Common Accounting Mistakes to Avoid Heading into the New Year

Are you nervous about accounting mistakes putting your business at risk?

Many new entrepreneurs often handle their own accounting and bookkeeping when they first start their businesses. Accounting tasks can easily fall through the cracks as the business grows. 

Reconciling income, expenses, taxes, vendor payments, and other financial commitments can become overwhelming — exposing you to a host of potential mistakes.

If you’re not careful, these small accounting mistakes snowball into costly errors.

You need to stay on top of your accounting and be aware of the most common mistakes that can trip up your business finances.

To help you avoid financial pitfalls this year, we’ve compiled a list of the most common accounting mistakes that business owners should avoid heading into the new year.

1.    Irregular Or Missing Records

One of the most common accounting mistakes is failing to keep accurate and up-to-date records. This can include everything from not tracking expenses to failing to reconcile bank statements regularly.

If your records are inaccurate or missing key information, making sound financial decisions for your business can be difficult. This is especially true come tax time when you may be scrambling to gather missing receipts and documentation.

Why it matters: Proper record-keeping ensures you stay on top of your finances and can make informed decisions about where to allocate your resources. It also makes tax time a breeze because you’ll have all the documentation you need to file your return.

What to do: Set up a system for tracking expenses and income from the start. This can be as simple as using a spreadsheet or accounting software like QuickBooks Online. Update your records regularly, at least once a month, to ensure that they are accurate.

2.    Not Following Proper Accounting Procedures

If you’re unfamiliar with basic accounting procedures, it’s easy to make mistakes that can throw off your whole system. These protocols provide a clear guide for recording, analyzing, and interpreting financial data.

Why it matters: Failing to follow proper accounting procedures can lead to inaccurate financial statements and misinformed business decisions. It can also create problems come tax time if your records don’t match up with the IRS requirements.

What to do: The accounting cycle is a basic yet essential procedure that all business owners should be familiar with. This cycle includes steps such as recording transactions, analyzing financial data, and preparing financial statements. Automating your accounting with software can help to ensure that all transactions are correctly recorded and analyzed.

3.    Inadequate Checks And Balances

No matter how highly you regard your employees, you can’t put all your trust in them to manage your finances. Having adequate checks and balances in place is crucial to preventing internal fraud and embezzlement.

Why it matters: Fraudulent activity can have a devastating impact on your business finances and reputation. You need to streamline your processes to ensure adequate controls are in place to prevent and detect fraud.

What to do: You can take a few steps to mitigate the risk of fraud, such as segregating duties, conducting background checks, and implementing an expense reimbursement policy. You should also have a system in place for employees to report any suspicious activity.

4.    Changing A Closed Period

Changing data in a prior period is one of the most common accounting mistakes. This can be done for many reasons, such as trying to make the current period look better by improving the results of a prior period. This is not only misleading, but it can also result in severe penalties.

Why it matters: Falsifying financial data is a serious offense that can lead to hefty fines and even jail time. It’s important to maintain the integrity of your financial statements and only report accurate information.

What to do: There are legitimate reasons for making changes to a prior period, such as correcting an error or adjusting an unusual transaction. If you need to make a change, be sure to document the reason for the change and get approval from your auditor or accountant.

5.    Not Reconciling Bank Statements

Failing to reconcile your bank statements is another mistake that can lead to inaccurate financial records. This process ensures that the transactions listed on your statement match up with the ones in your accounting system.

Why it matters: If you don’t reconcile your bank statements, there’s a risk that errors will go undetected, and your financial statements will be inaccurate. This can lead to problems come tax time or when you’re trying to secure financing.

What to do: Reconciling your bank statements monthly is a good way to catch errors and prevent them from snowballing into bigger problems. You can do this yourself or outsource it to a professional.

6.    Not Staying Up-To-Date With Financial Changes

Federal, state, and local governments are constantly changing the rules and regulations surrounding taxes, bookkeeping, and accounting. If you’re not keeping up with these changes, you could be at risk for penalties and interest charges.

Why it matters: Being compliant and up-to-date with financial regulations is vital to keeping your business running smoothly. Failing to do so can result in costly penalties, interest charges, and even legal action.

What to do: There are a few steps you can take to stay on top of financial changes:

• Read industry news and publications regularly
•  Attend webinars and conferences
•  Hire a professional accountant or bookkeeper

7.    Not Tracking Payroll

Payroll systems help businesses manage employee compensation, including salaries, bonuses, and commissions. Without one, staying on top of payroll taxes and deadlines can be challenging.

Why it matters: Failing to track payroll can lead to inaccurate financial statements and tax returns. It can also result in expensive penalties and interest charges from the IRS and/or states.

What to do: There are a few key components of an effective payroll system, including employee tracking, time tracking, and payroll tax compliance. Automating your payroll with software can help to ensure that all transactions are properly recorded and analyzed.

8.    Failing to Categorize Income and Expenses Properly

A shoebox method of accounting can work for a while, but it will eventually catch up to you. Incorrectly categorizing income and expenses can lead to problems come tax time.

Why it matters: Failing to categorize income and expenses properly can lead to over-reporting or under-reporting of income, resulting in trouble during year-end tax preparation.

What to do: There are a few key steps you can take to ensure proper categorization of income and expenses:

• Maintain separate business and personal bank accounts.
• Use accounting software to track income and expenses.
• Keep receipts and other documentation organized by category.
• Consult with a professional if you have questions about how to categorize income and expenses.

9.    Misuse Of Accounting Software

Accounting software can be a powerful tool, but only if it’s used correctly. Incorrectly entering data or using the wrong settings can lead to inaccurate financial statements.

Why it matters: Misusing accounting software can lead to inaccurate financial statements and an incorrect picture of a company’s financial health. This can make it difficult to make sound business decisions and can lead to problems if the company is audited.

How to avoid it: Train your employees on how to use the accounting software properly, maintain essential bookkeeping principles, and regularly review and update financial statements for accuracy.

10.  Not Seeking Help When Needed

When it comes to finances, there’s no shame in asking for help. Whether it’s hiring a professional accountant or using accounting software, getting help can save you time and money in the long run.

Why it matters: Not seeking help when needed can lead to errors, missed deadlines, and unnecessary stress. It can also lead to financial problems down the road.

How to avoid it: Don’t try to do everything yourself. If you’re not comfortable with bookkeeping or accounting, hire a professional or use accounting software.

Get Your Finances in Order Before the New Year

The new year is a great time to reflect on the past year and set goals for the coming one. But it’s also a good time to get your finances in order, so you can start the new year off on the right foot.

If you are ready to get rid of the stress around your bookkeeping, the catch-up professionals at Celerity Accounting are here to help you finish the year strong and start the new one with ease. We help get your books back on track, so you can focus on what you do best – running your business.

Get in touch with us today to learn more about how our bookkeeping catch-up service can help you get your finances in order before the new year.