Are Your Books A Mess? Five Common Bookkeeping Mistakes
Let’s just say that at one point or another we have all been in a place where no matter how much we tried, our books looked like a total mess. This happens with the most dedicated and disciplined amongst us.
However, there is no other way to function and manage taxes and finances better than proper bookkeeping. It is highly recommended to hire a professional who can assist you with bookkeeping, avoid the drudgery of data entry, and allow you to remain stress-free.
To help you avoid some basic errors that could prove to be costly, JB Training Services Inc. has put together a list of the most common bookkeeping mistakes.
1. Business owners fail to properly review their financial statements
This often happens because they don't understand the Balance Sheet, and casually look at the Income Statement. In doing so, they miss a few entries that are capable of making a huge difference in the final statement.
2. Failing to look at the Accounts Receivable report in detail
When they do, they may discover unpaid Accounts Receivables that date back several months or even years, despite the fact that payment was received, the amount may still appear on the books as owing to the company. Or, they may end up seeing negative numbers on the Accounts Receivables, indicating overpayments from customers that don't belong, or even minor amounts that should be removed and cleared off the Accounts Receivable detailed report. Every item in the report should be explained in detail to the business owner or management. A decision should be made regarding whether to write off the debt or leave it on the books if there are questions regarding whether a receivable may be recovered from the client. When it is on the books, that means the business has paid Income tax and GST/HST (if applicable) on that amount. If these are duplicate entries, or doubts about collecting on these amounts, they should be removed and the income tax & GST/HST paid returned to the business. Duplicate entries and inaccurate Accounts Receivables affect Sales on the Income Statement. This may prevent the business owner from getting accurate information from the Income Statement when trying to make business decisions, it becomes tough to make business decisions when you can't depend on your numbers.
3. Not reviewing the Accounts Payable report in detail
When this happens bills that have been paid may still show on the books. Duplicate entries may also remain on the books if the Accounts Payable detailed report is not looked at each month and errors removed. When duplicate bills and errors remain on the books, this reduces your profit (increases your expenses), increases your “Debt to Equity”, and “Liquidity” ratios indicating that your business might be too risky to qualify for business loans. This also prevents the business owner from getting accurate information from the Income Statement when trying to make business decisions. If the operating expenses or COGS are significantly higher because of double entries, or uncleared transactions in accounts payable, it becomes tough to make business decisions when you can't depend on your numbers.
4. Failing to understand and review the Balance Sheet
The business owner should have a clear understanding of what each item on the Balance Sheet means and what the final amount should be. Additionally, they need to understand every year end adjusting entry that the accountants are making. Don't agree with them just because an "accountant" is saying so. They make mistakes too. They get much of their information from you (as well as government rules and regulations) and if they don't understand what you are telling them, they may just "make a reasonable" attempt to deal with things.
5. Not understanding the Income Statement or setting it up to give YOU the information
You need some information to make company decisions that are equally important. The Income Statement (Profit and Loss Statement) should be set up in a format that is easy for you to understand. It is also important that you understand how sales, cost of goods/services sold, and expenses work. What type of expenses go into each "Account" on the income statement. Do you have monthly expenses such as Microsoft Office or Adobe added in "office supplies" one month, and "computer subscriptions" another month? If you're in the construction industry, or a small manufacturing business, do you have materials and supplies showing in "COGS - supplies" sometimes, and other times they show in "operating costs" as "job materials" or "supplies"? In order to pull reliable information from your income statement and make business decisions, you need to have consistency in data entry and know that you can count on the numbers you see.
To avoid these and other mistakes, reach out to the experts at JB Training Services Inc.
We provide online bookkeeping training, in-class bookkeeping training, QuickBooks training, business development, and more. We serve clients across Alberta including Edmonton, Calgary, Red Deer, & British Columbia including Vancouver, Victoria, and the surrounding areas.