10 Common Bookkeeping Mistakes Small Businesses Make and How to Avoid Them

The most common bookkeeping mistakes include mixing personal and business finances, failing to retain expense documentation, postponing reconciliations, recording sales tax incorrectly, and operating without documented financial controls. These errors can make reports unreliable, complicate tax preparation, hide cash flow problems, and increase the risk of fraud.

As the owner of a bookkeeping business, I have helped hundreds of local businesses and nonprofits systemize their bookkeeping workflows as a foundation for achieving their organizational goals. Whether you are a business owner, non-profit leader or bookkeeper, eliminating the 10 items below will help improve the integrity of your bookkeeping system and reports.

1. Mingling business and personal funds

Mingling business and personal funds is a big NO-NO! First and foremost, it usually distorts your bottom line. Moreover, in the case of an audit, it immediately raises red flags. Lastly, there may be negative legal ramifications in the event your business is party to a lawsuit.

BEST PRACTICE: Open a bank account for each business or non-profit.

2. Not saving receipts

Requiring supporting documentation – receipts – for all purchases may result in a legitimate business expense being disqualified in a tax audit. That could cost you money as purchases without receipts cannot count against your gross revenues, resulting in higher tax bills.

BEST PRACTICE: Require receipts for all purchases at the time of purchase or before the payment is made.

3. Not reimbursing yourself for business expenses paid out of your pocket

Not reimbursing yourself for legitimate business expenses paid out of your pocket will make the bottom line look better but will result in the business paying extra tax. Not repaying yourself for those business expenses will inflate net revenues and bring a higher tax bill.

BEST PRACTICE: Submit a monthly request for reimbursement.

4. Not tracking cash properly

Not tracking petty cash properly may result in a legitimate business expense being disqualified in the event of a tax audit. Again, accuracy is key here.

BEST PRACTICE: Establish a petty cash system and assign the management responsibility to someone in your office.

5. Including sales tax collected as part of sales income

Including sales tax collected as part of sales income results in an inflated sales total, overpayment of business income tax on the overstated profit and underpayment of sales tax due.

BEST PRACTICE: Create a procedure to reconcile sales tax monthly.

6. Not reconciling the books with bank and credit card statements each month

Not reconciling the books with bank and credit card statements each month may cause transactions to be missed. Data entry errors, miscategorized transactions, and the like are much easier to spot when the books are reviewed and updated on a monthly basis.

BEST PRACTICE:  Be diligent about reconciliations. Reconcile every month.

7. Not having a documented bookkeeping system, including policies and procedures

Not having a documented bookkeeping system, including policies and procedures, often results in errors and poor financial control. The lack of an organized, documented flow can cause real challenges, especially during transitions between those with responsibility for handling bookkeeping.

BEST PRACTICE:  Ask your accountant or a professional bookkeeper for help.

8. Not using accounting software to maintain your books

Not using accounting software to maintain your books reduces efficiency, compromises accuracy and limits reporting capability. Simply put, the days of paper-based or spreadsheet-based bookkeeping should be well behind us. It is too easy to make mistakes – and to not catch those mistakes when reviewing the books – on those older systems.

BEST PRACTICE:  Ask your accountant or a professional bookkeeper for help selecting and implementing accounting software.

9. Leaving the bookkeeping to someone who is not qualified

Leaving the bookkeeping to someone who is not qualified will result in frustration, headaches, lack of financial control, inaccurate reports, tax problems, and, lastly, opportunities for fraud and theft. Good bookkeeping is perhaps one of the most important tools for running a successful organization. Do not trust bookkeeping to people who do not know what they are doing.

BEST PRACTICE:  Ask your accountant for help when hiring and training a bookkeeper or outsource your bookkeeping to a professional.

10. Not creating a system of checks and balances to monitor your bookkeeper and bookkeeping system

Not creating a system of checks and balances to monitor your bookkeeper and bookkeeping system is simply inviting disaster. We have quality assurance (QA) checks built into the products or services that we sell. A lack of a QA system with our own bookkeeping can allow our books to run amuck.

BEST PRACTICE:  Ask your accountant or a professional bookkeeper for help!

Local Bookkeepers Here to Help

With offices in Kennett Square, Paisley Solutions supports businesses and nonprofits in Pennsylvania, Delaware, and Maryland. Our team of trained and experienced bookkeepers can help you avoid these 10 mistakes by organizing your bookkeeping workflows and automating your systems.

We invite to you to contact us to schedule a time to chat about how we can bring order and accuracy to your organization’s books.