How to Avoid These 5 Common Accounting Mistakes

Many entrepreneurs and small business owners have assumed the responsibility of overseeing the business’s accounting and bookkeeping services. Realistically, not every company has the resources or staff available to have their own accounting departments. As a result, keeping on top of accounting and bookkeeping can often fall in the lap of a single individual or small team of people. 

While accounting mistakes can happen anywhere (even at large scale companies) and among any group of people, there are a few common mistakes that can slip through the cracks when small businesses or individuals handle accounting on their own. This is because generally, there are less checks and balances in place to double check the work of one person. Not to mention, keeping track of every dollar, expense, income and revenue amount and more can be tedious work—and can get put off as a result.

If you’re wondering what the big deal is about some accounting errors, there are a number of ways it could negatively affect your business. Some examples include:

• Late payments can lead to additional fees and interest that a business has to pay
• Incorrect inputting of information can distort a company’s profit margins, amount of cash on hand, or expenses. When businesses over- or under-report certain values, the consequences—which can range from overpaying in taxes, not having enough cash to pay for expenses, or over-reporting revenue and income—can be vast. 

• Classifying income or expenses in the wrong period can throw off future financial statements and guide decisions that may be based on wrong information.

And these are just a few of many…

Now that we’ve covered the severity of making certain accounting mistakes, let’s discuss five common accounting mistakes that can occur, and how they can be avoided.

1. First and foremost, one of the most common accounting mistakes an individual can make is lacking organization. As we’ve previously discussed, bookkeeping is a meticulous and detailed process that requires a huge amount of organization. Many people tend to put off tracking and storing information and receipts, which can hurt during tax season.

How to avoid this: No matter how big or small, keep track of your transactions both physically and digitally so you can ensure that everything adds up and you have everything you need come tax season. This way, you can prevent overpaying in the future and stay prepared for any future audits.

1. Errors of omission and commission. Both of these errors can happen more easily than you’d think. The error of commission happens when an amount or item is put in the wrong place. For example, the amount that you entered may be correct, but under the wrong month or account. Similarly, the error of omission happens when an amount or item is overlooked and fails to be recorded. While these mistakes 

How to avoid this: Simple entry or omission errors can be avoided by not overloading your employees and making sure they have the adequate time and resources to handle everything. Doing so can also reduce the chances that your employees make data entry errors like duplicating entries, switching expenses and income, or others. Additionally, it may be helpful to implement internal checks that detect and course correct accounting errors. 

• Failure to reconcile accounts: Reconciliation is the process of making sure your bank account reflects your cash flow balance. Doesn’t sound that hard, right? Well…Surprisingly, failing to reconcile accounts is a much more common occurrence than you’d think. This is a big problem as discrepancies between the two can lead to the failure to validate the information in your books against an external document and prevent you from detecting other errors. Account reconciliation will also ensure that you don’t commit fraud.

How to avoid this: Set a date or reminder in your calendar for either once a month or bi-weekly to get you in the rhythm of reconciling your accounts and making sure it’s done in time. This will require you to cross-check your accounts against your books, which can take some time, but is definitely worth doing as it’ll make sure you stay on top of everything. 

• Not using accounting software: While using accounting software will not solve all your problems, it can be extremely useful in terms of reducing the menial tasks of bookkeeping. It’s also important to learn how to use accounting technology to your benefit so that there is a balance between real people and technology and automation. When you don’t leverage accounting software at all, whoever is in charge of your business’s financials may be more prone to making mistakes. In addition, using an accounting software can help in making sure you have a digital place to back up your financial data in case something happens to your physical books or copies of receipts.

How to avoid this: Don’t be intimidated by the myriad of accounting software options available. Instead, do your research and consult external accounting professionals for their opinion on which accounting softwares will be the best fit for the goals you’re looking to achieve. Then, once you decide on an accounting software, make sure the onboarding process is streamlined and seamless for whoever is overseeing your accounting functions. This way, you can reduce the potential for errors made.

• Last but not least, lacking internal oversight. Regardless of how small a business is, it’s not always the best idea to give one sole person the responsibility of taking care of all of the financial matters, unless they are the owner of the business. First, it’s good for business leaders to know the ins and outs of their business’s financials to get a good idea of the company’s overall health, and if there are areas that can be strengthened or minimized. Second, having internal oversights in place can ensure that numbers and entries are double checked by a second (or third) pair of eyes in case something goes wrong or an error is made. Third, internal oversight can be a safeguard to fraud. 

Fraud is the last thing any business wants, but can happen nonetheless. However, it becomes more difficult to commit fraud if there are multiple people responsible for overseeing the financial activity of the business.

How to avoid this: Depending on the resources available, it may be a worthwhile idea to set up a financial committee that is responsible for overseeing the revenue, income and expenses, taking care of the assets and equity, and tracking cash flow to the tee. This is a good alternative for small businesses that don’t have the manpower or financial means to hire an entire accounting team or outsource accounting functions. With this in place, you can rest easier knowing you have guardrails against fraud and that you are best prepared to catch small mistakes.

Unfortunately, accounting mistakes are not limited to the five we just discussed—there are many more that can be made. Because of this, it’s imperative that business leaders take every precaution necessary to protect against and make up for human error, mal intent, and missing financial information. 

To help make this all a whole lot easier, you can always outsource your accounting functions to a trained team of CPAs who have the expert insight to man your financial functions. If you’re ready to outsource your accounting to, we’re here and ready to talk! Let’s get a conversation started today about how to get your accounting done the right way.