This guest post is brought to you by Bench, the online accountants that use your Shoeboxed receipts to build you tax-ready financial statements.
Bookkeeping is a key component to any successful business, but it can be complex and time-consuming if you don’t have the necessary knowledge and experience. Mistakes with your books can also be expensive to fix. Read on for three bookkeeping mistakes you should take care to avoid in your small business.
1. Mixing Business and Personal Finances
In the event of an audit, having business and personal expenses combined can be a very costly mistake. Under audit, the IRS may take a sample of a period of a few months to see the volume of personal expenses on your books. If they find many personal expenses, they’ll extrapolate that to the entire period and apply taxes for that amount. As you can imagine, this is an expensive consequence of not separating accounts. If you have an LLC or corporation, you have even more reason to be vigilant about separating expenses – in fact, you’re legally required to do so. Failure to comply could result in a lifting, or piercing of the corporate veil, which opens you up to unlimited personal liability.
2. Doing it Yourself for Too Long
While a DIY approach is good in the beginning when the books are simple, as your business grows you’ll need to decide on a more robust system. To determine when the time is right to hire a professional, calculate your hourly wage and multiply it by the number of hours you spend bookkeeping – hours that could be spent improving your business in other ways. When the cost to do it yourself matches or exceeds the price of outsourcing it, you may want to look at your options. And remember, many professional services expenses can be deducted!
3. Trashing Receipts
Part of tracking expenses is maintaining records that prove the legitimacy of those costs. While the IRS doesn’t require receipts for expenses under $75 (provided you can show a bank statement), they can still be helpful to have for bookkeeping purposes. Not to mention, the more evidence you have, the better off you’ll be in the event of an audit. And in this day and age, keeping a thorough record of your expenses is no reason to clutter up your office; digitize your receipts with Shoeboxed or send them directly to your Bench bookkeeper. The following receipts are important to keep, so take extra care with them:
- Meal and entertainment costs
- Business travel costs
- Mixed-use assets (for example, a vehicle used for personal and business, or the home office).
- Client gifts
While it may be a pain point for your business, thorough bookkeeping is key to long-term success. Avoid these expensive mistakes by doing your research and bringing in help when you need it.