This post was originally published October 09, 2017, and extensively updated May 6, 2021
Accounting can be a tricky and confusing part of running your company. Unless you have an accounting background or know someone who does, it can be an area where you feel you are in over your head. However, this should not deter you from keeping accurate records.
With that in mind, we would like to share the most common types of accounting errors that we have seen over the years to help you avoid encountering the same problems.
Mistake 1: Failing to Follow Accounting Procedures
One of the most common accounting errors we see is the failure to follow accounting procedures. Your accounting system should allow you to create standardized forms and procedures for everything from setting up a new vendor to logging invoice payments. A lack of continuity can cause big problems. Data entry is easy and accurate when your system is consistent and easy to use.
We suggest creating a standardized form or checklist for each accounting procedure to avoid data entry errors for accounting entries. For example, to enter a new vendor, you would need the vendor's name, address, telephone number, and Employer Identification Number (EIN). Depending on the type of business, you may also need proof of insurance or copies of professional licenses.
Mistake 2: Not Properly Planning for Tax Season
Filing your taxes can be time-consuming even if you are organized and ready to go. While 93% of small business owners say they're confident in their ability to file their own taxes, a third are convinced they have overpaid. A lack of tax planning is one of the most common accounting errors we see.
When you are filing taxes, even a small error or omission can be costly. If you are not organized throughout the year, adhering to accounting principles by tracking receipts, expenses, and payroll, you may end up paying more than necessary when tax season arrives.
Mistake 3: Not Backing Up Your Accounting Data
One accounting error that is easily avoided is the failure to back up your accounting data. Your accounting system should be on a regular backup schedule to ensure that you are not forced to redo accounting entries. Nobody wants to repeat data entry.
We suggest that in addition to scheduling regular backups, you test your backups periodically. Systems can fall and you do not want the error of not checking to cause an accounting catastrophe. We suggest that you occasionally use the backup file to ensure you can restore everything if necessary.
Mistake 4: Not Reconciling Your Accounts EVERY Month
There is a noticeable difference in the stress level of a businessperson who waits until the end of the year to balance their books versus a company that must reconcile only one month when December arrives.
There are cloud bookkeeping resources that have the tools you need to make reconciliation easy. QuickBooks is the most widely used system.
If the program your business uses doesn’t have a reconciliation tool, you should print out the monthly bank statements for each of your accounts and mark each transaction off as you see it.
If a transaction on your bank statement is missing from your bookkeeping tool, you should resolve it quickly. It is also a good idea to run regular checks on your trial balance.
Mistake 5: Identifying Payments to Owners as an Expense
As a sole proprietor or single-member LLC, it is important not to categorize payments to yourself as an expense. Doing this lowers your overall profit and may potentially lead to errors with your taxes.
According to QuickBooks, the best way to record these payments is to put them on an equity account that is called “Owner’s Draw.” That way, you eliminate one of the most common types of accounting errors and avoid confusion when you file your taxes.
Mistake 6: Forgetting to Save Your Receipts
If you want to count something as a business deduction, you need to save every receipt that relates to your business. There are mobile solutions that allow you to snap a quick picture of your receipt, immediately allocating the expense into your books.
Whether you like to save physical copies, use digital copies, or both, saving your receipts is incredibly important in case you ever get audited. Having all receipts organized in one location will allow you to find and identify past expenses.
Mistake 7: Making Personal Purchases on Your Business Account
Mixing personal and professional expenditures is one of the most common accounting errors we see. Fortunately, it is an easy error to fix. Simply record the purchase you made into the “Owner’s Draw” section of your books or reimburse your business account for the purchase.
Failure to do this can put you at risk for problems with the IRS, which holds a negative view of company owners claiming personal expenditures as a business-related expense.
When the IRS looks at a sample period of a few months and sees many personal expenses, they will extrapolate that whole period and put it under audit.
Many business owners fall into the trap of believing that using their business account is just like paying themselves, but this can make things complicated, especially if you need to separate your personal and business assets.
Mistake 8: Minor Math Mistakes
Because many people don’t particularly enjoy doing their books, they may rush at the end of the day or month to get this task done as quickly as possible. We have even seen clients make careless errors in their automated programs. Not being completely aware of what you are inputting can cause headaches down the road that could have been avoided.
It is important to review your previous entries to ensure there are no accounting errors or data entry mistakes. We are all human; we make mistakes. It is better to double-check yourself than to allow one small error to lead to a maze of accounting errors down the line.
Mistake 9: Not Focusing Long-Term
Running a business comes with its share of challenges. Trying to keep up with every tiny error can take up much of your time and can take your focus away from thinking about the future. That is where accurate accounting can come into play.
This area is not just about keeping up-to-date with present and past numbers. A huge part of accounting is being able to forecast your business’s future numbers and growth. This will put your mindset in a good place to define future goals for your company and identify the risks associated with attaining those goals.
When looking into the future of your business, you have other issues to consider. According to Harvard Business Review, some of these include opportunities to increase growth within your business and identify long-term accounting issues that may become apparent along with this growth.
It is also important to understand the financial strain of growth. If you plan to scale your company, you will need an accounting system that can grow with you and reduce the chance of making an error of principle or an error of omission.
Mistake 10: Not Taking Who You Hire More Seriously
One of the most common types of accounting errors happens when management puts the wrong person in place to handle the books for the company. You may want to help a family member, try to find a cheap, inexperienced office temp, or handle the books yourself even though you do not have the appropriate background.
Whoever it may be, this decision can cause significant issues down the road. Trying to help a family member can cause audits or further penalties.
Even though you may be saving a little money by hiring cheap labor, the costs of fixing their errors down the road can be a major headache and a lot more expensive. The lack of experience in a cheaper hire will likely keep your company from optimizing its financials and will slow down your potential growth.
If the person you hire has no idea how to categorize the expenses involved with your day-to-day operations, or can’t create accurate journal entries, it can lead to major accounting errors.
The most appropriate person for this position is an accounting professional that will help you avoid making a catastrophic accounting error. These mistakes can include:
- The accounting method used (cash vs. accrual)
- Errors that come along with interpreting facts about assets
- Unrealistic estimates based on conclusions about certain assets
- Poor recognition relevant to the accrual of expenses
Any error you make has the potential to cause problems, so it makes sense to hire the right person.
Mistake 11: You Think Technology is the Solution
Using technology cannot guarantee that your business will avoid common accounting errors. You need technology that works with you and not against you. A rigorous vetting process can help you determine if the technology in question is useful and relevant.
It is a strategic approach that will help you not make matters harder for you and your business. A technology solution is a significant investment that should be treated as such.
Before you make a technology purchase, evaluate the advantages that it will bring to your business. Many tech solutions have added functions that are not necessarily important, especially to small enterprises. Look for a platform that offers the essentials you need, such as cash flow, invoicing, compliance, etc.
Mistake 12: Refusing to Let Outside Help Come In
We see business owners all the time who are unwilling to let anyone else have control over their accounting system. It is hard to admit you do not have the expertise to handle it, but ultimately, having this mindset and not finding professional help can lead to your demise.
As a leader, you must focus on the bigger vision of your business. Not allowing other people to help can hinder your growth and scalability. Look for accounting professionals that will enable you to do what you do best.
Be sure to vet potential accountants and bookkeepers to ensure that they are trustworthy and have the expertise required to help you avoid accounting errors.
Consequences of DIY Accounting Errors
Even a small accounting error can lead to big problems for your company. If you run a trial balance that's not accurate, the effects of a single error or omission on an accounting entry can ripple out to every area of your company. That is not the type of error you want to make.
There are serious potential consequences to handling your accounting without assistance. They include the following.
- You are at higher risk of being targeted by the IRS for an audit
- You may wind up with cash flow issues that can impact your operations
- You may make business decisions based on an error (for example, transposition errors can cause you to believe you have more cash on hand than you do)
- You lose time both during data entry and as you attempt to fix each error as you find it.
Any type of error, whether it's an error of omission, an error of commission, or an error of principle, can put you in a precarious situation that can cost you time and money. While it might be tempting to think that you can save time with DIY accounting, the truth is that it is likely to cost you less, in the long run, to hire someone with the experience and expertise to help you avoid errors.
Don’t Make the Same Accounting Mistakes Again!
Accounting and aligning financials are two of the most important tasks for any small business owner. If you have an error in your accounting, it could destroy everything you have worked hard to build.
If you are making any of these errors, fix them to ensure you will not have any major setbacks in the future. If you need help, contact an accounting expert today to avoid making any disastrous errors that could cause huge problems for your business.