Accounting is one of the most crucial parts of a Business.
Thanks to the ever-growing number of accounting applications created by great minds of this age, businesses no longer need to go through a tedious process of manual accounting.
From recording sales and expenses to tracking payables, paying bills, billing clients, creating Financial reports, and basically managing financial accounts — everything has been made simple and easy.
However, even provided with the best tools, accounting errors still happen from time to time.
Apparently, most of these accounting errors are due to various human mistakes, negligence at times.
Effects of accounting mistakes vary. Some can be insignificant to financial accounts, and some can easily be corrected. Yet some can result in serious dangers to a business’s financial health.
Here’s a list of the most common accounting management mistakes your business could be making, and tips on what you can do about them:
Most Common Accounting Errors
- Misclassified assets and liabilities
Experienced accountants have mastered the accounting terms with years of education and experience. But at times, human as we are, even the simplest classification of a financial transaction can be confused.
One common accounting mistake with most companies is misclassifying financial transactions such as assets and liabilities.
Assets refer to the things owned by a company for its use and benefits including the expenses paid months or years ago. Accounts receivable, notes receivable, cash, prepaid insurance, equipment, machines, and buildings are all categorized as assets.
Liabilities refer to all the things the company owes and its financial obligations for business operations. Examples are accounts payable, notes payable, employee’s salary, and debts.
Ideally, assets should be higher than liabilities. When these categories are confused and mixed up, it could result in a misleading inordinate liability that could negatively impact the business and put the company in trouble.
Barbara Weltman on preventing misclassification of financial transactions:
“Do a periodic review of entries. Some misclassifications may be easy to spot because the description won’t match the item. You may also want to compare numbers from last year with this year’s entries to detect any differences that don’t make sense. You may want your accountant to periodically review your accounts to make sure that they appropriately reflect the expenses you incur and comply with generally accepted accounting principles.”
- Erroneous data entry
Whether you’re using a software, a spreadsheet, or manual bookkeeping for your accounting needs, we can’t deny the fact that when manual data encoding is needed, there’s always a chance for errors.
We oftentimes mistakenly hit the wrong key or wrongly transcribe the written receipt. For example, you’re supposed to be encoding a $100 payable but you’ve unconsciously entered $1000. If it goes unnoticed, you’ll just end up paying 10 times what you’re billed for. This also goes the same with transactions entered twice.
The outcome of data entry errors could lead your business to pay too much than what is really needed including overpaid taxes, or underpaid taxes which could demand penalties, and bad business reputation.
Helen Cousins of Tweak Your Biz, suggests the following to avoid suffering from the effects of data entry mistakes:
“You need to review bank reconciliations at the end of every month to make sure that there are no old outstanding items that need to be corrected or written off.”
Keen attention to detail is key. Although unavoidable, another way to counter data entry mistakes is to keep a digital or scanned copy of all financial data to easily review and fix the errors made.
- No standardized process
A process is needed most especially when dealing with financial accounts. A detailed procedure, be it simple or complicated is essential no matter how big or small a company is.
For small businesses, you may have started with the shoebox technique where all your invoices, receipts and business documents are filed up in a shoebox or a small cabinet. While this is convenient, eventually you’ll end up wasting time looking for that invoice you thought of paying a month ago but just remembered upon receiving a due notice.
To avoid facing unnecessary issues caused by poor accounting practices, it is wise for a business to start the business right, along with standardized procedures inclusive of every financial aspect — recording receipts of all expenditures, making and accepting payments, debit and credit transactions, and an up to date finance books.
- Mixing business and personal finances
This accounting mistake is common for startup businesses and is also true still to some businesses running for years already.
Mixing business and personal finances is the easiest way to screw up business accounting. At the very start of the business, it should be the business’s first goal to create a separate business account. Failure to do so would bring your accounting process to chaos and cause problems to your tax filing later on.
Matthew Duven of Quickbooks,
Using the same accounts for business and personal transactions should be avoided as the hassle of differentiating them can quickly get out of hand and before you know it, you’ll have lost track of whether the money going in and out of your account is for personal use or for your business.
For a pain-free accounting process, run all your business financial transactions solely on your business account and make sure to separate the ones for personal use. If you still need to use your personal account for business expenditures, it’s recommended to keep a record of those expenses for future filing and tax purposes.
- Doing too much yourself
Small business owners usually do everything on their own. May it be for sheer passion or to save money from service expenses, they often do all business transactions and errands themselves.
However, in the case of accounting, doing too much yourself is just unnecessary. In fact, it can cost you dollars.
For example, for tax liability, handling your accounting responsibilities yourself could lead you to pay excess tax or tax penalties for unpaid taxes. This could be prevented by hiring an accountant.
Tax accountants know which of your expenditures can be used against your taxes.
They don’t only give you expert eyes to look after your business, they also give you expert advice on applying the right strategies to minimize your tax payables and maximize profit.
If you do too much yourself including accounting tasks, you’ll end up getting your financial transactions in trouble.
Free yourself from unnecessary baggage when you can ask help from experts. Devote more of your time for business growth and critical administrative decisions.
Dennis Najjar of The Balance:
“Simply, you must be willing to let other people do their jobs while you do yours. Few business owners are qualified in accounting, tax strategies, managing business assets and setting up business entities to capitalize on the advantages of certain business structures. You need expert advice and an experienced accountant to maximize income and minimize taxes.”
- Failing to backup your financial data
Most businesses depend on software for their accounting needs. In this digital age, it doesn’t come as a surprise. It is convenient and beneficial.
Even so, some businesses take for granted backing up their financial data regularly.
If something happens to the accounting software, all financial transactions will be put to waste. That’s why it is important to regularly backup all financial data should issues arise.
Businesses should have a backup plan for unexpected instances like computer crashes, physical computer damages, accidents, loss of equipment, and natural calamities.
Make sure to backup all your important data in a secure location before any of these instances wipe out all your files.
Backing up does not only protect your financial data from possible losses but also bolsters business data analysis for the years to come.
There are various accounting solutions that allow automatic backups. If you’re already using an accounting software and it offers automatic backup, don’t hesitate to take advantage of it.
Renuka Rana of Bplans:
“You should always schedule routine backups of your financial data, even in separate locations, ensuring safe data even in the case of disaster.”
- Poor communication and collaboration
Effective communication between you and your accountant is essential to prevent serious accounting mistakes in financial reports. Even when you use the best accounting software or hire the best accountant, when effective and transparent communication is not practiced, your accounting system will remain in disarray.
Ivan Lavelle of Bplans,
“Seemingly small mistakes like purchasing products or services—especially those with monthly recurring costs—and not reporting this to your bookkeeper can end up causing serious problems and lots of extra work further down the line.”
Poor communication is one of the reasons why discrepancies are present in an accounting department. There are many ways to avoid discrepancies though. Strong and transparent communication is one.
Your bookkeeper and accountant work hand in hand. To help them create financial statements that would reflect the real status of your business’s financial health, they would need to know what’s happening in your business. Keep them updated with everything you do financially. Utilize what your accountant and accounting software can do.
Use a simple but effective communication tool for your business like Dead Drop Software which does not only aid your communication needs but also provides a platform for a productive and effective business to business or team collaboration. It is a cloud-based collaboration tool that highlights data security online, secure file-sharing, and easy project collaboration among your employees.
Effects of Poor Accounting Practices
- Criminal and Civil Penalties
“If company management is unethical to the point of financial fraud, the company could be subject to civil and criminal penalties. For publicly traded companies, the Sarbanes-Oxley Act prescribes fines and prison time for knowingly falsifying financial information. Further, investors of the company may be able to successfully sue the company and its owners for civil damages.” — John Freedman of AZCentral
- Personal Consequences
“Once caught and tried, accountants so unethical as to commit crimes related to their profession are punished. Depending on the specific circumstances of the case, this can result in prison time, financial costs and other legal punishments to the accountants found guilty.” — Alan Li of Houston Chronicle
- Negative Business Reputation
“If you operate your small business in an unethical manner, word will eventually get out…If your company does not operate ethically, this can affect the willingness of customers and suppliers to conduct business with you. Over time, this may destroy your business.” — John Freedman of AZCentral
A business’s success is driven by the passion, dedication, and the efforts of its leaders.
Don’t let your accounting efforts go in vain. Make sure not to suffer the consequences of accounting mistakes.
You may want to check out Dead Drop Software to help you not just with your accounting needs, but also with all other aspects of your business. We have invested our team’s efforts to provide an exceptional tool for immediate business to business collaboration away from prying eyes.
Let Dead Drop help your business achieve its highest heights.
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