Whether for tax compliance, to apply for financing, to attract investors or for internal decision making, having accurate books is important to your business health.
Below are some of the most common bookkeeping errors I see:
1- Not having any books
If you are in business, shoving your receipts in a shoe box and looking at your bank statements at the end of the year to file your taxes is not enough. You need to keep detailed records to be in compliance with IRS recordkeeping requirements. Also, having a set of books gives you the information to know if what you are doing in your business is working and what needs to be tweaked before it’s too late.
The best time to start is today, the longer you wait, the harder it will be to get caught up which brings us to the next error…
2- Outdated Books
You started a set of books, you setup your accounts and then business and life got in the way and it’s been months (if not years) since you touched them. It’s easy for transactions to be missed the longer you wait to record them. It’s also harder to remember what a transaction was for or what you did with the receipt for it months later.
3- Incomplete Books
You’ve done some part of the bookkeeping but not all. For example, the accounting software was used to create invoices but not entering expenses. Bookkeeping is somewhere where “some of it” isn’t good enough. It’s important to have a complete financial picture of the financial health of your business.
4- The Books haven’t been reconciled
You never want to file your taxes before reconciling your books, you could be leaving money on the table and not know it!
Reconciliation means that all of the transactions for the period and ending balance match the statement. This ensures that no transactions are duplicated or missing. Unfortunately, checking off the check register and adding from the bank feed doesn’t replace reconciling your accounts. The only way to know that your books are actually accurate is by reconciling them.
5- No source documents
Your bank or credit card statement is not enough to substantiate a tax deduction (IRS Burden of Proof). Making sure that you have all of your source documents organized and accessible will get you a step closer to having audit proof books. These documents include bills, receipts, cancelled checks, etc.
An ounce of prevention in the form of up to date and accurate books can yield a pound of peace of mind in the case of an audit.