Accounting errors occasionally occur, but you can mitigate many common mistakes with proper preparation and planning. Remember, it usually takes more time to correct an error than it does to get it right initially.
Interestingly, it’s also cheaper to recognize and correct errors early instead of waiting to correct the issue later. While some accounting errors are minor and insignificant, others can be more serious and could significantly affect your business’s economic health.
Over time, clumsy practices could distort the reality of your business’s fiscal health. In severe instances, repeated accounting errors and a lack of best practices could drive your company towards insolvency. Here is a list of common accounting mistakes you need to avoid.
1. Not Following Accounting Procedures
Even small business proprietors, freelancers, and self-employed persons must set up formal, detailed, and documented Standard Operating Procedures (SOP) for managing accounting and bookkeeping procedures as well as for conducting other routine tasks.
A useful step involves developing standardized checklists and forms to complete to maintain accuracy and consistency. For instance, you’ll want to document a procedure for setting up new merchants.
To do this, you’ll need to collect the vendor’s address, name, Employer Identification Number, and telephone number, among other documents. Examples of these documents include insurance certificates, recommendation letters, and signed contracts. Then you’ll have to input the information into the accounting software so you can process payments.
You’ll want to take the time necessary to consider the information you’ll require to gather from your merchants. Develop a standardized checklist or form to ensure you obtain that information and have a written policy that your workers can easily follow.
2. Not Reconciling Accounting Books with Bank Accounts
It’s imperative that your company reconciles its accounts often. Reconciling involves checking that an account balance as recorded in your account books is correct and accurate, ensuring that it matches the actual bank account balance.
Occasionally, you might not record small expenses, however; it’s important you reconcile your accounts from your company’s bank cash to the payable accounts. This way, you’ll track your economic situation accurately. Small businesses must reconcile their books monthly to ensure the accurate recording of transactions to prevent their books from being uncoordinated with the actual status of their accounts.
3. Omission Errors
Whether you’re purchasing inventory or collecting consumer payments, you handle transactions constantly. The outflow and inflow of cash at times cause company activities to slip through the cracks.
When you don’t record transactions, they’re omission errors. Beware that unrecorded business costs can create huge problems. Inaccurate economic records create problems with measuring profitability and filing business taxes. It’s important you record each business transaction, even seemingly unimportant ones.
Consider organizing minor expenses into the suitable accounts and maintain the receipts. For instance, petty cash is a small amount of money you have on hand. Most companies use this fund to cover inexpensive items.
If you purchase something with petty cash, document it in your accounting ledger. If you don’t do so, you’ll end up with accounting mistakes in the future.
4. Not Seeking Assistance when Required
When managing a newly developing or growing business, you can’t do it all yourself. Ask for assistance where you know it is necessary. Perhaps you enjoy doing the bookkeeping for your company but require assistance with processing payroll or answering the phones.
Recognize your strengths and outsource the weak areas. If you postpone seeking assistance, you’ll incur needless expenses when it comes to sorting out the mess.
5. Not Separating Business and Personal Accounts
It might seem obvious but failing to separate these accounts is a common trap for those starting out. Maintaining your business finances in a single place is necessary to avoid costly mistakes and for protecting your own assets and credit.
6. Not Having a Budget
Develop a budget so you’ll have a baseline to judge your company’s operating results. Budgets aren’t just beneficial in controlling overspending. You can use it to establish practical, written economic goals.
7. Data Entry Mistakes
Data entry mistakes occur occasionally and while you can’t prevent all of them, you can develop a policy to conduct different reconciliations in a timely fashion. This way, you’ll detect data entries fast and rectification can take place.
Accounting errors do in fact occasionally occur, but hopefully with the valuable tips in this article you can mitigate many common mistakes. Remember what you have learned and get in touch with Out of the Box Technology or browse our accounting services if you need further assistance.