5 Common Small Business Bookkeeping Mistakes
Running a small business presents many challenges, not the least of which is financial record keeping. To help you spot small problems before they turn into large ones, here are 5 common small business bookkeeping mistakes.
Depreciation vs. Capitalization of Assets
When purchasing property or equipment to build a business, items classified as assets must be added to the balance sheet and depreciated properly. Many small companies mistakenly expense purchases such as computers, machinery, and office furniture which should in fact be capitalized and written off over the items' useful lives. To assist with proper classification, check the IRS website for an overview on depreciable assets or consult an accounting professional.
Failing to Separate Business vs. Personal Expenses
Many small businesses get their start with funding from personal cash outlays and the use of home office equipment. As a company grows and becomes viable on its own, a separation of business and personal expenses is required. Maintaining separate bank accounts and applying for a business credit card are two ways to ensure a high degree of separation. Also, receipts for business-related expenditures should be saved and recorded for accounting purposes. Cash advances to a business from personal reserves should be recorded as capital contributions or loans. An accounting professional can assist you with these types of transactions to ensure proper classification for financial statement and tax purposes.
Even with all of the checks and balances built into today's accounting software, mathematical or data input errors are still possible. The best way to identify these types of errors is through monthly account reconciliations to bank statements or other supporting detail. Generate error reports using accounting software and double check the accuracy of data inputs on a periodic basis.
Balance Sheet out of Balance
The balance sheet provides a snapshot of a company's financial position at any point in time. When using a dual entry accounting system, the balance sheet should balance, meaning total assets should equal liabilities plus equity at the end of the month, quarter or year. If an asset is misclassified or entered incorrectly, a difference will be noted and must be resolved to achieve proper balance.
Sticking With an Old Bookkeeping System
The use of accounting software, with built in checks and balances, is one of the best ways to avoid bookkeeping mistakes. Although many small business owners feel comfortable using spreadsheets, or even paper reports to track expenses, time and productivity gains can be made by switching to an online accounting solution. Cloud based software designed exclusively for small business bookkeeping is user friendly even for those who aren't well versed in accounting.