The bad news: your gut is probably right. When new clients bring their DIY books to Bench, we almost always find mistakes in the ledger and balance sheet.
The really bad news: accounting errors can cost you big if you don’t catch them early. Come tax season, you might have to pay your CPA to redo a year’s worth of journal entries. Or you could submit your taxes with errors and get saddled with steep penalties.
The great news: with a little know-how, you can identify (and fix) the most common slip-ups.
Mistake 1: Missing transactions
When you’re a busy business owner—and not so keen on bookkeeping—it’s easy to fall behind on your records. But when your books no longer reflect the reality of your finances, it’s hard to gauge the health of your business.
The solution is to get in the habit of recording every transaction the day (or the week) it takes place. Which can be a pain. But playing catch-up at the end of the quarter or year makes it way too easy to miss transactions.
Mistake 2: The same item appears in two different places
The opposite can also happen—sometimes entrepreneurs forget they’ve entered an item and end up counting it twice.
It’s surprisingly easy to do. Say you buy a client dinner for $50, pay with your credit card, then log it as an expense for your business. Later in the month, when you pay off your credit card balance, you accidentally re-enter the same $50 as a second expense. Now that same client dinner is in your books twice, which means your books won’t balance and your accountant will likely bill you for the time it takes to go back and find the double charge.
Mistake 3: An idiosyncratic chart of accounts
Your chart of accounts lists all the categories you use to record your income, assets, liabilities, receivables, and operating expenses. These categories are the raw material for your financial statements—so it’s key to have them set up properly. If you don’t, a CPA will have to go back through and re-categorize everything. You’ll be saddled with a hefty bill, and you may even have to re-do part of your books.
When setting up your QuickBooks, make sure your chart of accounts is clean and easy to understand. If you make your system too complicated, it’s inevitable that items will get coded wrong. Don’t create a million hyper-specific accounts. And remember to group similar accounts together.
It’s also a good idea to line up your chart of accounts with the categories you’ll use when preparing your taxes. Basing your chart of accounts on Schedule C (Form 1040) is a good place to start.
Mistake 4: Using accrual instead of cash-basis accounting
You have to choose whether your business will use cash-basis accounting or accrual accounting when you file your first tax return. QuickBooks defaults to accrual—but cash-basis is often a better choice for most businesses that are just starting out. It’s straightforward, clearly shows when transactions took place, and makes it easier to see how much cash you have at any given time.
Mistake 5: Missing or incorrect adjustments
In accrual basis accounting, you need to adjust journal entries at the end of the year, quarter or month to make sure your statements reflect the expenses and revenues that really happened during that period. People doing their own books often forget to make adjustments. Or they don’t do them right (and fair enough—it’s not the most intuitive thing in the world).
Merchant adjustments, which account for the fees charged by your payment processor (think Square, Shopify, etc.), are especially liable to trip people up. If, for instance, you sell $10 worth of ice cream and the credit card company takes a $1 fee, you’re not allowed to simply record revenue of $9. Instead, you’ll need to do an adjustment to ensure your books show revenue of $10 and expenses of $1. You’ll also need to do a merchant adjustment for refunds involving merchant fees—your records should show the total amount the customer received, as well as the fees you were charged to process the refund.
Further reading: The Ecommerce Guide to Merchant Fees and Form 1099-K
Adjustments to account for interest paid on your business loans are another common culprit. To prevent confusion, Bench uses your loan documents to create an amortization schedule for you.
Mistake 6: Losing your old records
Maybe you’ve switched accounting platforms or shut down your business (and your QuickBooks account with it). Just remember that if you cancel your QuickBooks subscription, you’ll only have one year of read-only access.
It’s critical to export and save your books for future use. You never know when you might need historical financials—random audits, securing a loan, proving to new investors that your last business was a success, etc.
Mistake 7: Trying to scrape by instead of getting help
Feeling overwhelmed? It may be time to hire a bookkeeper (like Bench). Even if your business is still small, it’s cheaper—and a lot less stressful—to hire a bookkeeper than to pay your CPA to clean up the mess at tax-time. You can export your QuickBooks and our Bench bookkeepers will take it from there.
Want to learn more about Bench? Start here.