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4 Common Small Business Accounting Errors

How to Avoid Common Accounting Mistakes

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We all make mistakes. While some accounting errors are unavoidable, a few basic checks and balances will make them avoidable or at least help spot them quicker.

Here’s a list of 4 common accounting errors I’ve seen small business owners make:

1. No Accounting Software Back Up

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Your data can be lost in the blink of an eye if your network gets a virus, hard drive crashes, or operating systems becomes corrupted. Your data is vital. If you have to re-enter all your accounting information, it’s time consuming, painstaking, and just downright demoralizing to redo all that work.

Implement Back Up Process
You should back up your accounting data regularly, and be sure to check the data you’ve backed up to make sure that your process before something goes wrong. In one instance, a client was backing up data regularly. When there operating system had to be reinstalled after it crashed, they reinstalled all their backup files. To their surprise, some key files wouldn’t work after being reinstalled because they weren’t saved in the correct format for backups – the files were corrupted during the backup process. So check your backup files before you need them so you can be assured they’ll work if you ever need to use them.

2. Commingling Business and Personal Expenses

You should separate your business activities from your personal ones. Your financial records are the basis for preparing your business’s tax return. Since you can’t deduct personal expenses as a business expense, you’ll have to go back to identify all the personal expenses that are recorded in your businesses' books. Then, you’ll have to go back to reclassify those payments as distributions, dividends, or maybe even salary payments.

Keep Business and Personal Records Separate
You should separate all business records from personal ones –- bank accounts, credit and debit cards, and financial records for your business should all be separated from your personal accounts.

3. Misclassification of Employees and Contractors

You’ve got an incentive to classify all individuals who work for you as independent contractors -- the record keeping’s easier for contractors and you don’t pay payroll taxes for them either. However, you’ll need to resist that temptation because misclassifying employees as contractors is a good way to be audited by the IRS, your state labor bureau, and many other organziations that protect employees’ rights.

Know the Rules for Worker Classification
The IRS has a strict set of rules for classifying workers as employees or independent contractors. The general rule is that you can classify an individual is an independent contractor if you only have the right to direct the result of the work and not what will be done and how it will be done. You should consult an attorney or a certified public account if you have questions about worker classification.

4. Failure to Conduct Periodic Account Reconciliations

You’re constantly billing, invoicing, and collecting payments from customers. You’re buying materials, getting bills daily, and paying your vendors. Errors will occur throughout these processes. You should be conducting periodic reconciliations to ensure that any errors will be caught and resolved timely. There’s nothing worse than double paying an invoice (except trying to get your money back), and there’s nothing more frustrating for customers who keep receiving bills for invoices they have paid.

Reconcile Receivables and Payables Regularly
You’ll want to set up reconciliation schedules that are performed periodically -- daily, weekly, monthly, or annually, depending on your needs. You can print your Accounts Receivable Aging Report and Accounts Payable Aging Report to look for unusually or old outstanding items. Then, you can investigate these items to see if you’ve made a mistake. Another benefit of conducting these reconciliations regularly is that you just might find a customer account with a negative balance, indicating that a customer made a payment without being invoiced. Your customers aren’t likely to pay you without receiving an invoice, so that’s a pretty good hint that a payment was misapplied.

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