Top Accounting Mistakes You Can Avoid

Accounting Mistakes Small Business Owners Don't Have to Make

Accounting errors will happen from time to time, but many common accounting mistakes can be avoided with proper planning and preparation. We all know that it usually takes more time to correct a mistake than to get it right the first time. Interestingly, it is also cheaper to identify and correct mistakes early in a project rather than waiting to correct the problem later (see Error Cost Escalation Through a Projects Life Cycle). If you treat your business like a long-term project, then you will want to be pro-active by becoming aware of common mistakes that others are making and correct them early on, which will not only save your company time, money, and headaches, but also give you a competitive advantage in the marketplace with more streamlined operations and better customer satisfaction. The following are common accounting mistakes that I have watched small business owners make during my experience as a Certified Public Accountant.

Failing to follow accounting procedures.

Home accounting and finance scenario.Female hands.
John Lamb / Photodisc / Getty Images

Even the small business owners, self-employed individuals, and freelancers should set up formal, documented, and detailed procedures for managing bookkeeping and accounting procedures as well for performing other routine tasks. As part of these procedures, I have found that it is helpful to develop standardized forms and checklists to complete to ensure consistency and accuracy. For example, you will want to document a process for setting up new vendors. You will need the vendors name, address, telephone number, and Employer Identification Number (EIN), among other documents such as insurance certificates, letters of recommendation, or signed contracts. Then, you will need to enter this information into your accounting software so you can process payments. You will want to take the time needed to consider the information you need to gather from your vendors, develop a standardized form or checklist to make sure you get that information, and then have a written policy that your employees can follow.

Working without a budget.

You will want to create a budget so you have a baseline to judge your business’s operating results. Budgets are not only useful in curbing overspending but can be used to establish realistic, written financial objectives. Budgets should always be grounded in reality, but you can certainly use your budget to set reasonable financial goals, whether it be increasing revenues or reducing operating expenses.

Making data entry errors.

Data entry errors will happen from time to time. So while you cannot prevent all data entry errors, you can have a policy to perform various reconciliations timely to ensure that data entries are detected timely and can be corrected. For example, you will want to perform monthly bank reconciliations, as well as accounts receivable and payable reconciliations. You can also run budget-to-actual variances to identify possible errors in classifying revenues or expenses, or run customer receipts or vendor payment reports periodically to ensure that all receipts and disbursements seem reasonable. Unusual transactions should be reviewed to ensure that no data entry mistakes were made and that the transactions are accurate.

Failing to Back Up Accounting Software

You will need to back up your business’s accounting software and other data regularly. Many small business accounting software programs have a feature that lets you set up automatic backup of your accounting program. Use it. You should also take the time to double-check your backup files, even going as far as to use the backup file to see if you can run your business as usual with it. Sometimes files corrupt; sometimes you do not back up all the data you need. A quick check can identify problems with your back up process so that you can ensure you have everything you need to continue operating your business if the need should arise.

Doing Too Much Yourself.

Outsourcing administrative tasks that do not add value to your company can be an advantage. For example, a tax accountant is likely better versed in tax law than you are so outsourcing tax planning and preparation to your accountant will let you lower your tax liability, increase tax compliance, and leave you with more time to devote to revenue-generating activities. Many small business owners do not want to delegate responsibility to other capable professionals, but outsourcing accounting, legal, IT, and other administrative functions can reduce errors and increase profitability if you use the newfound time wisely.

Failing to properly categorize income and expenses.

The shoe box method of accounting is probably not a good choice for small businesses with more than just a few transactions per year. All money coming in and going out of your business must be assigned to the appropriate category. You will find that if you stay on top of your accounting records, you will not run into mistakes. You will know who you billed, how much, and whether or not your customer has paid. You will also find you’re your year-end tax preparation will be much smoother than trying to reassemble the records you need to prepare your business’s tax return right before the return is due.