Common Small Business Bookkeeping Blunders

Stephen Nelson
October 4, 2008 — 1,503 views  
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As the end of year approaches, many small business CPAs and bookkeepers find their stress levels rising.

In only a few short weeks, these accountants know they'll see silly bookkeeping errors in many of their small business clients' books--errors that have meant the business owners have paid too little or too much in taxes. Errors that mean the business owner hasn't really been able to effectively manage the finances of the business.

Fortunately, these common bookkeeping blunders are easy enough to fix--if you know what they are and if you know the simple steps you can take to avoid making them.

Bookkeeping Blunder #1: Pretending No Accounting System is Needed

The first--and perhaps most serious blunder--is especially common with new business owners. The neophyte business owner sometimes pretends he or she can make do without a real accounting system.

In place of a real bookkeeping system--something like Microsoft Small Business Accounting or Intuit's QuickBooks--the business owner simply collects receipts in a box or keeps a check register by hand. Or maybe the business creates the illusion of an accounting system by using something like Microsoft Excel to, at least, add up some of the numbers.

Unfortunately, the "no accounting system" doesn't work. Before you have your tax return prepared, someone (perhaps your tax preparer) will need to cobble together some sort of makeshift system. And that's too bad, really. Such a system allows your federal and state business and individual tax returns to be prepared. But such a system almost surely won't capture all your tax deductions. And the information that this crude "system" provides will be too late to help you better run your business.

Bookkeeping Blunder #2: Slow Entry of Accounting Data

Another common blunder? Taking too long to enter the accounting data into your system. Which is surprising, in a way...

You would think that people who've gone to the modest effort and expense of having a real accounting system set up would keep the system up to date. But often they don't.

The problem with pokey data entry is that any useful insights that come from your accounting system, come too late.

Whoever is doing your accounting should keep up to date on the data entry. Within a day or two of a transaction occurring, the bookkeeping records should be updated for the activity.

Bookkeeping Blunder #3: Skipping Account Reality Checks

An important yet simple point: Of course people make errors in using their accounting systems. But the nature of double-entry bookkeeping means that it's usually relatively easy to catch errors. How? You need to reconcile your bank accounts at the end of each month when the bank statement arrives.

Furthermore, if you hold other valuable assets like inventory or investments, periodically you should compare what the accounting system says to an actual physical count or statements from an external source.

Regularly performing reality checks on key accounts (especially cash) cleans up all sort of easy-to-miss errors.

Bookkeeping Blunder #4: Financial Complexity Beyond Bookkeeping Skill Levels

One common bookkeeping blunder makes for awkward conversations between accountants and their small business clients. But you deserve to know what the blunder is...

Unfortunately, accountants regularly encounter business clients with finances that are too complex for their bookkeepers. And that's a huge problem. If the business gets too complicated for the in-house bookkeeper (often the owner's spouse), the accounting system slowly becomes more and more unreliable. And this accounting unreliability usually means the business will shortly get into big trouble. (How can someone successfully manage a business if they don't know when they're making or losing money or how much cash they have in the bank?)

By the way, you'll easily be able to determine if the accountant or bookkeeper is overwhelmed. She will be falling further and further behind on the data entry. She will be producing reports that make less and less sense. And, often items, the profit and loss statement or the balance sheet will include a suspicious catch-all account named something like , "Ask the Accountant," "Suspense," or "Intercompany Transactions" that keeps increasing in size.

Only two true solutions exist for the "too much complexity" problem. You can simplify the business (probably the best idea). Or you can find a more experienced (and probably more costly) bookkeeper or accountant.

Bookkeeping Blunder #5: Co-mingling Personal and Business Assets and Liabilities

One final bookkeeping blunder should be mentioned given the approaching tax season.

Many small businesses don't clearly separate their business finances from their personal finances. For example, the businesses may use a single checking account for both personal and business banking. The business may regularly borrow personally to pay for business expenditures--and vice versa. And the business owner may too frequently mislabel personal expenses as business deductions.

Sadly, rampant co-mingling of finances makes financial records and books pretty much useless for tax preparation and for use in managing the business's finances.


About the Author

Seattle accounting firm Stephen L. Nelson, CPA, PLLC serves small businesses and publishes the popular small business web sites http:///www.stephenlnelson.com and http://www.scorporationsexplained.com .

Stephen Nelson