10 Common Accounting Errors and How to Avoid Them

Correct accounting is crucial to your enterprise’s success. With out correct accounting:

• You gained’t have the data essential to steer your enterprise towards worthwhile progress.

• Accurately submitting your annual tax returns can turn into cumbersome and rife with errors.

• Your enterprise might be left susceptible to fraud.

The easiest way to make sure your accounting is correct is to know the frequent accounting errors and the way to keep away from them. On this article, we’ll share the ten most typical accounting errors — and the straightforward steps you’ll be able to take to be sure you don’t make them.

Not all accounting errors are created equal. Many of the errors addressed listed below are technical errors, however there are two frequent administrative errors we’ll handle first.

1. Improper record-keeping

We get it, nobody likes submitting. Digital applied sciences have nearly eradicated piles of paper it’s essential to kind into folders in submitting cupboards, however that doesn’t imply recordkeeping and information administration are out of date. You have to handle your digital information with as a lot care as you’d paper information.

Why that is vital: In a tax audit, you is likely to be known as upon to offer receipts or different information to show the legitimacy of a enterprise expense. However the significance of correct recordkeeping goes past tax ramifications. Do you have to determine to promote your enterprise, the client will doubtless request an exterior audit of your organization’s financials or a proper valuation of the enterprise. In each circumstances, receipts and different documentation will probably be required to confirm the accuracy of your monetary statements.

Correct recordkeeping additionally prevents worker fraud. When staff know they should submit receipts for purchases, they’re much less doubtless to make use of enterprise funds for private bills.

Easy methods to keep away from: Implement a receipt seize, submitting and backup system, and implement its correct use. Apps like Receipt Financial institution and Hubdoc make it simple to determine such a system.

2. Insufficient checks and balances

It’s frequent for one particular person to deal with all monetary issues in a small enterprise. In any case, there’s solely a lot work to do, and it doesn’t make sense to rent extra workers only for the aim of getting checks and balances. Sadly, insufficient checks and balances can spell large bother for your enterprise.

Why that is vital: If somebody apart from you, the enterprise proprietor, is dealing with all of the monetary affairs for your enterprise, your enterprise is susceptible to fraud. Even when your staff are like household — or even when they really are household — nobody particular person within the enterprise (apart from the enterprise proprietor) ought to deal with enterprise funds with out oversight.

Easy methods to keep away from: Implement checks and balances as a lot as attainable in your enterprise. At a minimal, guarantee the one who does the bookkeeping in your enterprise isn’t the identical particular person making deposits for the enterprise. Keep away from giving staff signing authority on your enterprise financial institution accounts. And be sure you evaluation your enterprise’s financial institution statements — together with photographs of canceled checks — on a month-to-month foundation.

3. Altering a closed interval

Modifications to a closed accounting interval can throw off your monetary statements, inflicting you to make enterprise selections based mostly on defective data. If you happen to change the data in a interval for which a tax return has been filed, you may also need to file an amended tax return. These errors in your books are simple to keep away from however might be pricey to repair.

Why that is vital: An accounting interval is taken into account to be closed as soon as all the information for the interval has been entered, financial institution and legal responsibility accounts have been reconciled, and the reviews have been deemed appropriate. Any modifications to a closed accounting interval require you to finish the closing course of once more.

Sadly, it’s very simple to by chance put up transactions to a closed accounting interval. All it takes is incorrectly keying within the date of the transaction. However there may be excellent news: One easy step on the finish of your accounting interval can stop this error.

Easy methods to keep away from: Most accounting software program means that you can set a closing password in your books on the finish of every accounting interval. But many enterprise homeowners — and bookkeepers — don’t use this function.

In case your accounting software program permits for a closing password, begin utilizing it. The eight-digit date for the top of the interval — for instance, 06302020 for the interval ending June 30, 2020 — is simple to recollect should you do want to vary a closed interval. If you happen to attempt to put up or change a transaction in a closed interval, it’s best to get a popup warning you of the change, stopping you from making a change in error.

4. Skipping financial institution reconciliations

Financial institution feeds synced with accounting software program have allowed for streamlined knowledge entry and real-time matching of the account balances in your books to the steadiness proven by your financial institution. Nonetheless, this doesn’t preclude the necessity to reconcile your financial institution and bank card statements each month.

Why that is vital: If you reconcile your accounts on the finish of the month, you validate the data in your books towards an exterior doc (the financial institution or bank card assertion). Doing this not solely helps you detect and handle errors, but it surely additionally helps you stop fraud.

Easy methods to keep away from: Make it a follow to reconcile your financial institution and bank card accounts each month. Put a be aware in your calendar to make sure that is finished inside a number of days of receiving your statements. If you happen to’re utilizing financial institution feeds, reconciliation ought to solely take a couple of minutes.

5. Not reconciling mortgage accounts

Financial institution and bank card accounts aren’t the one accounts you could reconcile. You must also reconcile your mortgage accounts every time you obtain your mortgage assertion.

Why that is vital: Reconciling your mortgage accounts is the simplest means to ensure the liabilities portion of your steadiness sheet is correct. It additionally ensures you document the curiosity portion of your mortgage funds accurately. Too usually, all the mortgage cost is posted towards the principal steadiness in your books, which suggests your liabilities and your curiosity bills will probably be understated.

Easy methods to keep away from: As along with your financial institution reconciliations, put a be aware in your calendar to make sure your mortgage accounts are reconciled recurrently. At a minimal, it’s best to reconcile your mortgage accounts previous to submitting your tax returns annually.

That is an particularly frequent accounting error for corporations that difficulty invoices to their clients for cost later and in addition use financial institution feeds for knowledge entry functions. With out correct workflows in place, a enterprise can simply present practically double its precise income on its revenue and loss assertion.

Why that is vital: Overstated income can value you 1000’s in taxes you don’t actually owe. What’s worse, although, is you would possibly assume your enterprise is having a banner yr, solely to find revenues are literally down.

Easy methods to keep away from: This error is simple to keep away from by organising correct workflows. Be sure your bookkeeper is aware of all incoming funds must be entered into the accounting software program accurately and posted towards open invoices as a substitute of posted straight to income. A month-to-month evaluation of your accounts receivable will shortly present you whether or not or not this course of is being adopted.

7. Undeposited funds on the books

Just like Quantity 6, this error happens principally in corporations that use financial institution feeds for knowledge entry functions. And, as with overstated income, this error might be prevented with correct workflows. When there are undeposited funds on the books, it means the cost has been posted into the bookkeeping software program, however the deposit hasn’t been posted.

Why that is vital: Undeposited funds on the books is one other means income might be overstated. As talked about above, this could trigger you to overpay your taxes and make incorrect assumptions about your enterprise’s progress.

Easy methods to keep away from: Make precisely getting into deposits a part of your accounting course of. You’ll be able to confirm the method is being adopted by in search of the undeposited funds line in your steadiness sheet every month. The steadiness on this account needs to be $0 (it may not seem in your steadiness sheet in any respect if there’s no steadiness within the account). If there’s a steadiness on this account, examine. It’s attainable you had been holding a deposit on the finish of the month that has since been taken to the financial institution, but when there are very previous transactions within the undeposited funds account, you have got an accounting error in your fingers.

8. Steadiness sheet gadgets on the revenue and loss assertion

This accounting error most ceaselessly occurs when a bookkeeper with out accounting information is sustaining the books. On this error, asset purchases, legal responsibility funds and proprietor’s attracts or shareholder distributions are recorded as bills, and loans is likely to be recorded as revenue.

Why that is vital: Your revenue and loss assertion ought to present the revenues and bills for an outlined time period. Your steadiness sheet is a abstract of what you personal (belongings and fairness) and what you owe (liabilities) at a second in time. The 2 monetary statements serve totally different functions and “ought to” be reviewed individually.

That stated, generally a bookkeeper will make the strategic choice to incorporate steadiness sheet gadgets on the revenue and loss assertion in an effort to present the enterprise proprietor their enterprise’s money place, with out the necessity to use the money circulation assertion. Though that is technically incorrect, we advocate doing no matter is critical to assist the enterprise proprietor perceive their enterprise funds higher.

Easy methods to keep away from: Guarantee your bookkeeper understands accounting fundamentals, or have them work along with your accountant to determine good bookkeeping practices. Additionally, ask your accountant to evaluation your monetary statements on at the least a quarterly foundation. Lastly, if steadiness sheet gadgets are included on the revenue and loss assertion for administration functions, be sure the statements are corrected previous to submitting your tax return or utilizing your statements to use for financing or funding.

9. Over-relying on automation

Automation has simplified a lot of the bookkeeping and accounting course of, but it surely’s not infallible. The most typical points we see related to this error are incorrect payee names on transactions, transactions being posted to the improper expense accounts, and proprietor’s attracts or distributions posted as transfers to asset accounts.

Why that is vital: Accounting software program that makes use of synthetic or augmented intelligence is continually “studying.” It makes ideas and assumptions based mostly on related transactions in your enterprise’s historical past. It might additionally use combination knowledge collected from different companies.

This studying course of means the automation is just not infallible. Of the three errors talked about right here, the inaccurate payee title on transactions is the one more likely to trigger probably the most bother. This error can result in incorrect reporting on Type 1099, which might trigger your vendor to be taxed on revenue they didn’t truly obtain.

Easy methods to keep away from: Once more, a workflow and a predetermined course of can assist keep away from this error. Be sure the particular person doing all your bookkeeping is aware of to not merely settle for transactions within the financial institution feed with out first ensuring the ideas for the transaction are appropriate. Doing knowledge entry prematurely after which utilizing the financial institution feed to match the transaction is a greatest follow that may additionally make it easier to keep away from this error.

10. Not utilizing your accounting software program correctly

In the present day’s accounting software program is extraordinarily highly effective. It may produce very particular and detailed reviews so that you can use to make enterprise selections. The caveat is that the software program have to be used correctly.

Why that is vital: Accountants and old-school bookkeepers are very keen on journal entries. Bookkeeping utilizing journal entries solely, or fixing accounting errors with journal entries, will provide you with appropriate monetary statements. Nonetheless, it would wreak havoc on the subsidiary reviews you would possibly wish to use in your enterprise.

Easy methods to keep away from: Be sure the particular person doing all your bookkeeping is aware of the way to use the software program correctly. Most trendy accounting software program is form-based, making journal entries a form of “final resort” for knowledge entry.