Let’s face it. We all make mistakes. Sure, it’s great to learn from what doesn’t work, but actually paying for those mistakes is something we’d all like to avoid. In the case of simple mistakes, it’s often one small detail that makes the difference between “getting it right the first time” and “paying to fix it.”
Most business owners know their craft. Dentists know how to fill teeth. Contractors know how to build walls. Few of these consider themselves pros when it comes to accounting. In fact, experts claim that more than half of all accounting mistakes result from simple bookkeeping errors or misapplication of easily understood accounting standards.
You can pay an accountant to fix those mistakes, as most business owners do, or you can fix the easy ones yourself. Could the enlightenment from seeing your own errors mean fewer next time? Would you save money if they never happened again? Could your accountant spend less time on the simple stuff, leaving more time for helping you solve the big problems?
Here are five common accounting mistakes that business owners make and some suggestions on how to fix them:
1) Accidentally Recording Transactions in a Prior Period — Once you’ve “closed the books” there really aren’t many reasons to change them. Still, some accounting applications allow you to make this mistake if you haven’t configured the software to lock prior period financials.
Quick Check: Make sure the Balance Sheet for last period hasn’t changed since you closed the books. For example, a 12/31/09 Balance Sheet printed on 1/1/10 should match one printed on 9/30/10. If not, you need to investigate.
2) Accidentally Recording Customer Payments as Deposits — This is an honest mistake that can cause real problems. You get a check from a customer. You deposit it into your bank account. You record it as a deposit in your accounting system. Done. Unless your accounting system includes invoicing, then you could be understating your sales taxes.
Quick Check: Make sure the Total Sales listed on your Sales Tax Liability report matches Total Sales as reported on your Income Statement for the same period.
3) Unapplied Vendor Credits — As silly as it seems, paying twice is a common problem particularly when a business has a large number of vendors or more than one person is involved with the accounting function. Don’t forget to check for open credits before you pay vendor invoices.
Quick Check: Most accounting systems provide a report called an A/P Aging. Check this report for values that seem odd in comparison to the others on the report. For example, if most of the values are positive amounts, a negative value might signal an unapplied credit.
4) Negative Inventory — Not all businesses have inventory. A common mistake for those that do is accidentally recording the sale of inventory to a customer before it’s received. In other words, it’s on the shelf, but hasn’t been received into the accounting system. In short, this scenario can make a real mess of your financial statements.
Quick Check: Scan your inventory listing and investigate any items that show negative quantities.
5) Misclassifying Expenses — When you’re in a rush it’s easy to pick the wrong expense description or forget to classify an expense altogether. The bad news is that if you don’t assign that lease payment to the right category, then reports you generate from the accounting system may not properly reflect what’s actually happening in your business.
Quick Check: Scan your expenses periodically to make sure the data appears reasonable. For example, if lease expense drops significantly in one month it might be a classification problem. Many accounting systems enable you to automatically assign categories to specific vendors as a way to minimize errors.