Bookkeeping mistakes can cost you and your business a lot of time and money. That’s why it’s so important to be at least aware of the most common bookkeeping mistakes early on so you can avoid the frustration of having to go back and redo your books. 

Most errors result from not spending enough time on your books and making assumptions about transactions and procedures that are incorrect. If you arm yourself with time and knowledge, then you will have given your business everything it needs to succeed in the future.

Here are the most common bookkeeping mistakes made by small businesses that I’ve seen and committed myself throughout the years.

Mistake #1. Procrastinating is the bookkeeping mistake that never ends well

Let’s face it, we’re all guilty of this one at some point during our careers. Bookkeeping isn’t known as being a fun or enjoyable way to spend your time. Therefore, you really have to set aside some time and make yourself sit down and do what can seem at times to be tedious and redundant tasks. 

If you wait until the last minute or until the end of the year, you’re going to panic and stress out, which will only lead to even more mistakes. Not only that, but you’re not going to remember the details behind the transactions after a certain amount of time has passed.

How to fix this bookkeeping mistake:

So that you don’t feel overwhelmed at the last minute and can remember the details behind the transactions, set aside some designated time every day or week to record all transactions for that period of time. This way, everything is still fresh in your mind, there are fewer transactions to deal with so it’s not so dreadful and overwhelming, and it will cut down on the number of mistakes made.

Maintaining up-to-date records or records in real-time will give you a better idea of where your business stands at any point in time, will save you from a lot of frustration down the road, and possibly prevent you from paying unnecessary penalties.

Mistake #2. Assuming you know everything there is to know about bookkeeping

If you’re a small business owner doing your own books, you’ve got a lot on your plate. It’s impossible to keep up with everything and know how to do everything just right. If you’re a bookkeeper, every business is different depending on the industry, and you’re going to run up against things you haven’t dealt with in other businesses. It’s ok not to know.

How to fix this bookkeeping mistake:

If there’s any question about how to treat a transaction, check in with a professional or CPA for a month or two and have them look over the transactions to make sure you have recorded and treated each transaction correctly. Don’t just assume you know and keep making the same types of errors over and over again until it snowballs into a massive error that you will have to go back and clean up. This bookkeeping mistake is where a lot of time and money gets wasted.

Mistake #3. Incorrectly categorizing income accounts

There are three common bookkeeping mistakes that I have seen consistently throughout the years and have experienced myself. One is reporting transfers as income. Just because the cash in your business account increases, that doesn’t mean that the additional money is a result of income. It could be that you’re just moving money from one account to another.

How to fix this bookkeeping mistake:

This is something that you will have to watch for very closely because if you don’t have your chart of accounts set up properly, then the software will generally record the transfer as income. You need to set up an account in the chart of accounts and classify it as a transfer or movement of funds and not a revenue or expense. Then, make sure it is coded properly when recorded. Otherwise, it’s going to indicate that you have more money than you actually do, and it will throw off your budgeting method, forecasting, and reporting.

Mistake #4. Incorrectly categorizing expense accounts

The second mistake I see quite often is sole proprietors and single-member LLCs paying themselves and categorizing the payment as an expense.

How to fix this bookkeeping mistake:

Set up an equity account in your chart of accounts and call it “owner’s draw.” Otherwise, your profit is going to be understated, and you will not pay enough tax on your income which could result in fines and penalties. This mistake could cost you a lot of money.

How to Categorize Income and Expenses by Collective

Mistake #5. Incorrectly classifying workers

The third mistake I run across quite frequently is not classifying workers correctly. Is the worker you hired an employee or an independent contractor?

How to fix this bookkeeping mistake:

Learn how to distinguish between an employee and an independent contractor. An employee is a permanent worker who is on your payroll. An independent contract does temporary work or projects for you. If you mistakenly classify an employee as a contractor, then you won’t be filing the proper paperwork or paying everything you owe in taxes. You also would be misfiling your taxes. This error could lead to some very steep fines. Check out our article if you duplicated your tax returns.

Mistake #6. Not tracking petty cash

Petty cash is a small amount of cash you have on hand for regular and unexpected small office expenses. Some business owners don’t or can’t keep up with tracking where this money is spent.

How to fix this bookkeeping mistake:

Set up a system to track how much is spent on what and where. To do this, get a petty cash box, a composition notebook, and an envelope. Record every amount in the notebook used from your petty cash fund, including the date, what it was used for, where it was used, and place the receipt for every transaction in a labeled envelope.

Mistake #7. Not having an effective system set up for saving receipts

Sometimes the best intentions can fall by the wayside. Saving receipts sounds like a no-brainer. However, there are many times when you’re out buying something for the business, and you stick or thought you stuck that receipt in the bag, your pocket, or purse only to find out later you can’t find it anywhere.

How to fix this bookkeeping mistake:

One of the easiest ways to set up a receipt system is digitizing receipts or saving your receipts in an electronic format. This can be done immediately upon receiving the receipt. This prevents you from losing a receipt, having to keep up with a physical file, and makes it easy to retrieve whenever from wherever. 

Keeping track of all of your transactions and having a paper trail to back them up will make it so much easier when determining your expenses and deductions when preparing your taxes or during an audit.

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Mistake #8. Failing to review financial statements

If you only organize and record transactions but never summarize, you won’t have a clue as to what the numbers mean or how your business is performing financially. 

How to fix this bookkeeping mistake:

So, it’s important to print out financial statements at the end of every month so you can see where you have been, where you are now, and where you could go. Review your financial statements on a monthly basis to keep yourself updated on how your company is performing financially so you can make adjustments for the following month if needed and to ensure that you are making sound business decisions from month-to-month.

Mistake #9. Not properly tracking reimbursement expenses

At one point or another, you will get caught paying for business expenses out of your own pocket. The problem develops when you fail to account for these.

How to fix this bookkeeping mistake:

If you don’t record or take these into account, you risk forgetting to reimburse yourself for these funds and losing some of your personal money. You also risk qualifying for tax deductions. The solution is to create a system to record these transactions so that they can easily be tracked and reimbursed. That way you can keep your personal and business finances separate and protect either your personal finances or your employee’s, depending on who paid. To do this, simply buy a journal or set up an Excel sheet to keep up with these transactions.

See also: 45+ Bookkeeping Resources You Shouldn’t Ignore

Mistake #10. Not reconciling accounts

When reconciling accounts, your income and expenses on your bank statement should match up with the transactions recorded in your books or entered into the accounting software. If you don’t reconcile monthly and the numbers don’t match up, then you could end up with a real mess on your hands that could possibly take a lot of time to find the source of and correct moving forward on a monthly basis from there.

How to fix this bookkeeping mistake:

Be sure that all of your debits and credits on the monthly bank statement and other accounting information match up with what you have recorded in the books or entered into the software. Doing this includes comparing and matching the beginning and ending balances with each other as well. If this is done on a monthly basis, then errors won’t snowball from month to month, and you will have accurate numbers to go off of to make the best possible decisions for your business.

Business Owners DON’T Make These Bookkeeping Mistakes by Infinite Book Equity

In closing

Bookkeeping isn’t beneficial to you or your business if your books consist of a lot of inaccurate numbers. Books that have been managed incorrectly can really throw your numbers off and give you a false snapshot of where your business stands financially.

Take the time to avoid these common bookkeeping mistakes, back up your data to protect it from any technical glitches, and hire a CPA to do your taxes so you can get professional advice on ways to maximize your profit while minimizing expenses.

Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.

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