Most Common Mistakes to Avoid in Bookkeeping for LLC

Bookkeeping for LLC is a core part of the business finances and can have a significant impact on the growth and profitability of your business. It can encompass a variety of tasks, such as billing a customer, recording a fixed asset, or paying compensation to employees. 

Since bookkeeping is the backbone of any business, there are many potential mistakes that can damage your accounting and financial system. This article will introduce the most common mistakes to avoid in bookkeeping for an LLC. 

Mixing business and personal expenses

It may appear simple to cover a work expense with private money. However, combining your funds tends to make financial reporting (and taxes) more difficult in the long term. 

To prevent this stumbling block, make an effort never to use your cash to support business costs. Here is some advice to help you stay on track:

  • Manage your company’s finances with separate business bank accounts.
  • Have a separate payment method for your business (e.g., only using credit cards or checks instead of cash).
  • Stick a logo on your business credit cards to differentiate them from your personal cards.
  • Keep a small sum of money in your corporation checking account to pay unexpected business costs (so you aren’t inclined to use personal funds when you have your business accounts).

Failure in reconciling bank statements and accounts

This mistake in bookkeeping for LLC can result from mixing business and personal expenses. It could become a serious issue in the future if you don’t use separate bank accounts for your personal and corporate finances.

Using a single bank account can cause confusion between your personal and formal company spending. The IRS may request a detailed record of your entirely business-related expenditure if you are audited.

It’s a good idea to use separate bank accounts for personal and official activities. This simple practice helps you reconcile your bank statements and invoices at the end of each month. You can also identify the source of your finances and avoid any possible auditing events.

Throwing away receipts

If you lose your receipts (or throw them away), you won’t be eligible to claim the business deductions you created on your tax forms. We have already published several articles about the importance of keeping business receipts, make sure to check them out! 

Here are a few points to bear in mind to storing your business receipts:

  • It is perfectly acceptable to keep and use the online version of your receipts.
  • You may need to keep your receipts for up to six years. 
  • You can scan your receipts and save them in a cloud system such as Google Drive, Dropbox, or Shoeboxed to keep them safe for years without being damaged by fire, flood, or faded ink. 
  • Try to keep as detailed records of all business expenses (especially for meals and entertainment) as possible. You can claim a significant deduction from them. 

Recording payments to yourself as an expense

Don’t record the payouts as a possible cost when you charge yourself as a sole trader or a separate LLC. It’s a simple mistake to make. However, it will reduce your total financial gain and showcase an utterly bogus total for the earnings you must pay taxes on. Instead, deposit these funds into “Owner’s Draw.”

Neglecting sales tax

One of the most costly minor business bookkeeping blunders is failing to account for and pay sales taxes. Not paying enough attention to the measurement and processing of sales taxes can lead you to IRS penalties and fines. If you input information improperly, you may wind up with an invalid overall sales amount and, as a result, the obscene amounts of revenue taxes due.

We suggest that you work with your accountants and lawyer to ensure that your company complies by submitting the correct amounts of sales tax.

Tracking reimbursable expenses improperly

Accounting for business expenses from your own money is often a must, and one small business accounting error is failing to document refundable charges. If you fail to track these expenses, you potentially lose money and lack the right to claim tax breaks.

The solution is to build a documentation system that allows your organization to manage and document all reimbursable expenses regularly and easily. And Shoeboxed can help you with that!

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

Bookkeeping for Freelancers: 4 Proven Best Practices

If you’re a freelance writer, accountant, translator, or consultant, you’ll likely do your own bookkeeping. Though bookkeeping for freelancers is crucial for a freelance business, keeping an accurate log of your clients and business cash flow isn’t always easy. 

If you’re struggling to keep up with your financing, check this article for the four proven best bookkeeping practices for freelancers! 

Keep track of your records

Staying on top of your bookkeeping is critical to filing your taxes. Besides staying organized, you also need to keep track of some essential information, documents, and expenses for tax seasons, including: 

  • Total hours you worked on a project
  • Cost per hour for each client
  • Records of products or services you’ve provided to your clients
  • Internet and phone bills
  • Power and utility bills
  • Office supplies
  • Educational expenses
  • Software subscription fees  
  • Office rent (if you work from home, you can claim mortgage and property taxes)

In most states, freelancers are required to keep business financial documentation for up to six years for tax purposes. It’s a good practice to keep your documentation and data well organized and safely preserved, regardless of where you work or how much money you make.

Try to incorporate a coherent archiving system that allows you to access your financial data like bills, receipts, and notes quickly and efficiently. You never know when you’ll need to find some random document from the past! 

You can also check out our step-by-step guide on filing taxes as an independent contractor to get yourself ready for tax season.  

Separate your personal and business expenses

It might be difficult to keep your personal and company finances separate as a freelancer. Most freelancers will likely pay their business expenses with their personal money. However, this immediate benefit will lead to a huge hassle to sort through and separate personal and business expenses. It can also be an extra cost if you hire an accountant or bookkeeper to do it for you.

You should open up a business-only bank account as soon as you start your freelance business. It doesn’t necessarily need to be a business account. A second bank account would be sufficient when you’re just getting started.

This separation in your finances helps you better visualize where your money is going and coming from, making your tax preparation and cash flow analysis considerably more precise. This simple practice also helps you avoid financial problems in the future and determine which expenses are necessary for your work.

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Set reminders for payment

A freelancer is likely to work with many projects and clients, meaning that your payment depends on your clients’ schedules. 

Staying on top of your income may be difficult when you’re waiting to be paid. Since your clients likely focus on their business and forget upcoming bill dates, you may receive your payments later than expected. These overdue payments can affect your cash flow and planned income. 

A solution to this is to send out invoices with clear due dates and set up automatic reminders for payments and overdue payments. A little effort can go a long way in helping you receive your payments on time. 

File your taxes

Filing taxes can be a challenge for a freelancer, especially when you need to handle all of your business’s aspects.

Before you file your tax returns, think about your business structure. As a freelancer, your business is most likely a sole proprietorship. In this case, you pay your business taxes on your tax return by filing a Schedule C form with your Form 1040 Individual tax return. On the other hand, if you’re in a partnership or have formed an LLC (limited liability company), you can consider hiring a tax professional or using accounting software. And Shoeboxed can help you with that! 

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

The bottom line

By incorporating some of the helpful best bookkeeping practices for freelancers outlined in this article, you can streamline your financial record-keeping, spend more time on your business’s core tasks and bring the best services to your clients. If you’d like to discover more helpful accounting and bookkeeping knowledge, tax tips, and engaging entrepreneur stories, don’t forget to subscribe to the Shoeboxed blog
Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

7 Bookkeeping Practices Every Business Should Implement

Bookkeeping is one of the most fundamental activities of a business. It’s the job of recording all financial transactions within your business. Without bookkeeping you won’t be aware of your financial position.

It’s essential to build a consistent bookkeeping practice so that you can avoid monetary issues and use your financial reserves efficiently to grow your company. With that being said, do you know how to build basic bookkeeping practices? If you don’t, we’re here to help. In this article, we list out seven essential bookkeeping best practices every business should implement.

1. Separate personal and business finances

The first bookkeeping practice is related to business finance management. Co-mingling expenses for personal and business purposes leads to many issues in the future for a business. Therefore, for your business’s sake, you should establish a clear distinction between your personal and corporate accounts.

The simplest approach would be to get a business debit card or a credit card. Both make it easy to track your business transactions. Details of any transaction are stored on the e-banking app which you can access anywhere at any time. 

Now that you know how separating finances helps you manage your business better, it’s time to inform other people involved in your business too. Ensure your employees aren’t buying things for personal use with business funds. If funds aren’t accurately allocated it will lead to cash flow issues as well as tax filing and auditing complications.

2. Determine which accounting method to use

Another bookkeeping practice is to choose which accounting method your company will use to record transactions. There are two standard systems of accounting: cash accounting and accrual accounting.

Cash accounting is relatively simple and broadly utilized by small firms. Cash accounting records transactions only when money is spent or gained. Due to its simplicity, the cash accounting method is also used by many people to manage their personal finances.

On the other hand, under the accrual method, transactions are recorded when they are incurred rather than awaiting payment. This means a purchase or expense is recorded as a transaction even though the funds haven’t been received or bills haven’t been paid immediately.

3. Establish cash controls

Cash controls refer to all cash management policies and procedures within your organization. Many of the financial hazards associated with running a business (such as inaccurate payments, theft, and fraud), can be mitigated by implementing procedures that maintain control over cash flow.

There are many examples of best bookkeeping practices which you can adopt to enhance the management of a company’s funds, including reconciling cash receipts to deposits and the general ledger, following up on collections of returned checks, or preparing cash flow forecasts. 

4. Keep track of sales

Bookkeeping is the recording of all financial transactions involving your business, and it goes without saying that sales receipts are the most important of all financial documents because they allow businesses to gain visibility into their performance, to identify whether they’re doing well and whether you have to adjust any strategies.

It’s essential to keep track of sales receipts because you’ll need them to calculate your business’s income. Your income reveals the profits or losses you make while operating your business. This data helps you make better business decisions, ranging from day-to-day purchases to long-term expansion.

5. Keep track of expenses

Bookkeeping isn’t only about the recording of sales, but also expenses. Expenses are a necessary part of any business. If you don’t keep track of your expenses, chances are you’re likely to run out of funds, or worse, you may get deep in debt.

Expenses turn out to be more tricky than one might think. People often assume expenses only include payments for office rent, utilities, loan repayments, or such. But business expenses are much broader than that. They could be anything that costs to run your business and are categorized into three groups: fixed, variable, and periodic expenses. Knowing which category each of your expenses falls into will help you manage them better.

Read also: 5 Tips to Control Your Business’ Expenses

6. Review financial data monthly

It’s critical to close the books on all financial transactions for the current month before moving on to the next. When you review transactions on a monthly basis, you’ll catch issues early and fix them quickly before they leak over into the next month. 

Other than that, reviewing financial data monthly helps a lot for your decision-making. By looking at the financial data you can determine whether your goals were achieved. Goals are an important part of running a successful business. 

For example, if your last month’s goal for sales revenue was $200,000 and you successfully achieved it, your business seems to be on the right track. On the other hand, if you fail to achieve your goals, you can quickly adjust your strategies to get everything back on track. 

7. Make a choice: professional bookkeeper or bookkeeping software? 

Many small business owners and managers take on the businesses’ bookkeeping management to save costs. As a result, the success of this task lies in their experience. But most of the time, their knowledge and experience are insufficient to handle this intricate job. 

If you ever find yourself in this awkward situation, there are two options: turn to a professional bookkeeper or adopt a bookkeeping software. Each of these solutions has its own advantages and disadvantages. Depending on your business size, model, and finance, you can determine which option fits best with you.

How can a professional bookkeeper help?

Bookkeepers are more experienced in handling records which could prevent errors that result in penalties on filing documents in the future. A bookkeeper provides you with a fresh perspective on your business, such as suggestions on managing your budget better and running your company.

However, the price of hiring a professional bookkeeper can break your bank. The average salary of a bookkeeper is $45,088, which means you have to pay them more than $3,000 per month. Unless you’re a big firm, whether to hire a bookkeeper should involve  serious consideration.

How can bookkeeping software help?

Bookkeeping management software are a better solution for small businesses, as they can do the same job as a bookkeeper and cost only a fraction of a bookkeeper’s salary. There are many names that you’ve always heard of such as  QuickBooks, Xero, or Shoeboxed. Bookkeeping management software developed by Shoeboxed is an ideal tool for small business owners. 

With Shoeboxed, you can turn your receipts into data, organize them, make reports and analyze your current financial position at any time and anywhere. And Shoeboxed only costs from $18 to $54, depending on your business size. To get the most out of your bookkeeping management, get started with Shoeboxed for free!

The bottom line

Proper bookkeeping practice drives your company to success. It allows you to stay on top of your business transactions. What’s more, it streamlines your financial data management; hence, you can stay focused on growing your business.