How to fix bad bookkeeping – 7 key tips
DIY bookkeeping can be tricky, and the feeling of doing something wrong always lurks in our minds. Errors can cost small businesses big if not caught early enough or lead to penalties on taxes submitted with mistakes!
Don’t get us wrong; we’re not saying that you should never attempt to do your bookkeeping. We are simply trying to point out that it’s essential to be aware of the risks involved and take measures to avoid them.
What if your gut says there is something wrong with your accounting records, and true enough, upon closer inspection, you find several accounting errors? What do you do now?
First and foremost, don’t panic! Take a deep breath and relax because the solution is almost always simpler than it seems.
How to fix and organize your bookkeeping
1. Separate personal and business records
Mixing personal and business records is one of the most common accounting mistakes business owners make. It can create a mess come tax time or if you ever get audited.
To avoid this, always ensure that you have separate bank accounts and credit cards for yourself and the business. This will make it easier to keep track of business expenses and income, which is critical for accurate bookkeeping.
Most small business owners will inevitably draw money from their savings or take out loans from friends and family to get their business off the ground. While this is perfectly normal, ensure you record all transactions correctly and file all documentation.
2. Get organized
One of the best ways to fix your bookkeeping is to get your business transaction records in order. This may seem daunting, but it is pretty simple to break it down into smaller tasks.
- Start by creating a system for tracking expenses and income. This can be as simple as using a spreadsheet or software.
- Then, categorize your expenses and income to see where your money is going. This will help you identify areas where you may be overspending so you can make the needed adjustments.
- Once you have a system in place, make it a habit to update your records regularly. This ensures that your accounting records are always accurate and up-to-date.
One of the best ways to stay organized is by using digital programs to store documents. Programs like Envoice will help you store, organize and easily retrieve all the financial records.
3. Do bank and card reconciliation
Bank reconciliation is when you match the transactions in your bank statement with your accounting records. Similarly, credit card reconciliation involves checking the transactions on your credit card statements with the transactions in your accounting records.
With banks and credit cards, they record all the transactions that have taken place. So, if there are any discrepancies, you will be able to catch them and correct them right away.
Bank and credit card reconciliation should be done regularly, preferably monthly. It will aid in catching errors early on and prevent them from snowballing into bigger problems.
4. Do proper categorizations
In many cases, accounting errors start with entering an income or expense in the wrong category, leading to incorrect information in the financial statements.
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So, every small business owner needs to get them right from the start. And since it occurs at the earliest data entry stage, it can mess up the whole bookkeeping process.
For example, you may find machinery purchased listed as an expense instead of a fixed asset or the owner’s home rent recorded as a business expense.
To avoid this, ensure you have a firm grasp of basic bookkeeping principles. And whether using a spreadsheet or software, ensure that each transaction is classified correctly.
If unsure about the categorizations, you can always consult with an accountant or bookkeeper. But to avoid trouble, ensure that you hire a trained and experienced bookkeeper as an amateur can easily make the same mistakes.
5. Hire a professional
If you’re struggling to understand accounting principles, it may be time to hire a professional.
As your business grows and your accounting needs become more complex, hiring someone who knows accounting inside and out will save you a lot of time and money.
A professional accountant can help you set up an accounting system tailored to your specific business needs. They can also train you and your staff to use the system properly.
Most importantly, they can provide peace of mind knowing that your accounting records are accurate and up-to-date.
A professional can also help you correct your DIY bookkeeping attempts as they know all the accounting principles that many business owners don’t fully comprehend.
6. Use the correct accounting software
With the market saturated with accounting software, business owners need to choose the right tools to meet the specific needs of their business.
For example, you may not need an advanced accounting system if you have a small business. A simple spreadsheet or even a pen and paper can suffice. However, as your business grows, you will need something more sophisticated like QuickBooks or Xero.
Use the help of a professional bookkeeper to determine which software is best for your business. They can also help you set it up and train you to use it.
7. Automate as much as possible
Automation is revolutionizing the accounting profession. It has never been easier to automate your bookkeeping processes.
There are several ways you can do this. For example, you can set up automatic bank feeds to import all your transactions into your accounting software.
Another way to automate is by using online invoicing and payments. What this does is allows you to send invoices and receive payments online. Goodbye paper invoices!
You can also automate your inventory management by integrating your software with your inventory system. When stock levels change, the accounting records are updated to reflect this.
Most bookkeeping software like Quickbooks and Xero offers a range of features like sales tax automation. Rather than doing it manually, the program will calculate the taxes for you.
Add-ons like Envoice help with data extraction and categorization. The program uses OCR to extract data from receipts and invoices. It then categorizes the data to be imported into your accounting software.
Rather than wait to correct accounting errors, a business owner can get ahead of the game by automating as many of your bookkeeping processes as possible.
[Related Post: 6 Bookkeeping Tips for Small Business Owners]
Consequences of bad bookkeeping
Authorities may impose fines
Depending on your country or state, authorities may impose fines for overdue or incorrect tax returns. In the US, it can lead to an IRS audit which is always nerve-wracking for everyone involved.
The IRS has a team of auditors who go through business records to check for accuracy. They will contact the business owner if they find errors and ask for clarification. And if the errors are significant, they may impose penalties.
No one wants to go through an IRS audit. It’s a time-consuming and stressful process. But it’s something that can be avoided by keeping good records.
It can damage relationships with suppliers
If you consistently pay your suppliers late, they may start to view your business negatively. This could lead to them charging you late fees or even cutting you off altogether.
Imagine dealing with clients who miss their payment dates or constantly need reminders. It would be frustrating, right? The same goes for suppliers.
It can lead to financial problems
As a business owner, you need to have a clear picture of your financial situation. This way, you can make informed decisions about where to allocate resources.
Suppose you don’t have clear and accurate bookkeeping records. You won’t know where the money is going or coming from. This can lead to financial problems down the road.
Cash flow problems
Businesses thrive on good cash flow. Everything needs to run smoothly, from receiving payments on time to paying suppliers.
If your bookkeeping is in disarray, it won’t be easy to make informed decisions about where to allocate resources. And inaccuracies in your books can lead to missed opportunities and a shortage of working capital.
You may miss out on essential deductions
Most governments will not tell you what deductions you’re missing out on. It’s up to the business owner to keep track of expenses and take advantage of any available deductions.
For example, there is a deduction for home office expenses in the US. But you can only claim it if you have receipts to back up your expense reports.
If you don’t have accurate records, you may miss these and similar deductions that could save you money.
The process of finding and correcting mistakes in the books is painfully slow and time-consuming. Before you tackle your own bookkeeping, our advice is to do a course that educates you on the basic accounting principles and regulations. Accurately recording transactions from the start will save you a lot of headaches!
If, on the other hand, you simply don’t have the time to do either a course or self-study, consider hiring a professional. That way, you can focus on what you’re good at while your accountant takes care of the numbers.
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