If you’re reading this, chances are you’ve poured your heart and soul into building your company. You’re navigating the challenges of entrepreneurship. But even the most experienced owners can run into trouble, especially when it comes to bookkeeping.
In my years as a CPA, I’ve seen plenty of smart, hardworking business owners make the same mistakes over and over. That’s why I’m sharing the top five bookkeeping blunders that could seriously harm your business. Trust me, these are mistakes you literally can’t afford to make.
So, grab a cup of coffee, and let’s dive in. I promise to keep things simple, practical, and maybe even a little interesting.
Bookkeeping Mistake #1: Improperly recording deposits from the owner into your business bank account
When you don’t properly record money from yourself (the owner) as either a capital contribution or a loan, these deposits often get counted as income. This can lead to some serious tax problems.
When you record this extra “income,” you can end up paying tax on your own money. This tax trap charges you for something you already own.
So, what’s the solution? It’s simple: Every time you put money into your business, make a clear note. Is it a loan you plan to pay back to yourself? Or is it a capital contribution – basically, an investment in your own company? Keep these records clear and up-to-date.
Time is Not Your Friend in this situation. Keep really good track of these deposits as they happen. If you wait until the end of the year to try and figure this out, you’ll lose track quickly. Do it correctly now, and your future self will thank you.
Deciding whether the money you put in should be a Loan or Capital Contribution can get a bit tricky. A good accountant can help you make the right decision. The right choice depends on your specific situation. It’s not just paperwork – this decision can actually make a big difference in your taxes.
Remember, your business is your livelihood, and you want to keep it healthy. By avoiding this common mistake, you’re preventing a problem that could seriously cost you. Stay tuned as we dive into the next big bookkeeping blunder – and how to avoid it.
Bookkeeping Mistake #2: Not reconciling every bank and credit card account
Alright, let’s talk about reconciliation. I know, it sounds like a fancy word, but it’s actually pretty simple. Reconciling is just matching up your books with your actual bank and credit card statements. It’s like doing a reality check for your business finances.
Not reconciling leads to discrepancies between your books and statements of your actual transactions. If you don’t tie your books back to your account statements, you can’t be confident that your books show what really happened. One common example is that reconciling makes it easy to see and correct transactions that have been recorded twice.
You won’t be able to reconcile properly if you’re missing anything on your statements. It’s a great way to catch those sneaky expenses or deposits you might have forgotten about.
When it comes to reconciling, all accounts matter. Some people do a pretty good job reconciling their main account, but they miss reconciling credit cards or accounts at other banks. This can cause the balances showing up for your cards to be all wrong.
If you want to know how your business is really doing and how much profit you need to pay tax on, then reconciling every account each month is a must!
Remember, reconciliation is like regular maintenance for your business finances. It might not be the most exciting task, but it keeps everything running smoothly and helps you avoid breakdowns. Trust me, a little time spent reconciling now can save you a lot of headaches (and money) later.
Bookkeeping Mistake #3: Mixing Business and Personal Transactions
Let’s talk about something many of us are guilty of – blurring the lines between business and personal finances. It’s tempting to get in the habit of using your business account for personal purchases. But trust me, this habit can cause more trouble than it’s worth. From the other side, when you pay business expenses with a personal card or account. You can easily forget to record those and miss out on the tax deduction.
Here’s why mixing business and personal transactions is a big no-no:
Paying personal transactions out of business accounts makes your job as a bookkeeper much harder. You’ll spend more time sorting through transactions, trying to remember which was which.
Paying business expenses out of personal accounts makes it easy to miss deductions. You might think you’re tracking everything, but it’s surprisingly easy to forget about that business lunch you paid for when it comes to tax time.
Some expenses that often slip through the cracks include:
– Owner’s cell phone used for business
– Client meals to discuss business
– Software Subscriptions you signed up for personally
-Times when you bought supplies and just pulled out the wrong card
Business expenses paid in cash often never show up on any statement, making them almost impossible to find later.
Think about this: frequent personal spending from the business account will create doubt when the IRS looks at your deductions. It’s like inviting the IRS to take a closer look at your books – and nobody wants that!
Here are the best habits that will make it easier to track all your business transactions:
- Deposit all income into your main business bank account. When income gets deposited to multiple places, things can get confusing fast. If you add transfers to the mix, untangling your actual revenue can be a weeklong process.
- Get a separate credit card for business expenses. It makes tracking much easier. This can even be a personal credit card that you start using only for business.
- Stop paying personal expenses out of your business accounts and cards. Only make an exception for true emergencies.
Remember, keeping your business and personal finances separate isn’t just good bookkeeping – it’s good business. It gives you a clear picture of your business’s financial health and makes life much easier come tax time.
Bookkeeping Mistake #4: Amounts Left in Undeposited Funds
Alright, folks, let’s talk about something that might sound a bit technical but is crucial to your business’s financial health: The Undeposited Funds Account on your Balance Sheet. This is a default account for QuickBooks. It’s designed to be a temporary waiting room where customer payments hang out before they’re deposited into your bank account.
Money should never be stuck in Undeposited Funds for a long time. The amounts flowing into this account should move out when you make your next bank deposit. When you see an amount on your balance sheet that is higher than the amount you are about to deposit, that’s a strong signal that your net profit is probably wrong as well. When you have this kind of problem, most of the time the balance in this account will keep rising higher and higher.
If the Undeposited Funds account looks suspicious, you might be accidentally recording sales twice – once when you receive the payment and again when you deposit it. Suddenly, your books are showing more sales and profit than you actually have.
If you need to clean this up, create a dummy bank account to deposit these transactions into, then zero it out. Don’t use journal entries – it’s like trying to patch a leak with duct tape. You will have more problems later.
Always clean up your undeposited funds before you reconcile your bank accounts. If you leave some problems in undeposited funds, you will mess up all your reconciliations when you fix them!
Review your undeposited funds weekly. That will keep small issues from becoming big problems.
Follow the same steps for every payment. Receive it, record it in undeposited funds, then deposit those payments you see in the Make Deposits screen to your bank account. No exceptions.
Undeposited funds should be a pit stop, not a parking lot for your money. Each customer payment should flow through here and then straight to your bank account. Don’t let problems with Undeposited Funds create phantom income that can cause you real problems!
Stay tuned for our final key point – we’re about to tackle a mistake that could put you in hot water with the IRS!
Bookkeeping Mistake #5: Making Changes to Your Books in a Previous Period
Alright, let’s talk about something that might seem harmless but can actually cause a world of trouble: tinkering with your books after you’ve closed them for the year. It’s like trying to change the score of a game after it’s already over. This is not going to fly with the referees at the IRS!
If you add, delete, or edit things in your books after you’ve sent them to your tax preparer, your books won’t match your tax return anymore. When your books have changed after you’ve used them for taxes, you are telling anyone who compares the 2 that you’ve paid the wrong amount of tax.
Not knowing how you came up with the numbers on your tax return can be a real nightmare during an IRS audit. Imagine trying to explain to a stern IRS agent why your books and tax return are telling different stories. It’s not a situation you want to find yourself in.
Sometimes, it’s better to make adjustments in the current year rather than going back and changing closed books. But other times it may be worth your while amend your tax return to fix the error. Always, and I mean always, talk to your CPA before you change anything in your prior year books. Your CPA can guide you on the best approach.
So, how do you avoid this mistake?
- Resolve any issues with your books before you send your year-end books to your tax accountant. Don’t count on your tax preparer to find the issue, because they don’t have all the information that you do.
- Keep an open line with your CPA or tax preparer. If you spot an error after filing, let them know immediately. They can help you decide on the best course of action.
- Once you’ve used your books for tax purposes, consider them frozen. When you finalize your books for the tax return, think of it as there is no going back now. Never make changes without professional advice. QuickBooks allows you to set a closing password at the end of the year to warn you of any changes you are making in a prior period.
Remember, your books tell the financial story of your business. Changing that story after you’ve reported it to the IRS is like trying to rewrite history – it rarely ends well. Resolve any problems with your books before you file your tax return, and always consult with a professional before making significant changes.
Bonus-Bookkeeping Mistake #6: Missing expenses that you didn’t pay out of your business account
Another mistake that’ll quietly cost you? Skipping over expenses you paid for personally. Just because something didn’t come out of your business account doesn’t mean it’s not deductible. A few easy ones to miss: mileage when you or your spouse run business errands in a personal vehicle, your phone bill if your line is part of a shared or family plan, or apps and subscriptions you pay for through your Apple ID or personal Google Play account. These are all legit business expenses, but they won’t show up in your books unless you track them. How can you stay away from this mistake? First, pay everything that you can with your business account or credit card. Its way better to avoid ever having transactions that are likely to be missed. But sometimes it’s just not convenient to pay through the business, so what’s the best fix? Try setting a monthly reminder to log anything you paid for outside the business using Outlook, Siri, Alexa, or whatever app works for you. Missed expenses up fast—and if you’re not claiming them, you’re overpaying on taxes. Don’t let sloppy bookkeeping steal your money!
By avoiding these five big bookkeeping mistakes, you’re setting your business up for financial success and peace of mind. And trust me, there’s nothing sweeter than knowing your books are in order when tax season rolls around!
Conclusion
Well, folks, we’ve navigated through the choppy waters of bookkeeping mistakes, and I hope you’re feeling more confident about steering your financial ship. Let’s quickly recap the five critical errors we’ve covered:
1. Improperly recording owner deposits
2. Not reconciling every bank and credit card account
3. Mixing business and personal transactions
4. Letting amounts linger in undeposited funds
5. Making changes to your books in a previous period
Any of these mistakes can seriously mess up your tax return. Plus, accurate bookkeeping isn’t just about satisfying the IRS (though that’s certainly important). It’s also about giving yourself a clear, honest picture of your business’s financial health. The good news? Now that you know what to watch out for, you’re already ahead of the game.
Remember, your business is your livelihood. It deserves the best care you can give it, and that includes keeping your financial records in tip-top shape. I encourage you to take a good, hard look at your current bookkeeping practices. If you spot any of these mistakes, it is important to start making changes now.
Now, go forth and conquer those books!