Bookkeeping is a critical part of any small business and ignoring this task can result in unnecessary penalties, poor financial decisions and ultimately business failure. Small business accounting and bookkeeping is of clerical nature and tends to be time-consuming, which is why many business owners have a tendency to avoid it.
Unfortunately for those who dislike bookkeeping, this activity is crucial to the success of a business and any mistakes can cost the company significantly. There are many tips on bookkeeping basics for small business, so instead of tips and tricks, we’ve decided to compile a list of common mistakes small business owners make when it comes to their books.
Top Small Business Bookkeeping Mistakes
1. Failing to keep receipts for small amounts
While the IRS may not require receipts for transactions of amounts smaller than $75, these provide documentation support for deductions you may claim.
2. Making bookkeeping a DIY project
Although the bookkeeping basics for small business might seem easy, the “do it yourself” approach is never a good idea. Having a professional handling the books can save you time and money by looking out for mistakes and providing suggestions.
3. Not keeping track of petty cash
Many small businesses tend to use petty cash funds without keeping accurate records. It is best to make a habit of properly recording each time money is taken out and the purpose of it.
4. Incorrectly classifying employees
One of the most common bookkeeping mistakes small business owners do is classifying employees incorrectly. There are many factors that go into determining if an individual should be classified as an employee or a contractor. If classified incorrectly you, as the business owner, are responsible for all past due payroll taxes and any penalties accumulated.
5. Mixing business with pleasure
Another very common mistake when it comes to bookkeeping is mixing personal and business expenses. For accurate record keeping, it is critical that personal and business finances are kept separate at all times, to ensure proper classification for financial statement and tax purposes.
6. Not reconciling accounts
Consistency is key when it comes to small business bookkeeping. Every month, without a fail, you should reconcile business’ books with bank statements, credit cards statements and any other statements. This activity is the fundamental aspect of bookkeeping, and its purpose is to verify the amount of money reflected in the books equals the amount of money in the back, minimizing errors and pointing out issues.
7. Lack of backup
Unfortunately, technical problems are a frequent reality in today’s technology-centered world. When it comes to your business’ books and records it is important to ensure the data is backed up on different platforms, especially if you operate in a paperless office.
8. Not tracking reimbursable expenses
Many owners tend to pay for business expenses out of pocket. It is important to keep accurate track of these expenses, failure to do so can result in a considerable loss of money and tax deductions.
9. Miscategorization of expenses
When it comes to bookkeeping basics for small business, there are standard categories for expenses. Without knowledge, accurately tracking expenses under the correct category can be difficult and time consuming. Using general bookkeeping guidelines for standard categorization and creating as few categories as possible helps to lower the chances of making a mistake. ( Click here to read our article on Basic Small Business Bookkeeping Accounts)
10. Lack of a system
Last, but not least, one of the biggest mistakes business owners make when it comes to small business bookkeeping is not selecting a proper system. A shoe-box full of receipts or a simple spreadsheet on excel is not a proper way to ‘do your books’. Maintaining accurate records on on a monthly basis saves time and avoids issues and penalties, and it also allows you to be prepared in case of an audit.
At BizCentral USA we understand what it takes to grow a small business. If you have any questions regarding our bookkeeping services, contact us today!