Bookkeeping may appear effortless and less appealing compared to owning and operating a small company. However, it is a crucial procedure that must be followed meticulously to ensure the sustainability and success of your business. It is important to be aware of the pitfalls that can jeopardize your financial well-being and strive to avoid the challenges associated with inadequate bookkeeping.
This article offers a comprehensive introduction to bookkeeping for small businesses and highlights the top bookkeeping mistakes commonly made by small businesses.
What Exactly is Small Business Bookkeeping?
Bookkeeping involves accurately recording every transaction conducted by a business. It brings numerous benefits for both management and business professionals. It facilitates accurate data reporting for compliance purposes, enables effective business monitoring, and supports informed decision-making to drive overall business growth. Bookkeeping serves as the initial step in the accounting process.
What are the Mistakes That Small Businesses Often Make During Bookkeeping?
Here are the common mistakes that small businesses often make during bookkeeping:
Neglecting to Maintain Record Backups
With the advancement of cloud technology, bookkeepers now have an easier time managing records. The days of relying on paper-based record-keeping are long gone, as cloud hosting provides a more secure solution and is easily accessible.
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However, relying solely on the cloud can lead to potential issues. Technical difficulties may prevent you from accessing important business reports, statements, and other documents saved in the cloud. Additionally, it is essential to prioritize cybersecurity issues. Therefore, it is advisable to maintain a digital or hard copy backup of every document.
Ignoring Sales Tax Obligations
Neglecting to collect and report sales tax is a costly mistake frequently made by small business owners. Failure to comply with sales tax regulations can result in penalties and fines.
Inaccurate data entry may lead to incorrect sales totals and subsequently, an incorrect amount of sales tax due. Collaborating with a bookkeeper and accountant is crucial to ensure that your company pays the accurate amount of sales tax on time.
Taking Sole Responsibility
Many small business owners, despite their disliking it, insist on managing their books. However, it can be highly beneficial to hire a competent bookkeeper to carry out the task efficiently and provide a fresh perspective to identify errors and offer valuable suggestions.
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Unable to Track Reimbursement Costs
Small business owners often use personal credit cards or pay bills out-of-pocket without properly tracking them. As a result, they fail to submit expense reports for reimbursement to the employer, leading to a discrepancy between the reported balance and the actual one.
Unclear Classification of Employees
Many small businesses hire both employees and independent contractors. It is crucial to accurately classify them to avoid overpayments and incorrect tax return filing. Maintaining clarity regarding the employment status of your staff is essential.
Failure to Reconcile Bank Statements Monthly
Reconciling books with bank statements is a vital aspect of monthly bookkeeping. However, some businesses neglect to perform this task, while others make errors in the process. It is advisable to outsource bookkeeping tasks to ensure accurate reconciliation.
Inaccurate Income and Expense Classification
Assigning bookkeeping responsibilities to someone who is a novice in proper bookkeeping processes. Lack of experience can lead to mistakes. One common error is treating non-business transactions, such as transfers, as income, which can distort profit and loss calculations. Precise differentiation between income and expenses, along with accurate record-keeping, is necessary to ensure an accurate representation of profit and minimize tax accountabilities.
Conclusion
Bookkeeping is a critical component of business success, but small mistakes can create financial hardships for many small business owners.
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By avoiding these errors and keeping your company’s books up to date, you can mitigate potential difficulties. This information will assist you in maintaining accurate and error-free bookkeeping for your business
