8 common mistakes to avoid while doing Accounting
Tilman J. Fertitta has quoted “Don’t ever let your business get ahead of the financial side of your business. Accounting, accounting, accounting. Know your numbers”. Accuracy and Accounting are synonymous; though accounting errors are common. With proper planning and preparation, these mistakes can be avoided and business can be estimated correctly.
The best way to learn proper accounting is to know the common mistakes and avoid them. The following are common accounting errors:
1. Haphazard Procedures
We understand; no one likes filing. Digital revolution has almost eliminated paper work and filing but proper procedure and record keeping isn’t obsolete. Organizations should set up formal, documented procedure for bookkeeping and accounting. Developing a standardized form and checklist shall ensure consistency and precision. Apps like Receipt Bank and Hubdoc make the filing easier. It shall be easy to provide all records and receipts for tax audit. This in turn shall prevent fraud.
2. Incorrect Data Entry
Data entry errors are common. While preventing all data entry errors is impossible, you can implement a policy to perform reconciliations in a timely manner to ensure quick detection and correction of mistakes. For eg. You can run vendor payment reports intermittently to check that all receipts and disbursements are aligned.
3. Inadequate use of Accounting Software
Proper use of accounting software is imperative. It helps produce specific and comprehensive reports for business decision making. The accounting software has a feature of automatic backup of your accounting program. Organizations must use it and also make time to double check back up files. Ensure that your bookkeeper knows the software properly.
4. Insufficient checks and balances
Inadequate checks and balances is a warning for your business. No one person in the business besides the business owner should handle business funds without supervision. Just one accounting authority increases the chances of fraud. You can at least ensure that the bookkeeper doesn’t make the deposits or write cheques. Also review your monthly bank statements and cancelled cheques.
5. Modifying in a closed Accounting Period
Changing a closed accounting period can ruin your financial statements and can lead to faulty business decisions. If you modify the books in a period for which a tax return has been filed, you might have to file an amended tax return. These mistakes can be costly to fix. But one simple step can prevent this error. Accounting software has a feature to set a closing password on your books at the end of each accounting period. If you amend in a closed period, you get a popup warning preventing you from making a change.
6. Not setting off the loan accounts
Very often we make a mistake of just reconciling bank and credit card accounts. But we should also reconcile loan accounts each time we receive the loan statement. Many a times, we post the entire loan payment against the principal balance in the books; thus understating the liabilities and interest. Reconciling loan account ensures that the liabilities of balance sheet are accurate.
7. Overstating revenue
This is a general accounting error when companies issue invoices to their clients for payment later and also use bank feeds for data entry. Lack of proper workflow in place leads a business to overestimate its actual revenue on its profit and loss statement. Overstated revenue costs you heavy taxes which you are not liable to pay. Organizations should verify that the bookkeeper enters all incoming payments against open invoices instead of posting straight to the revenue.
8. Overloading your Organization
Outsourcing plays a key role in today’s times. Delegating administrative and accounting tasks that are time consuming to other company can be an advantage. This also helps you to take professional services from the expert. It in turn facilitates optimum utilization of resources, reduction in errors and saving of time and operating costs.