As the 2011 tax season comes to an end, many small business owners may be learning the hard way that sloppy bookkeeping doesn’t pay- especially when you are dealing with the IRS.
For those looking to make amends in the current year, the below are seven of the most common bookkeeping mistakes to avoid:
1. Not seeking help where needed. Good bookkeeping is a skill, not just a task to get through. Many times it pays to hire an experienced bookkeeper to handle your books properly and efficiently; other cases may require the input of a qualified accountant. At the very least, if you choose to maintain your books alone then set yourself up with a good accounting software program, like QuickBooks. There are even some good, free open source options out there, such as GnuCash and TurboCash.
2. Being lax about recording information. Bookkeeping is best done on a regular basis. Once a month is the minimum suggested period you should take to update your financial records. Anything more and you run the risk of having a demoralising large pile of papers to go through and of misplacing important receipts and documents.
3. Not establishing a set bookkeeping system. Bookkeeping becomes a lot harder if you fail to create and communicate a standard policy for how receipts, petty cash, credit cards, and other financial translations are both handled and recorded. Again, it is recommended that you seek advice when setting up your accounting system.
4. Not saving receipts. Receipts under $75 aren’t required by the IRS, but this doesn’t mean you should throw them away. Those smaller transactions can quickly add up and throwing away your paper trail can prove to be a costly mistake should you find discrepancies or gaps in your financial records.
5. Not communicating with the bookkeeper. If a small business owner hires someone to take care of the books, then it is vital that there be an open and up-to-date flow of communication from the business owner and management regarding any changes to the company accounts or to any financial transactions.
6. Not having up-to-date accounting software and backups. Most accounting software programs are updated on a regular basis by the developers with fixes and other useful improvements or extensions. You should make it a habit to keep your software updated. Moreover, you should set up at least one or two methods of data backup to ensure that your financial data is not lost.
7. Miscategorising or overcategorising financial entries. As I mentioned in number three above, you need to set up a standard system for recording transactions and it definitely pays to get advice on how to go about doing that. Putting your financial transactions in the wrong categories can make it very hard to reconcile your books and accurately determine your tax obligations.