10 Common Accounting Mistakes that Will Cost Your Business Time & Money That You Probably Been Doing

What small business owners need to know…

Running your own small business requires dedication and accountability. And many business owners are so busy running their business operations that they don’t have the time to make sure that their bookkeeping is up to date and accurate.

We've seen it happen many times where a small business owner only has extra time in the evenings and on weekends to devote to get to the accounting tasks of their business that they put this much needed function off for months or even years, and what results is a colossal mess on their hands at tax time or when trying to get outside bank funding. Bookkeeping requires accounting knowledge and a thorough understanding of the accounting software in place for a company’s books to be clean and accurate.

Here are some common mistakes that small business owners make when trying to DIY on their accounting functions.

1. Mixing personal and business expenses

Making sure that personal and business expenses are separated is critical to avoid being fined in the event of a tax audit and to preserve the status of your corporate structure. A company established and taxed as a corporation is in jeopardy of having its corporate veil pierced if it is determined that the business owner has used business funds to pay for personal expenses. Make sure your business has its own separate credit card and checking accounts. For non-corporate entities, such as limited liability companies, any personal purchases or contributions made by or to the business would be routed through Owner’s Draws or Owner’s Contributions to stay IRS compliant.

2. Not performing monthly bank reconciliations

The bank reconciliation feature in your accounting software is a tool to help you make sure that your books match your bank account. You may have missed a transaction and reconciling to your bank statement will help you identify any missed items. You should always tie out your bank accounts in your accounting software to your bank statements to ensure the accuracy of your accounting and this should be done every month. It is easy to put this off and wind up with months of unreconciled accounts. Every month that this accumulates makes it that much harder to fix if there are errors. Conversely, banks also make mistakes, often in the form of duplicate transactions and duplicate fees and reconciling your accounts will uncover these errors so you can get them corrected with your bank.

3 . Creating duplicates in your bank feed

Bank feeds are a way to link your bank accounts to your accounting software for ease of reconciliation. Your accounting software will draw in your transactions on a daily basis so that you can easily “match” them to transactions that are already entered into your accounting software, such as customer deposits and bill payments. Make sure that you inspect each transaction and where it will be mapped to before you click the “match” button. Oftentimes owners will inadvertently book transactions to the wrong accounts or click the “add” button if the software can’t find a match, however, this can create duplicate transactions if the original transaction was added and not recognized by the software. This can create a colossal mess to unravel.

4. Recording all transactions through a bank feed

Ah…the bank feed again…yes. it’s a fast way that business owners can enter transactions into their accounting software as it allows the user to “add” items from the bank feed screen. However, a user should always record the source transaction such as a customer invoice, a bank deposit, a bill or a bill payment first and then “match” the transaction to the bank feed. With the use of payment apps like PayPal and Square an owner may not be given a source document, however, one should try their best to enter a source document when able to. The bank feed is merely a holding tank for items that are not yet recorded in your books and entering source transactions first will catch errors on the bank side or in your original posting.

5. Incorrect recording of loan payments

If you have loan payments for a car, a piece of equipment or a mortgage the original loan amount must be recorded as a an asset and a liability on your balance sheet and the payments must be recorded as a reduction in the liability for the principal amount and an expense on your income statement for the interest portion of the payment. Oftentimes, business owners will record the entire payment to the loan liability account or an expense account which is incorrect. Recording the entire payment to the loan liability account results in an inflated income statement which could translate into a higher tax liability. Conversely, recording the entire payment into an expense account results in an understated net profit which could mean lower taxes paid in error and fines and penalties if audited by the IRS.

6. Unbalanced Balance Sheet

A balance sheet is one of three main financial statements of any business, and it shows what you own (assets), what you owe (liabilities), and what’s left over (equity). It’s called a balance sheet because it should always “balance” and is depicted by the equation Assets = Liabilities + Equity. Your assets must always equal your liabilities plus your equity and if they don’t you’ve mis-posted something that will require some sleuthing to correct.

7. Mishandling of depreciation

Any large item that you purchase such as a car, a building or a piece of equipment is not expensed for the full amount but recorded on your balance sheet as an asset that has to be depreciated over a number of years based on the useful life of that asset type. A common mistake business owners make is to record the value of the purchase as an expense for the full amount. Or business owners may improperly record the depreciation which can result in recording more depreciation over the life of the asset than the actual value of the asset itself. A purchase is depreciated and not fully expensed if it adds value or extends the life of something. Be sure to adhere to generally accepted accounting standards useful life guidelines to properly record depreciation.

8. Writing off old outstanding checks and customer credits

It’s very tempting to clean up old uncashed payroll checks, customer refund checks, and old customer credits but your state may have strict rules on doing this. Some states consider this unclaimed property and require businesses to exhaust all options to contact the recipient. On average states consider these items as unclaimed property after 3 to 5

years and require reporting to the State. Policies and records should be kept documenting these items and noncompliance could result in an audit, fines and penalties. It’s always best practice to check with your state on how to handle these items.

9. Misclassification of employees

The Department of Labor and the IRS have strict rules on what is considered an employee and what is considered an independent 1099 contractor. A business can direct and control the work performed by an employee and the financial aspects of an employee’s job while they cannot direct these things for an independent contractor. Income, Medicare, Social Security and Workers Compensation taxes must be paid for employees, and misclassifying an employee as an independent contractor can carry steep fines, back tax payments and even jail time.

10. Improper lease accounting

The new lease standard, ASU 842, the latest FASB standard on lease accounting basically states that any leases over 12 months must be capitalized or put on one’s balance sheet. This means that if a business is the lessee of real property or equipment and the term of the lease is over one year that business can’t just expense the entire lease payment to rent or equipment rental as it did in the past. It must now be recorded as a right-of-use asset as well as a liability on the balance sheet and the corresponding amortization of the liability and depreciation of the asset must be computed and recorded monthly. This rule goes into effect for the most part in 2022 for private companies.

The accounting behind lease accounting can get quite complex and become a real nightmare if your business has many leases. The goal of this change is to create more transparency to third parties on the real future obligations of companies and not have these leases hidden, so to speak. A business owner will likely have issues if they haven’t implemented ASU 842 when they go for third party funding or try to sell their business, as the accounting for any leases they have will be questioned.

We can make sure that you are compliant with generally accepted accounting principles and the IRS. You don’t want to gamble on your business. Contact us today for a free consultation.

10 Common Accounting Mistakes that Will Cost Your Business Time & Money | sbkfinancialservices