The 5 Most Common Bookkeeping Errors, and How to Fix Them
Entrepreneurs trying to do their own bookkeeping all tend to make similar mistakes.
Here are some of the ones we see most often, and how they can be avoided.
1. Guessing When You Don’t Know What to Do
Entrepreneurs tend to muddle their way through challenges, including bookkeeping. Unfortunately, errors compounds over time, and you could find yourself with a year’s worth of books needing fixes at tax time.
Business owners mis-categorize expenses, overlook tax deductions, and miss filing deadlines because their books are not IRS-ready. These can all be costly mistakes.
You can find Bookkeeping 101 courses online, or, if you have decided to outsource your bookkeeping, here are some tips for finding a good partner.
2. Wasting Time
If your bookkeeping system isn’t tailored to your type of business, you can spend more time keeping the books than needed. Setting up a Chart of Accounts customized to your company is key. Then, you need to enter initial balances and always classify expenses in the proper account.
3. Procrastinating Recording Transactions
Waiting until your shoebox is overflowing can lead to unfortunate consequences:
- It will be hard to remember what your receipts and transactions were actually for and how you paid for them.
- Reconciling your bank account will be very unpleasant.
- You may not document all your expenses that are tax-deductible
- You may not have time to catch and fix errors that can lead to real headaches
- You might make business decisions based on outdated information.
To avoid these pitfalls, do your books at least monthly, preferably weekly.
4. Mixing Business and Personal Accounts
Commingling funds makes bookkeeping (and taxes) extra complicated. It can even take away an important layer of legal protection if your business gets audited or sued.
To keep accounts apart,
- manage your business finances in a separate bank account,
- get a dedicated business credit card, and
- keep some cash in your business checking to cover miscellaneous expenses (so you won’t use personal money when your business account is temporarily depleted).
5. Ignoring Financial Statements
Financial statements are a snapshot your business’s performance. If you don’t read them (or don’t understand them), you’re missing out on opportunities to produce revenue and avoid financial catastrophe.
Financial statements keep you in control of cash flow, help you develop (and stick to) a budget, make it possible to spot tax deductions, ensure your best chance at a bank loan, and show potential investors how your business is doing.