Accounting errors can be damaging—even fatal—to businesses, but mistakes are surprisingly common.
Here’s how to avoid the most common accounting mistakes that plague businesses-
1. Not Seeking Help When Needed:
You've heard the expression "penny wise and dollar poor" in reference to people who'll spend a few hours of their time to save a few dollars.
You've got to realize that your job is to run your business - a contractor builds, a painter paints, and a realtor sells.
Sometimes it's just not worth your time to spend hours upon hours going over the details of your accounting records or researching how to correct an error you've made.
If you believe you'll make more than you'll spend by tending to other issues than your accounting issues, then you should consider outsourcing the problem to a professional accountant or bookkeeper.
2. Don’t hire your brother-in-law:
Surprisingly, some business owners think it’s a good idea to hire family members to handle their accounting.
This invites financial trouble, as well as domestic strife. Neither of which, it turns out, are particularly good for business.
Hiring a professional might be more expensive than hiring a family member, but the cost will be easily offset by the lack of productivity-draining family turmoil.
3. Don’t overspend on tech solutions:
This is in fact not a direct contradiction of the first point. It’s a reminder that fancy new accounting software will not necessarily pay for itself.
Before your business sinks too much into a system you don’t need, evaluate the tools that are designed specifically for small businesses.
These platforms focus on the areas that concern small enterprises most—cash flow, invoicing, compliance, and the like—and won’t bog you down with unnecessary functions that don’t apply to your business.
4. Don’t mix business with personal finances:
Business and personal finance are a bad combination. And yet, too many small business owners use a single checking account for both sets of finances, a problem that becomes worse still when they commingle the expenses on their company’s books.
Was that 48-pack of microwave popcorn for your home or office? Who used the company credit card for INR 500 worth of video games? You need clear boundaries.
Mixing business and personal finances can also cause problems with the Income Tax Authorities, which is now taking an aggressive stance on things like claiming your island vacation as a business expense.
The ITA will take a sample of a period of a few months and, if they see a lot of personal expenses there, they will extrapolate that to the whole period under audit and compute taxes on it. It can get really expensive really quick.
5. Accidentally Recording Transactions in a Prior Period:
Once you've "closed the books" for a fiscal year, you really shouldn't go back to change them.
Still, some accounting applications don't allow you to lock a prior period financials so you can post current year's entries in a prior period if you're not careful.
Other accounting software programs allow you to make this mistake if you haven't configured the software to lock prior period financials.
Review Prior Period Balance Sheet for Changes. If you've recorded transactions in a prior period, the Balance Sheet will change.
Therefore, you can check your prior period Balance Sheet to make sure it hasn't changed since you last closed your books.
If it's changed, you'll need to investigate.
6. Incorrect Balance in Asset or Liability or Revenue or Expense:
Asset accounts should have debit balances, while liability accounts should have credit balances.
Revenue accounts should have credit balances, while expense accounts should have debit balances.
Some causes of this error is posting entries to the incorrect account, the most common causes of having an incorrect balance in these Balance Sheet or Profit & Loss accounts is posting entries to the incorrect account, with the incorrect amount, misclassifying accounts, and duplicating adjusting entries.
In the rush to get the books done after a long day, math mistakes can happen quite easily, even when using calculators.
Math mistakes can also result from posting entries to the wrong account or even just making typos.
One math mistake results in a tangled web of accounting errors, leading to bigger problems.
The Trial Balance must be checked monthly to make sure assets, liabilities, revenues and expenses have the correct balances.
If there's an account with an incorrect balance, you can pull up the detail of that account to find the entries that caused the error.
7. Letting revenue and expenses go unrecorded:
It's an easy mistake to make.
A lot of businesses tend to ignore small-scale revenue and expenses, letting them go unreported because they don't seem all that important.
But even minor transactions can add up over time, to the point where they can undermine the business's record-keeping overall.
If any revenue or expenses go unrecorded, the company simply won't be able to have an accurate view of its accounts.
If that's the case, then it'll be impossible for SMB leaders to remain fully informed of their firm's financial status at any given time.
8. Not Saving Receipts:
You diligently recorded all your expenses in your accounting records.
You’re expense statement is a work of art, without any errors or omissions.
Then, you’re asked by the ITA -- prove it.
Save your receipts or make scanned copies of all of them.
9. Confusing profit with cash flow:
To a seasoned business leader or accounting professional, the difference between the two is clear: Profit is revenue minus expenses, while cash flow is all of the money that comes into or leaves the company's accounts.
When firm leaders get confused here, they run the risk of running out of cash, and that can cause a host of serious problems.
By keeping this distinction in mind at all times, SMB leaders will always know how much cash is – and is likely to be – available, and that will lead to better, more responsible spending and decision-making.
10. Falling Behind in Entries and Reconciliation:
Suddenly, months have passed without making any entries in the books nor reconciling any business checking statements, credit card statements, sales tax accounts or other types of financial accounts.
This means financial statements and reports are not current.
Without up-to-date information, it is challenging to make sound business decisions.
Not entering financial data can also lead to problems with suppliers, where invoices to be paid may go unnoticed, leading to problems in getting materials or even a bad credit rating for the business.
On the whole, the importance of accounting can be summed up with one epic statement from the movie Jerry Maguire, 'Show me the money'.
Books of accounts indeed show us the money and its worth.
More than that, such books shout aloud the areas where we are wasting it and the areas where we are earning it.
Accurate accounting serves the long-term interests of the business.
An inaccurate balance sheet is not only a legal liability, but a significant one for the business as a whole.
If the books aren't balanced, it can be quite difficult to make accurate decisions regarding the funds of the business.
Truth in accounting is one of the fundamental professional principles upon which the integrity of the profession rests.