Guide
Accounting Mistakes

Most Common Accounting Mistakes Small Businesses Make

The Art of Accounting

Accounting is a process that helps an organisation in achieving its goals and objectives. It helps assemble, organise, and communicate information about its activities and is an integral aspect of doing business today. While accounting is essential, the role of an accountant in a company can also not be undermined. This is because they work at two levels: financial and managerial. Let us first understand all about this.

The role of accounting is as old as the Mesopotamian civilisation. Accounting is not business as such but something that helps a company move forward in its objective. It records and summarises business and financial transactions. Once this is done, it becomes easier to analyse, verify and report the results – and also understand whether the business is in profit or loss. All transactions carried out are documented, and so is every aspect of the business. 

In other words, accounting is the bloodline of any business. It helps understand the financial health of the company and helps in assessing the assets, liabilities, and cash flows. It is also a great way to foresee the future of the business and apply for possible investment. Accounting is thus, a vital part of the modern business environment. 

Types of Accounting in Business

Income and expenditure tracking

A business is required to fill out tax forms based on gross revenue and net income. For all these processes, it is important to track income and expenditure. Break down earnings into various categories and even categorise the expenses. 

Payroll accounting

Apart from the salaries, businesses also incur other expenses on employees such as medicare. This makes it important to maintain a comprehensive and up-to-date payroll accounting system that can keep track of these numbers.

Cash flow accounting

Accounting systems also have the tools to track the availability and need for cash. A cash-based accounting system will give a fair idea of income and expenditure. This is called cash flow accounting.

Balance sheets

This is nothing but a snapshot of a company’s financial picture. The list of assets includes cash in the bank, equipment purchased, etc. The list of liabilities includes balances due on loans and credit cards, and shorter-term debts. Subtracting liabilities from assets gives the accountant an idea of the company’s current net worth. Accounting helps in the creation of timely balance sheets and shows how much of this net worth is liquid, and what is tied up in assets.

The role of management accounting

Managerial accounting refers to providing accounting information to managers and enabling them to make decisions and perform their role with ease. It is different from cost accounting which refers to recording the costs incurred. Financial accounting, on the other hand, revolves around making financial statements for both internal and external purposes and all stakeholders concerned with the business. 

Management accounting also helps in providing information to support strategic, performance, and risk management. It helps in influencing the behaviour of managers and employees and furthering the company’s vision and goals. Professor John Hassell of Indiana University’s Kelly School of Business says that management accounting “provides managers with information, such as product costs, budgets and cash flows.  The information includes financial and non-financial data that helps managers with strategic planning and decision-making.” In addition, this kind of accounting helps in directing and controlling. This includes analysing and comparing actual performance to budgeted plans. It also directs the attention of relevant stakeholders to problems areas or the success achieved. Some other benefits of this are as follows.

  • Managers are motivated to achieve organisational goals through communication, measuring how well it was achieved, and prompting an explanation of deviations from plans.
  • It can help measure the performance of the entire organisation as well as specific sub-units, departments, and divisions – including the individuals therein. 
  • It can help assess the level of competitiveness of the organisation in a changing business environment. In addition, it is also a good way of measuring how well the organisation is working internally and where the financial loopholes are.

The role of financial accounting

Financial accounting has a very vital role, particularly where small businesses are concerned. It helps the owners in sharing information with external parties. This can be done through their financial statements which are the outcome of the financial accounting transactions carried out through the year. These external parties can then examine the financial statements and compare them with their expectations. Some of these external users are banks, suppliers and leasing companies. Some other reasons for the role of financial accounting are given below.

  • Suppliers provide products and services and therefore want to ensure they get the balance sheets on time. This ensures them of prompt payments for their goods. 
  • Statements are also important for creditors and banks that provide loans and other services. For them to do so, it is important for a business to give them a financial overview. 
  • Since employees, too, provide their services to a business, it is imperative for them to understand the business figures. It is also a reassurance that the business is viable and that it is making profits or otherwise.
  • Financial statements are also essential for government bodies that provide various kinds of permissions. Many government bodies also ask for company books, and it is the role of an accountant to keep these current and updated. 

Roles and responsibilities of an accountant

It is imperative at this juncture to understand the various responsibilities an accountant has in any organisation. They are as follows. 

  • Examine bank statements and check them with general ledger entries. They also examine expenses submitted by employees.
  • Accountants keep an eye on both incoming and outgoing payments from the accounts payable
  • They create financial reports for businesses and also collect, analyse, and summarise the account information and trends
  • They analyse the data collected to determine how the financial health of the company is and understand the profits and losses incurred. 
  • Accountants are responsible for preparing asset, liability and capital account entries. They do this by compiling and analysing account information
  • Accountants also document every financial transaction in the company. 
  • They recommend the best financial actions and summarise the current financial status 
  • They also help businesses comply with federal, state and local financial, legal requirements. They do this through a study of existing and new legislation. 
  • Overall, accountants ensure that the customer confidence in a company is not lost and protect operations by keeping financial information confidential.

Common bookkeeping mistakes

There are several accounting applications available today, which have made it easier for accountants to keep an accurate record of where the company’s money is being spent. Although these applications and software have made things easy, they are also prone to certain errors and can cause accounting problems. These can stem from incorrectly categorising transactions to other things. While it is possible to correct the minor accounting mistakes, major ones can prove detrimental to the health of a business. They can also lead a business towards insolvency or company administration. 

Given that small businesses have fewer resources, it is mostly a few people handling various tasks together. Though this may seem like a good way to save up on money and resources, it can also lead to several mistakes. Another thing to consider is that often startups or small businesses do not even realise these mistakes until a professional accountant points it out to them. Of all the difficulties is the one related to balancing the books and planning for taxes. We will now look at some of the common accounting mistakes that can creep into a business transaction, both small and big, impact it. These steps will also inform you on how to maintain accounts for small business and the need for a business accountant. 

Not following accounting procedures

Irrespective of the type of business, it is important to set up formal, documented, and detailed procedures to manage bookkeeping and other related accounting procedures. One way is to develop standardised forms and checklists for consistency and accuracy. For instance, whenever you sign up a new vendor, make sure to record all their details, including name, address, telephone number, and other such aspects. This information can be entered into the accounting software and will aid when you need to process payments.

Not having a budget

To judge a business’ operating results, it is important to have a budget in place. This becomes the baseline. Budgets help in curbing any kind of overspending and in establishing realistic, written financial objectives. Make sure the budgets are grounded in reality and set reasonable growth goals.

Data entry errors

These are a part of any business. However, though it may not be possible to prevent them entirely, it is a good idea to have a process to perform various reconciliations in a timely manner. This will ensure that any errors are detected at the earliest and corrected. For instance, monthly bank reconciliations, as well as accounts receivable and payable reconciliations. It is also better to run budget-to-actual variances as they enable in the identification of errors. Make sure you also review any unusual transactions that can creep up so that there are no data entry mistakes.

Not backing up the accounting software

One cannot understate the importance of backing up data in a regular manner. Set up an automatic backup of the accounting programme you use. Take time to double check all the files that have been backed up to ensure that the financial aspects of your venture run smooth. It is possible for files to get corrupted sometimes. Make regular checks to ensure that the backup process is fine and that there is no malware that can harm the files. Find out what is the most common accounting software and make good use of it.

Doing it all yourself

To ensure that you can perform to your optimum levels, it is imperative to outsource administrative tasks. For example, accountants are better versed in handling finances and bookkeeping aspects. They can also regularly inform you of your tax liability, compliances, and leave you with more time to devote time to other activities. There are several business owners who do it all. However, note that outsourcing accounting, legal, IT, and other administrative functions can reduce errors and increase profitability.

Not categorising income and expenses properly

Accounting with the shoebox method is not always the best choice. Make sure you assign all the incoming and outgoing money in your business to the appropriate category. It is only when you stay on top of your accounting records that you can avoid mistakes. Doing this will also smoothen out your year-end tax preparation. Make sure you do not fall into the trap of preparing your business’ tax return right before the return is due.

Poor communication

Your bookkeeper must be fully aware of and have all the information about what is going on in your business. This information should be clearly communicated to the accountant. Even seemingly small communication errors can lead to serious issues and extra work down the line. Keep a paper and book-based record of all small and big transactions, digitised or otherwise. Get your accountant to communicate with you in layman terms if you do not understand certain terminology. Pretending to understand can often land you in trouble. The accountant should also make it a point to communicate in terminology that everyone understands and answer all pertinent questions well. This will help everyone involved in the business function as a cohesive unit.

Mixing personal and professional

Never mix business and personal finances – there are many business owners who fall on their face after doing so. Keep the money separate and distinct. This will help you and the accountant to specifically track what was used for business and where the spending was on personal cases. Make sure your business account is always separate.

Managing and forecasting cash flows

A business cannot be successful without enough cash flows. Several factors impact the business cash flow. This includes accounts receivable, inventory, and the debt payments. Considering these factors will help the owner and in turn, the accountant, to determine how much cash is required. If the cash flow is not enough, the accountant can advise on the course of action as well.

Being unaware of accounting terminologies

Many small business owners are unaware of key business accounting terms and procedures. These include setting up controls, bank reconciliation, and even balance sheets! There are several online guides available to make you adept in these terms. What is important is to give this time and apply specific procedures and tax laws where appropriate.

In conclusion

No matter whether your business is small or big, an appropriate human resource as an accountant and managing the accounting duties can be a big asset. Omit blunders by being a little more careful and ensuring that the accounting processes are all up to date. The common accounting mistakes mentioned above are gathered for your advantage and ensure that your business is a success and not a failure. Correcting even one mistake and filling an accounting loophole can mean profit and a big name in the business world for you.

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