Your clients aren’t accounting professionals. Thankfully, you are. In an ideal world, your clients would come to you for all things accounting. But let’s face it: There will be holdouts who either don’t want to spend the money on day-to-day accounting transactions or those who want to handle it themselves. What’s a trusted advisor to do? You can equip your clients with the know-how to spot and fix these day-to-day accounting errors.
So, what kinds of accounting errors are common among business owners?
5 Common accounting mistakes and how to avoid them
Mistakes happen. But in accounting, you want to limit them as much as possible. Here are five of the most common accounting mistakes business owners make and how to avoid them in the first place:
- Making data entry errors
- Mixing personal and business money
- Forgetting to record transactions
- Failing to reconcile accounts
- Throwing away records
1. Making data entry errors
If one of your clients enters the wrong numbers into their accounting software or spreadsheet, they may not notice the mistake until it snowballs.
Data entry errors are easy to make. A client might look at the wrong set of numbers when entering values into their accounting system. Or, they might mistype or miswrite the values.
Another common culprit of data entry errors is a transposition error. Transposition errors happen when someone reverses the order of two numbers when recording a transaction (e.g., 16 vs. 61).
Whatever the reason, making a data entry error can result in inaccurate books, financial statements, business tax returns, and other government forms.
How to avoid data entry errors
Making data entry errors might be common, but it’s not inevitable. Business owners can ask their accountants to regularly review their books to avoid this mistake.
And, business owners who handle their own accounting for day-to-day transactions can avoid data entry errors by:
- Getting organized
- Double- and triple-checking their work
- Using a consistent process
- Sticking to a schedule
- Verifying they haven’t mixed up debits and credits
- Checking their books for matching debits and credits
- Cross-referencing supporting documents (e.g., receipts, invoices, etc.)
- Having a partner or trusted co-worker check their entries
Avoiding data entry errors can help your clients maintain accurate books, get a better overall picture of their business’s financial health, and file forms with the right numbers.
2. Mixing personal and business money
When your clients ask you if they should open a separate business bank account, you probably advise them to do so. But what about the ones who aren’t asking?
Some business owners combine personal and business money in one account. Combining funds could lead to inaccuracies, difficulties filling out tax forms, and overspending.
Not all business owners legally need to open a separate bank account. But, doing so can help them save time, keep organized accounting records, create a clear audit trail, and more easily reconcile bank statements.
How to avoid mixing personal and business money
Regardless of their business structure, all business owners should consider opening a separate bank account to avoid mixing personal and business funds.
3. Forgetting to record transactions
Business owners wear a lot of hats. At some point, they might be so busy doing one thing that they completely forget to do another.
But if your clients are forgetting to record transactions, they’re going to wind up with inaccurate books and accounting mistakes. And, they may miss out on certain tax deductions if they forget to record certain business expenses.
Business owners must record each and every transaction that takes place, regardless of how big or small it is.
Side note: On the other hand, business owners don’t want to forget they recorded a transaction … and wind up with duplicate entries. Duplicate recordkeeping can mess up business owners’ books just as much as forgetting to record them in the first place.
How to avoid forgetting to record transactions
Help your clients understand the difference between cash-basis vs. accrual accounting so they know when to record the transactions under their chosen accounting method.
If you partner with an accounting software provider to help your clients manage their day-to-day transactions, do some research. Look for accounting software that lets users enter financial transactions in the way they understand (cash in and cash out) but will also give you reports in accrual basis.
And, encourage clients to get into a habit of recording transactions each time one takes place in business (no matter how small). A reliable accounting system, like online accounting, can help with this.
4. Failing to reconcile accounts
Again, mistakes happen. One way to catch accounting errors is bank statement reconciliation. Through this process, business owners compare their bank statements to their accounting books to make sure everything lines up (which is another reason to have separate accounts for personal and business funds!).
But if your clients forget to reconcile their accounts, they are making a mistake that could cause other mistakes to go unnoticed.
Business owners who fail to reconcile their books may have simple mistakes snowball into complex problems.
How to avoid failing to reconcile accounts
You can help business owners catch mistakes, like data entry errors, through bank statement reconciliation. Or, you can show your clients how to do this themselves.
Before comparing bank statements and accounting books, remind your clients to make adjustments for:
- Deposits in transit
- Outstanding checks
- Bank statement fees
- Earned interest
5. Throwing away records
Tossing receipts might seem like a great way to avoid becoming a hoarder. But, pitching business records destroys proof of transactions, hurts consistency, and can make it more difficult for your clients if they’re audited.
How to avoid throwing away records
Encourage your clients to hold on to business records, like receipts, purchase orders, invoices, and copies of filed tax returns.
To avoid misplacing or accidentally throwing away paper copies, business owners can upload paper receipts and save them as digital copies in their accounting software or secure computer files.
If your clients aren’t sure how long to keep records for, you can direct them to the IRS’s period of limitations rules.