How to Avoid Common Business Accounting Errors
Bookkeeping can be especially tricky, especially for anyone who doesn’t consider math one of their strong suits. Handling your business’s bookkeeping yourself can result in a variety of common accounting errors. Luckily, there are simple ways to avoid these errors. There are also ways to recover if you’ve already experienced any of them.
Breaking Down Common Accounting Errors for Small Businesses
There are some types of errors in accounting practices that small business owners are likely to run into. They include mixing personal and business expenses, math errors, confusing accounting principles, and failing to complete financial tasks. Each of these errors can be avoided.
Sometimes, you simply need a better understanding of basic bookkeeping concepts. For other issues, putting in extra time can save you from being stressed in the future.
Even with careful planning and good intentions, there are numerous types of accounting errors can happen. It isn’t the end of the world if they do. However, you may need outside help to get your business back on track.
Not Properly Separating Business and Personal Expenses
Often, new business owners use their personal credit card and bank account to pay for their business expenses. While this method seems acceptable, it can lead to issues down the road.
For instance, some customers may consider it unprofessional if your name is on invoices instead of your business name. In addition, mixing expenses can cause difficulties at tax time and can cause you to miss out on benefits, like writing off business expenses.
A simple way to avoid this error is to separate your expenses clearly. Opening a business credit card and bank account will make this process easier. If all of your business expenditures are on your business credit card, you won’t have to guess what purchases were for at tax time. Remember, you’ll still need to hold onto all of your receipts to show what the expenses were for.
Dedicated business accounts will also show customers, stockholders, and the IRS that your company is legitimate and that you’re serious about building a successful business.
Common Mathematical Errors
Advances in technology, such as bookkeeping software, can detect and help you avoid a variety of math mistakes. However, even the best software may not be able to catch a simple typo.
In addition to transposing digits or hitting the wrong number on your keypad, other errors include entering information in the wrong column, such as recording an expense as income. Also, omitting certain data is also a concern. Don’t forget to keep track of sales tax, as some states require you to file a return for sales tax even if you didn’t collect any during that period.
One way to avoid these errors is to automate as many of your processes as possible. Try exporting transactions from your online banking so you can copy and paste data into a spreadsheet or software, rather than entering it manually. Some software allows you to connect your bank and credit card accounts, so accounting records are pulled automatically.
For any numbers you enter manually, double- or triple-check your entries. Going over a spreadsheet with a fine-tooth comb isn’t exciting, but it will be worth it if you can find and correct a mistake early on. Also, use a calculator for any math you do yourself. You might think you don’t need it, but it doesn’t hurt to be careful.
Confusion of Profit, Revenue, EBITDA, and NOPAT
If you aren’t an accountant, it’s easy to get confused by accounting and tax terms. Understanding some basic terms relating to revenue can help you avoid costly accounting errors. For example, if you confuse your net profit with your revenue, you might not realize that your expenses are too high compared to how much money your business is generating.
Profit refers to gross, operating, or net profit. Your company’s gross profit is your revenue minus the cost of goods sold (COGS). COGS refers to the direct cost of manufacturing products.
Operating profit is revenue minus the expenses of running the business.
Net profit, or net income, is your revenue minus COGS, operating costs, and all other business expenses such as interest and taxes.
Revenue is the total amount of income your business generates within a particular period. This value is calculated before you subtract any expenses, such as tax, interest, and operating costs. While it’s important to be aware of, revenue alone doesn’t provide an accurate picture of how your business is faring.
EBITDA is your earnings before interest, taxes, depreciation, and amortization. EBITDA is one way that you can measure your business’s financial performance and profitability. To calculate EBITDA, start with net income and add in the amount of taxes, interest, depreciation, and amortization.
NOPAT stands for net operating profit after tax. Like EBITDA, this figure shows how well a company performed. The main difference is that NOPAT doesn’t include any debt or interest you owe on that debt, but it does take taxes into account.
Too Much Time Passing Before Financial Preparations
Tasks like preparing financial statements and filing taxes are a vital part of running a business. Unfortunately, these tasks can fall by the wayside when you’re busy managing your day-to-day operations.
Failing to analyze financial data regularly can lead to unpleasant surprises, such as not having liquid cash available to cover an unexpected expense. In addition, waiting until the last minute to prepare tax documents increases stress and can also lead to costly issues like an IRS audit.
On a monthly basis, review your business’s finances and take note of all tax deadlines. If you have employees, you’ll need to file quarterly. Even if you aren’t required to file quarterly, you can benefit from filing quarterly estimated returns to cover your income taxes, including the self-employment tax.
These Errors Aren’t The End Of The World. Here Is What To Do
Some errors, such as combining your business and personal expenses, you can resolve yourself. Although it will take some extra time and effort, this should motivate you to avoid making repeated mistakes.
For other errors, seeking outside help is a wise choice. A certified accountant can ensure that you aren’t missing out on revenue or making tax errors that could lead to an audit.
If you need assistance with taxes, a tax advisor can be an affordable option. Going forward, you might want to consider hiring a bookkeeper. The amount of time and money you save by avoiding errors could more than outweigh the cost of hiring someone. Plus, they can help with the correction of errors in accounting.
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Frequently Asked Questions
What are some of the most common accounting errors for businesses?
- Combining business and personal expenses
- Mathematical errors such as typos
- Confusing accounting terms such as revenue, profit, EBITDA, and NOPAT
- Allowing too much time to pass before completing financial preparations
What are some of the best ways to avoid accounting errors?
- Keep separate credit card and bank accounts for your business
- Automate bookkeeping processes as much as possible. Double-check data entry and use a calculator
- Learn what different accounting terms mean
- Prepare financial statements and tax returns often and be aware of deadlines
What should I do if I made one of these errors?
Often, error corrections can be made yourself. However, you can also consult an accountant or tax preparer. To avoid errors going forward, consider hiring a bookkeeper.
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