Despite how many accounting software programs exist, it’s hard to expect that anyone who has the job of running a business, selling a product and keeping track of finances can do the latter without a hitch. Even after running a few successful businesses, I still have experienced accounting errors along the way, despite adding to my body of knowledge and leveraging numerous accounting tools.
Most mistakes aren’t due to a lack of automation; they may be the fault of simple human error, rushed transactions, forgotten expenses, lost receipts and faulty hardware. In other words, anyone could make these mistakes, and they frequently do. The next time you’re updating your numbers and something just doesn’t add up, it might be that you committed one of these frequently overlooked accounting errors.
1. Making Data Entry Errors
There’s often no one reason why the numbers don’t add up by tax season or when you delve into the books to check your finances. When it's happened to me, it was actually many small, careless reasons. For example, a number didn't get carried into the next column, numerals were transposed or a zero was left out. It can be bound to happen when entering numbers after a long day of work or numerous distractions. They say the "devil is in the details," so it might be better to leave this task to a time period when you are more alert or not interrupted.
2. Errors of Omissions
For small-business owners tackling 20 different tasks a day, it can be difficult to remember what needs to get recorded in the books and what doesn't. Expenses don’t always get reported, receipts get thrown out and inventory quantities are not always updated. I've been known to lose receipts running between meetings or while I'm on the road. The problem with errors of omission is that they can lead to an inaccurate view of how the business is doing and the level of cash flow you have or need. To solve that, I've switched to an app that lets me scan and organize receipts that can be used to report expenses correctly. While I don't need to track inventory per se, I have colleagues who have automated this process.
3. Confusing Employees With Contractors
As more of the workforce shifts to freelance work, company owners may struggle to designate regular employees from independent contractors. For example, two people in your office could easily have the exact same job except with different employment benefits and contracts. However, not correctly classifying a contractor or employee may carry huge risks, resulting in possible audits, financial penalties or legal action. At the very least, it could cause confusion with the IRS, because contractors have to sign a different tax form and are fully responsible for their taxes. To minimize this risk, I've turned to basic accounting software, which helps me by providing codes for each employee or contractor and then correctly recording payroll and taxes for me.
4. Not Backing Up Regularly
Forgetting to back up data can seriously damage your business—almost all of us have probably done that. I know I've mentally told myself, "I'll just do it the next time." And then I say the same thing next time. What this can lead to is a huge problem when the unexpected happens, such as a computer crash, robbery, fire or natural disaster. Losing that critical data means it can be impossible to do taxes, or prove records during an audit. This is when I made the decision to implement a cloud-based accounting solution and discipline myself to schedule regular backups.
5. Forgetting to Cross-Check Records With Bank Accounts
To have the most accurate and updated view of cash flow and profits, you may want to routinely check your account balances against what the bank has listed. In doing so, you may be able to identify anything that might be missing from your financial records. Small expenses or quickly executed sales may not always be recorded. When enough of these incidentals build up over time, they can lead to some serious discrepancies between how you think the business is performing and how it's actually doing. No matter how busy I get, I schedule time each month to cross-check records after receiving notice that my current bank statement is ready to view online. I can even download this into my accounting software to make any discrepancies instantly apparent.
When it comes to this list of accounting errors, I can say I'm guilty as charged. However, recognizing that I've made these mistakes was just the first step. Since then, I've made a conscious effort to double- and triple-check the numbers, regularly back up all data, review and upgrade automated solutions, and invest in long-term accounting support. While I realize that accounting mistakes are bound to happen, my focus remains on creating the most efficient and accurate system possible to maximize the company's financial position.
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A version of this article was originally published on February 24, 2016.
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