Top 5 Accounting Mistakes We See Businesses Make

Do it yourself accounting has come a long way.  Quickbooks Online and other similar software packages make everything seem almost effortless.  That is the blessing and the curse that is today’s software.  They put the power in the hands of the user, allow automation of routine tasks, and can give us financials at the press of a button.  However, failure to set things up properly and maintain the system can lead to inaccurate reporting, improper tax filings, and uncertainty if faced with an audit.

Failing to use an accounting software

I just described how great and easy-to-use the software is but there are many small businesses using - nothing!  At the end of the year, bank and credit card statements are downloaded and handed to an accountant to summarize.  If you like not knowing where you are during the year or being unable to provide financials to interested parties, then this is the option for you. 

Mixing Personal and Business Accounts

Another common issue that we regularly encounter is the mixing of business and personal expenses either in one bank or credit card account.  This can create a number of issues.  First, if you are seeking help with your accounting records, it will be much more expensive to pay someone to wade through what is business and what is personal.  Second, this could make an audit much more expensive to manage.  Justification may be required on many more items if the IRS agent is aware of this mixing of items.  Finally, many of us take great pains to create an entity that can shield our personal assets from liability – and then start mixing our personal and business activities in the same account.  While we don’t offer legal advice – you might want to check with your business attorney about piercing the corporate veil!

not Reconciling the bank account

Another common problem we see is failure to reconcile your bank account.  The bank account is the center of your business and has to be reconciled so your accounting system has an accurate representation of what is happening.  In some cases, we see reconciled bank accounts, but it is apparent from our review of outstanding items on the bank reconciliation that these have not been reviewed or managed properly.  The biggest error we tend to see is duplicate transactions.  An item got entered twice so one will never clear the bank.  If you have a lot of uncleared items on your bank reconciliation, there is a good chance your financial statements are wrong.

Changing records for a closed accounting period

If records are changed in a prior accounting period for which a tax return has been filed, it might necessitate the filing of an amended tax return.  Furthermore, there will be inconsistencies in the financial statements from period to period.  Sometimes there are legitimate issues that do require adjustment of prior period financials.  Care should be taken or it can create problems down the road. 

Improper set up of the chart of accounts

One issue that we regularly see is the improper set up of the chart of accounts.  We may see loan payments on a car set up as automobile expense – rather than as a note payable.  Another common mix up is the purchase of capital assets, which belong on the balance sheet, being reported as operating expenses.  Those are just a couple examples which will both lead to inaccurate reporting. This is an area where the software can be of great assistance, but knowing when something needs special handling often needs the eyes of a trained accountant to get them right. This particular error is a good example of the cure costing more than prevention. Untangling a year of misclassified transactions can be time consuming indeed.

If this all sounds like a pain in the neck, you are not alone! We help clients tackle these problems every day.  If you have a small business in the Greenville, SC area and would like to learn more, please reach out to our team.