By Kellie Ferry
No one can be an expert in all things and if you own a business, you want to place your energy into building your business, not keeping up the books. However, sloppy bookkeeping inevitably leads to headaches and big bills from your accountant when they try to make heads or tails of your books. Below are some of the most common bookkeeping mistakes we see and how to avoid making them. · Not balancing the checkbook. The potential for incorrect financial reports increases significantly when bank accounts are not reconciled. Aim to reconcile your accounts within 5 days of receiving the bank statement each month. · Expensing loan payments. While it may seem logical to post your car payment to auto expense, it is incorrect. Loan balances are kept on the Balance Sheet where all asset, liability and equity accounts are maintained. Accordingly, loan payments should be posted to the corresponding loan on the Balance Sheet. · Expensing fixed asset purchases. If an item has a useful life greater than one year it should be posted to a fixed asset account on the Balance Sheet and expensed (depreciated) over time, unless the dollar value is deminimis. · Entering credit card charges to Credit Card Expense. Again, this may seem logical but is incorrect. You must allocate the expenditures to the accounts that best represent the nature of the purchase. For example, a single credit card statement could have charges that would be allocated to office expense, auto expense, meals & entertainment and travel. · Not reconciling credit card statements. This is an opportunity for missed deductions if you carry a balance on your credit card. For example, say your credit card statement indicates a beginning balance of $0, charges of $2,000 and you plan to pay $500. You should first enter all the charges equaling $2,000 either through accounts payable or a separate liability account. The payment of $500 will be posted to the liability account as well, leaving an unpaid balance of $1,500. This results in an immediate $2,000 deduction even if you don?t make a payment. · Using business accounts for personal expenditures. Actually this is a relatively common practice, particularly among small business owners. It is not advisable to do so, but will not make a mess of your business books if properly handled. Segregate the expenditures into an account called ?Owner Draws? or something similar. The account should be an equity-type of account that will show on the Balance Sheet. · Not tracking business expenses paid with personal funds. The opposite of the previous problem, this represents the potential for missed deductions. Periodically compile receipts for the expenditures, summarize them on an expense report, and reimburse yourself via payment from a company account. · Recording payment of taxes collected from customers and employees on the Income Statement. When you charge customers sales tax or withhold taxes from employee paychecks, you are collecting it on behalf of the taxing agency and holding it until it is time to forward it on. As such, it is a liability and should be recorded on the Balance Sheet. When you pay it to the taxing agency, you should post the amount of the tax being paid to the corresponding liability account. · Recording all payroll transactions to a single account. Wages are reported separately from payroll tax on your tax return. In addition, officer wages are reported separately from wages paid to other employees. As a result, it is advisable to have separate accounts for officer wages, employee wages, payroll tax expense (for employer portion of payroll taxes), and payroll tax liabilities (for employee portion of payroll taxes). · Improper recording of payroll transactions. It is important that payroll transactions are broken out among the various accounts. For example, do not record the net paycheck amount to a wage expense account. Instead, record gross wages to the wage expense account, taxes withheld to a payroll tax liability account and any other withholdings to an appropriate liability account. · Over-using Miscellaneous Expense. Try not to use this account at all and, if you do, only for transactions of a nominal amount. If you?re not sure to what account a transaction should be posted, create an account called ?Ask My Accountant? and put a good description in the Memo field. We?ll work with you to get it properly allocated. Following these few steps should help you significantly in your quest to have clean books and meaningful reports. Fall is a great time to send us your updated financial statements for help dealing with unresolved transactions. |
