12 Bookkeeping Mistakes That Could Cost You Dearly

Bookkeeping is an essential part of running any business, no matter how big or small. Proper bookkeeping allows you to track your income and expenses, provide necessary financial statements, and do your taxes.

However, bookkeeping mistakes can prove very costly if not spotted and corrected in time. Even the most experienced bookkeepers can make errors, but being aware of the common pitfalls can help you avoid them.

In this article, we will look at 12 of the most common bookkeeping mistakes that could end up costing you dearly.

1. Not Keeping Up With Data Entry

One of the most basic bookkeeping tasks is to enter all your income and expenses into your accounting system. However, many business owners put off data entry, allowing a backlog to build up. This makes your bookkeeping disorganized and increases the chance of errors.

Try to enter all transactions at least weekly. The longer you wait, the harder it gets, and you may end up missing important details. Staying on top of data entry takes diligence but avoids many issues down the road.

2. Sloppy Source Documents

Whenever a financial transaction occurs in your business, you need to keep supporting documentation like receipts and invoices. However, maintaining orderly and descriptive source documents is another spot where many bookkeepers falter. Source documents that are unorganized, unclear, or lacking key details can lead to incorrect data entry.

Get in the habit of keeping immaculate source documents. Make sure they are filed properly and include important info like dates, descriptions, amounts, and vendor names.

3. Not Performing Regular Reconciliations

One way to catch bookkeeping errors is by regularly reconciling your accounts. This includes reconciling bank and credit card statements with your accounting records. When you reconcile, you compare your transactions against the bank’s records to identify any discrepancies. Failing to reconcile accounts frequently is asking for trouble.

Aim to reconcile at least monthly. This will reveal any mistakes before they compound over time. Reconciling is tedious but well worth the effort.

4. Mixing Personal and Business Expenses

If you run your business as a sole proprietorship, it can be tempting to intermingle personal and business expenses. However, this is a recipe for trouble come tax time. Make sure to always separate your personal and business spending 100%.

Never pay personal expenses from your business account or make personal purchases on a business credit card. Likewise, don’t pay business expenses from personal funds unless you immediately record it in your books as a shareholder loan. Mixing expenses creates accounting headaches and leaves you vulnerable to missing tax deductions.

5. Not Tracking Mileage

For businesses that involve driving, tracking mileage is a must. Mileage for business trips in your personal vehicle is a write-off you don’t want to miss. But without proper mileage logs, you won’t have the documentation needed to claim the deduction.

Get in the routine of tracking all your business-related mileage with a tool like Everlance or Hurdlr. Note the date, distance, purpose, and destination for every trip. Come tax time, you’ll be glad you did.

6. Sloppy Payroll Accounting

If you have employees, payroll mistakes can get you in hot water. Every small business needs diligent payroll accounting to calculate withholdings, payroll taxes, and year-end tax documents properly.

Common errors include misclassifying employees as contractors, neglecting to withhold taxes, submitting payroll taxes late, and failing to remit withholdings. These mistakes result in fines and penalties from the IRS and state tax authorities. Work closely with your accountant to ensure you handle payroll by the book.

7. Skipping Review of Financial Statements

Your bookkeeping system should be set up to generate key financial statements like profit and loss, balance sheets, and cash flow statements. But the reports do you no good if you don’t review them regularly.

Analyzing financial statements monthly or quarterly is vital for spotting anomalies that could indicate accounting errors. Unusual balances, transactions, or trends may all signify mistakes. So make financial statement review a consistent practice.

8. Not Performing Regular Backups

In the digital age, your accounting data lives on your computers and the cloud. Failing to back up this data leaves you vulnerable to loss due to hard drive failures, ransomware, or other mishaps.

Get in the habit of performing regular backups of your bookkeeping system and company data files. Back up locally and to the cloud for ideal redundancy. Test restoring from backups periodically to ensure the process works when needed.

9. Skipping Year-End Tasks

As tax time approaches, there are key year-end bookkeeping tasks that must be done. This includes procedures like recording depreciation on assets, counting inventory, recording owner’s draws, accruing liabilities, and more.

Failing to complete year-end tasks means your books will be incorrect and out of compliance for tax filings. Work closely with your accountant to ensure you know what year-end adjustments are required and complete them on time.

10. Being Disorganized

Bookkeeping requires copious transactions, documents, files, and notes. Without diligent organization, things will quickly descend into chaos. Invest time upfront in setting up an orderly accounting workflow and filing system.

Use consistent procedures for data entry, approvals, document storage, and other key tasks. The more organized you are, the less likely errors become.

11. DIYing Complex Tasks

Some bookkeeping tasks are simply too complex for DIY handling, like preparing depreciation schedules, valuing inventory, calculating accrued liabilities, or assessing sales tax compliance.

Attempting these without professional help is asking for trouble. Know when to call in an accountant or bookkeeper for assistance. Their expertise will save you from costly mistakes.

12. Not Staying Current on Standards

Bookkeeping rules, regulations, and best practices change over time. Failing to stay current can leave you using outdated methods that won’t pass muster. Read up on new bookkeeping standards and software regularly.

Attend webinars, read blogs, and consult with your accountant to keep your practices up to date. Doing so will help you avoid errors and make the most of available technologies.

The Bottom Line

Solid bookkeeping is crucial for business success. But it's also easy for bookkeeping mistakes and oversights to creep in, even when you're diligent. Avoiding common errors like sloppy source documents, unreconciled accounts, mileage under-tracking, and disorganization can save you significant money in the long run.

Just staying vigilant by performing regular reviews and reconciliations will eliminate many missteps. And never be afraid to get expert help with thorny bookkeeping tasks. Invest time in keeping immaculate books, and it will pay dividends when tax season rolls around.