of the most common bookkeeping mistakes small business owners make when approaching their company’s finances:

In a tax audit, you might be called upon to provide receipts or other records to prove the legitimacy of a business expense. But the importance of proper recordkeeping goes beyond tax ramifications. Should you decide to sell your business, the buyer will likely request an external audit of your company’s financials or a formal valuation of the business. In both cases, receipts and other documentation will be required to verify the accuracy of your financial statements.

Even the most meticulous business owners occasionally forget to save a receipt related to a business purchase. While it might not seem like a big deal if a meal ticket is missing here or there, those small purchases can add up to big money. Likewise, you don’t want to have to answer to Uncle Sam if you claim expenses without the proof to back up every penny. Whether you’re handling your own accounting or outsourcing to a professional, bookkeeping mistakes can cause major issues for your business. It’s best to prevent and confront these issues before they become more serious concerns.

Entry Reversal error

https://bookkeeping-reviews.com/ly tracking income and expenses in the correct categories ensures proper measurement of profitability. Knowing the different tax treatments of each income and expense category can result in significant tax savings, as well. When the two accounts are mixed together, it will become difficult to conciliate them with tax deductions and bank statements. The business owner will also end up spending business money in a personal emergency.

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As the CEO and founder of cloud-based bookkeeping and accounting platform Xendoo, Lil Roberts has seen her share of these mistakes among new business owners. To help, she outlined some common errors entrepreneurs make when doing their own books and offered her advice on how to avoid them. Small-business owners often make bookkeeping mistakes in their early years of operation, primarily due to a lack of knowledge regarding proper accounting procedures.

If you don’t have a separate bank account for your personal and business finances, it can become an issue later on. Operating on a single bank account can mix up your personal and official business spending. When auditing comes, the IRS may ask you to provide a complete record of your purely business-related spending.

Not Knowing When It’s Time To Seek Help

In 2012, she started Pocket Protector Bookkeeping, a virtual bookkeeping and managerial accounting service for small businesses. At the end of the day, it’s important to realize when it’s time to delegate your bookkeeping duties to a qualified professional. Sometimes a business has simply grown too big for management to handle bookkeeping on their own. However, not all businesses sell items that require the collection of sales tax, and each state varies in what types of items they charge sales tax for.

And even a casual business meeting in a coffee shop can mean writing off the cost of 2 cappuccinos. Suddenly, you may find yourself owing expenses you didn’t expect or coming up short when it’s time to pay. And that can cause serious damage to your financial well-being.

Track financial information at any given time for external stakeholders like your customers, investors, lenders, and even the IRS. Entrepreneurs may not always understand their books, but they might also avoid asking for help when they’re out of their comfort zone, Roberts said. Entrepreneurs may not always understand their books, but they might also avoid asking for help when they’re out of their comfort zone.

Bookkeepers and accountants will charge you extra to get your books up to date for tax filing; that’s one more fee you must pay on top of taxes. At its heart, bookkeeping is all about tracking how money enters and leaves your business. It also means being crystal clear about which transactions are personal, and which ones are for your business. Roberts said the best way for business owners to stay on top of their finances is to truly know their numbers. This means avoiding the temptation to treat your business like it’s a piggy bank. Key performance indicators help business owners guide their organization in the right direction based on goals and progress.

Reconciling your what does it take to become a cfo with bank statements is a fundamental step. It should be done consistently to confirm that what you’ve spent matches your records. When you reconcile your books, it’s easier to spot errors BEFORE they become major problems.