Accounting is among the most essential elements of running a small business in the U.S. It can help you monitor exactly where your money goes and stay away from trouble with the IRS. But did you know that 60% of small businesses believe they're not so knowledgeable about accounting and finance? And over 40% of small businesses pay extra charges due to accounting mistakes.Whether you deal with your own books yourself or use an expert, making even tiny errors can set you back, give legal headaches and cost money.
In this article, we will cover 5 common accounting mistakes that business owners make and show you the way to prevent them. Eventually, you will be a little more confident to manage your books correctly and save yourself from pressure later on.
5 Common Accounting Mistakes Made by Business Owners and Ways to Avoid Them
Below are 5 accounting mistakes and ways you can avoid these costly blunders:
1 You Mix Personal & Business Finances.
The largest mistake small businesses make is not keeping business and personal finances separate. Utilizing the same credit card or bank account for groceries & office supplies causes it to be hard to monitor business expenses clearly. This could confuse your records and make tax time harder.
How you can avoid it:
Open a separate business bank account along with a credit card. Rather than dipping into business funds, always pay yourself a salary or even draw. Track business spending using accounting software like QuickBooks Online. So you will be organized and your accountant or maybe the IRS will not scratch their head.
2 Not Keeping Receipts or Documentation.
It is tempting to toss receipts or even omit modest expenses. But little slips can rapidly become big problems. An audit might not enable deductions because the IRS lacks proof. Additionally, not tracking could result in missed deductions - which means you owe much more taxes than you need to.
How you can avoid it:
Scan and store receipts immediately with a digital app or accounting software. Even better, automate it: many apps connect with your phone's email or camera and can upload receipts directly to your books. Keep digital records for 3 years if you are audited. Keeping organized prevents stress later.
3 Falling Behind on Bookkeeping.
In case you wait till tax season to begin tackling months of transactions, you are not the only one - it could mean skipped earnings, forgotten expenses and also inaccurate financial statements. You might even make poor business decisions if you do not get the entire picture - with out-of-dated or inaccurate books.
How you can avoid it:
Set aside time every week to examine your finances and update your books. Even thirty minutes a week might help. Better, find a part time bookkeeper or accountant. This keeps your records accurate year round, making taxes and audits simpler.
4 Misclassifying Employees versus Contractors.
The IRS treats worker classification seriously. You might be penalized in case you mistakenly classify somebody that works as a worker for a contractor to avoid payroll taxes. The rules are often misunderstood - particularly by small businesses which use part time help or freelancers.
How you can avoid it:
Learn the distinction between an employee and an independent contractor. Employees work for you - at your time, with your tools. Contractors typically work according to their terms and charge you for work. For those who have questions, ask a tax expert or even see IRS Form SS-8 for advice.
5 Not Reviewing Financial Statements.
Lots of business owners leave their earnings statement, balance sheet or cash flow report till something goes wrong. However your financial reports are your business reports. In case you do not check them often, you might not see cash shortages, increasing debt or fall in revenue till it is way too late.
How you can avoid it:
Make examining your financial reports a monthly habit. Watch for trends, unexpected changes or anything that doesn't seem right. Your income statement will show losses or profits while your cash flow statement shows how you plan ahead. A basic review can avoid expensive surprises and help you plan smarter.
Bonus Tip: Get a Bookkeeper or Accountant
In case accounting appears too overwhelming or time-consuming, ask for assistance. Hiring a professional - even part time - can help you save cash later on. Businesses which employ accountants are 30% more likely to survive the very first 5 years, according to the Small Business Administration.
A professional will catch mistakes early, give tax-saving suggestions and get your records audit ready. This leaves you time to do what you love: growing your business.
Also Read | What Can You Expect from an Accounting Services Company? - A Detailed Guide
Conclusion
Operating a business is hard, and keeping your accounting clean and current is most likely one of your most significant responsibilities. With 82% of small business mishaps being caused by bad cash flow management or poor knowledge of finance, staying away from basic accounting mistakes can help keep your company healthy.
By learning from these accounting mistakes, like combining personal and business funds, falling behind in bookkeeping or misclassifying employees, you can be certain of long-term success. Remember, you do not need to be an expert in anything. What really matters is that you are willing to improve. Regardless if you get it done yourself or you hire help, getting your accounting right means less anxiety, much better decision making and much more time on your goals.
