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As a business owner, it is imperative to be involved to some degree in every aspect of your operations. One of the most crucial parts of a business is accounting – and many business owners fail to sufficiently invest in it.
All types of errors in accounting can hinder business growth, impede cash flow, damage relationships with customers and suppliers, and even attract attention from the Internal Revenue Service (IRS).
As many business owners do not come from an accounting background, there is plenty of room for error when taking part in crucial accounting activities, such as daily accounting reconciliation. While robust accounting or reconciliation software such as CrushErrors can help minimize such mistakes, it is nonetheless always better to be familiar with common accounting errors so you can avoid them.
In this article, we’ll cover the different types of errors in accounting, so you know what to look out for.
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Common Types of Errors in Accounting
Maintaining a budget and tracking sales and purchases are all crucial parts of a successful business. However, arguably the most important part is taking care of your company’s financial information.
Read on to discover the most common types of errors in accounting so you know what to avoid.
Common Types of Errors in Accounting
1. Neglecting Entries & Reconciliation
Time may not always be on your side, and months can pass without making entries in the books or reconciling credit card statements, checking statements, sales tax accounts, or other accounts.
This means that your reports and financial statements will not be current. Without information that is up-to-date, it will become challenging to make sound, profitable decisions.
Speaking of reconciliation, if you’re considering the manual process, it is important to be aware of its various drawbacks.
2. Not Keeping Receipts
Receipts should always be kept, so that they can be input into an accounting software. These will provide solutions and insights into gaps or mistakes in your bookkeeping records. They can also offer various opportunities of supplementary deduction during tax preparation.
Try to practice keeping more than you think you might need. You don’t want to get to the end of the year and realize you’re lacking in important receipts.
Some of the key receipts you should always keep include:
Gross receipts (income received)
Cash register tapes
Purchases (items bought to be sold to customers)
Documents showing proof of payment/e-funds transfer
Credit card statements and receipts
Assets purchased for business, such as machinery or furniture
Expenses, including travel, entertainment, gift and transport
3. No Proper Documentation Procedures
In most countries, an audit is statutorily required.
During an audit, auditors will inspect your company’s financial information to see whether your financial statements represent a fair, complete and true picture of your company.
To aid auditors, you will need to provide documentary evidence to support your financial statements. If you do not have a proper documentation procedure, you risk non-compliance.
How much documentation you require may also depend on your location. For example, Hong Kong (HK) requires all HK-incorporated businesses to maintain transaction records for at least seven years from the date of conducting the transaction. Failure to produce documents supporting transactions may result in penalties and fines.
We do recommend going for tools instead of paper-based documentation systems. This is because manually sorting and assessing each document can be time-consuming and awkward. With tools, important data such as invoice amounts and dates can be automatically categorized and recorded.
4. No Separation of Personal & Business Expenses
While it can seem harmless to run the company card for buying a tin of biscuits or a bottle of shampoo, not keeping your business and personal expenses separate can lead to disaster.
These expenses should always be kept separate. To ensure things start off correctly, business bank accounts and cards should be opened before the first product is sold or service is given. This way, tracking monthly and yearly expenses will become much more straightforward.
5. Focusing on Sales Instead of Profit
Being so focused on sales that you neglect profit is a mistake many business owners make. Remember that sales and profit are different, and it is crucial that you know which one to prioritize and when.
6. Poor Billing Management
Here are a couple of examples of poor billing management that can result in late fees and penalties.
Not keeping up with billing or invoicing
Not knowing how and when to charge sales tax
By keeping up with upcoming expenditures and knowing how to pay upcoming bills, you can make sure there is a good cash flow. Even simple things such as setting reminders or an auto-pay system can help you with this.
7. Not Keeping an Emergency Fund
Investing everything you have is generally not a good idea. Materials could unexpectedly increase in price, energy bills could come back unusually high – the list of variables is endless.
Hence, you should always keep an emergency fund handy. Furthermore, putting all unexpected expenses on a credit card is a disaster waiting to happen. Interest rates can range from 20% to 30%, and you may find yourself having a hard time paying the debt back. Ideally, you will instead stash away some of your profits for an emergency fund.
The above are common accounting mistakes that can be avoided by virtue of having knowledge of them.
Having said that, the best way to avoid accounting errors is to hire NextGen Accounting. We offer credit card reconciliation services, bank reconciliation services, reconciliation automation, and consulting services. Our services are specially tailored to firms with vary large amounts of data that are extremely difficult to reconcile.
To give you the most accurate and fastest reconciliation, we use our patented software CrushErrors, which you can also obtain as a product if you’d rather conduct reconciliations in-house.
NextGen Accounting’s management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC. Contact us today for reconciliation services or book a free demo if you’d like to get CrushErrors!