by Stephen
Nelson
http://www.stephenlnelson.com
and
http://www.llcsexplained.com
©
2008
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. Sometimes, sadly, the new business owner pretends he or she can get away
without a real accounting system.
In place of a real accounting
system--something like QuickBooks or Quicken--the business owner simply collects
receipts or manually maintains a check register. 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 will allow
your tax return 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 few days of some
transaction actually occurring, the accounting system should reflect 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--you need to periodically compare
what the accounting records say to an actual physical count.
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 commonly see clients in businesses that are too complex for their
bookkeepers to handle. 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 smarter (and
probably more expensive) 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.
Not
surprisingly, such co-mingling of finances makes the bookkeeping records nearly
useless for tax preparation and for use in managing the business's finances.
