So, you started a business and you are ready to jump in and start doing your own bookkeeping? Although some business owners can get away with DIY bookkeeping, the truth is, mistakes are more common than you might think. At Steadfast, when new clients come to us with books that they have been DIY-ing, we almost always find errors that have been throwing off their true profits and we have to break the news to them that their books are not accurate due to these errors and that usually also means that the tax returns they’ve filed aren’t accurate either since the books weren’t accurate.
The reality is that errors in your bookkeeping can cost you big time if you don’t catch them early. When tax season comes around, you could end up paying your CPA to redo a year’s worth of bookkeeping to get it right. Or, if you don’t know about the errors and the CPA doesn’t catch them, you might even submit your taxes with errors and get hit with a big penalty later on down the road when you have to amend your tax return.
The good news is that with a little research and investigating, you can identify and fix the most common bookkeeping errors. But, most of the time you will need someone else to identify and correct those errors so it’s not the same person trying to fix what they already DIY-ed. To help you try to avoid some of the most common bookkeeping errors we see, we’ve compiled the list below with the errors and how you can avoid them.
Error #1: Missing Transactions
It’s easy to fall behind on your bookkeeping when you’re a busy business owner. If you aren’t using an online software like Quickbooks Online with your bank accounts synced, it’s 100% up to you to remember to login and record each transaction. Or, if you are using a software like Quickbooks Online but you fail to login for a long time, your bank accounts may become disconnected and when you reconnect it, you may not realize that you are missing some of your transactions. This causes your books to be inaccurate immediately because when you are missing transactions, your books no longer reflect the reality of what has happened in your business. If your books no longer reflect the reality of your finances, it’s hard to gauge the health of your business. The solution? Get in the habit of doing your bookkeeping at least one time per week. This will ensure that you are capturing all of the transactions that happened in the last few days and if there is a connection issue with the bank and your software, you will catch it quickly and you can make sure that no transactions were missed while it was disconncted. Another solution is to reconcile your books each and every month. So, every week you spend time categorizing the books but then after the end of the month, you will want to reconcile to ensure that every transaction truly was captured. This is a great double check to make sure nothing was missed in the prior month.
Error #2: Duplicate Transactions
This one is surprisingly common specifically when you are using a software like Quickbooks Online. The reason is that as mentioned above, QBO has a great feature where you can connect your bank accounts and your transactions sync right into the software and are there waiting for you to categorize them. The mistake we see is that the bank sync brings in the transaction and is waiting to be categorized, meanwhile, QBO thinks it’s smart so it gives you a suggested category and it just wants you to “Add” the transaction and keep moving on. While this can be tempting and definitely makes for quick bookkeeping, this is where the errors start to happen. As an example, let’s say you send an invoice to a client and they pay it online. You may see that payment come through so you go ahead and “receive payment” in QBO. Then, a couple of days later, the payment finally reaches your bank account and you see that the transaction syncs to Quickbooks and they are suggesting that you categorize that payment to an income account instead of matching it to the invoice and payment you already recorded and there you have it – duplicate transaction! You have the payment recorded to the invoice when you did it manually and now you have the payment recorded to an income account as well. That one error right there has overstated your income and essentially doubled it. Now, imagine that over and over again over the course of a year – that causes very inaccurate books and we have seen it over and over again. The solution to this is the same as #1 – consistent bookkeeping with monthly reconciliation will help you avoid this error because you’ll see the duplicate when you go to reconcile and you’ll know something is not right.
Error #3: A Hyper-Specific Chart of Accounts
Your chart of accounts lists all the categories you use to record your income, assets, liabilities, receivables, and operating expenses. Ever heard the saying, better safe than sorry? This definitely applies to your books! If it’s not set up the right way to start, a CPA will have to go back through and re-categorize everything, which can be expensive and time-consuming. Make sure your chart of accounts is clean and easy to understand. Don’t create a million hyper-specific accounts, and remember to group similar accounts together. You don’t need sub accounts for every type of office supply you buy but you also don’t want a general “business expense” account either – the perfect chart of accounts falls somewhere between those two!
Error #4: Using Accrual Instead of Cash-Basis Accounting
You have to choose whether your business will use cash-basis accounting or accrual accounting when you file your first tax return. QuickBooks defaults to accrual, but cash-basis is often a better choice for most businesses that are just starting out or for service based businesses that do not have inventory. Cash-based accounting is a suitable option for businesses that want to keep things simple and have a clear understanding of their current cash flow. By recording transactions as they occur, it provides an accurate representation of a business’s available funds. On the other hand, accrual-based accounting tracks revenues and expenses based on when they are incurred, regardless of when payment is received or made. This method is more complex and as we previously mentioned, we would really only recommend this method to larger businesses or those with a lot of inventory.
When setting up your bookkeeping in QuickBooks Online, take some time to consider which method to choose and ensure you don’t accidentally choose the wrong one. QuickBooks Online does offer guidance on selecting the right accounting method during setup and can also provide tools to switch between the two methods if needed which is helpful. When in doubt, consult with your accountant to see what method you should be using.
Error #5: Trying to Scrape By Instead of Getting Help
Feeling overwhelmed? It may be time to hire a bookkeeper. Even if your business is still small, it’s a lot less stressful to hire a bookkeeper than to pay your CPA to clean up the mess at tax-time. Trying to manage your own bookkeeping can be overwhelming, especially as your business grows. Mistakes can be costly, both in terms of time and money. Instead of scraping by and risking errors, consider hiring a professional bookkeeper. A bookkeeper can help you keep your financial records accurate and up-to-date, freeing up your time to focus on other important aspects of your business. They can also provide valuable insights and advice on financial matters, helping you make informed decisions. While it may seem like an added expense, the cost of hiring a bookkeeper ongoing is often less than having to scramble at tax time and have someone try to go back and get everything caught up. So, don’t let bookkeeping mistakes cost you big bucks. Get help from a professional bookkeeper and set your business up for success.
There you have it, 5 bookkeeping errors to avoid with your DIY bookkeeping. And if you think that it’s more than what you’re willing to tackle, head on over to our contact page. Steadfast is standing by and ready to help you with your books!