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Top Bookkeeping Mistakes in Small Business

  • By Lauri Paxton
  • 09 Oct, 2014
Small business owners wear a lot of hats. Ever wonder why some business owners are successful while others fail within the first five years of operation? This failure often is attributed to poor financial management.
These are some of the most common challenges faced when setting up your bookkeeping system. If not done properly, business owners could be paying more taxes, open themselves up for an IRS audit, or end up closing their doors.
  • Accrual versus Cash Accounting Methods.Cash Accounting is typically used by businesses that have no inventory. Income and expenses occur when cash flows in and out of the business. As a business becomes more complex, some businesses will switch to Accrual Accounting. With this method, expenses and revenue are matched.
  • Comingling of Personal and Business funds. Business owners should have a separate business checking account and business credit card account to provide an accurate financial picture of income and expenses.
  • Misclassification of Workers.Classifying personnel – full-time, part-time, or temporary employees and independent contractors set the stage for company benefits. The employee categories determine what benefits and accompanying taxes must be paid. Misclassification of workers can lead to IRS audits and fines for the business owner.
  • Regular Account Reconciliation.Monthly reconciliation of both bank and credit card statements will ensure there are no discrepancies. With cybercrime raising an alarming rate, this reconciliation will also alert business owners of any unauthorized charges.
  • Profits versus Cash Flow.An influx of cash or negotiating terms of payment with vendors can leave a business with a positive cash flow, yet they may not be making a profit. A balance sheet and income statement for a cash business, and a balance sheet, income statement and cash flow statement for an accrual based business should be run monthly.
  • Receipts for Small Purchases.The IRS doesn’t require a receipt for purchase under $75. But $50 here and there can add up.
  • Internal Controls.Establishing internal controls with checks and balances are important to prevent fraud and embezzlement.
  • Paperless Work Environment.IRS audits may sometimes require financial records in paper format. If your computer system is compromised, your data may be damaged, stolen or destroyed. How would you reproduce the information?
Build your business on a strong financial foundation with a solid understanding of how to read your financial reporting. Seek professional help from a bookkeeping service if you have questions on any of the above.
Paxton Bookkeeping and Tax Services works with a number of small business owners in establishing and implementing sound bookkeeping policies and procedures. Outsourcing bookkeeping services can enable a business owner to focus on what they do best….grow their business.
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