All businesses, whether sole proprietorships, partnerships or corporations, must pay attention to bookkeeping because it is an indicator of a company’s financial health and profitability. Bookkeeping errors could spell doom, while books in tip top shape would give one a clear picture of a business’s fiscal situation.
The following are common bookkeeping mistakes an entrepreneur would do well to avoid:
- No reconciliation of bank transactions. Small business owners often run their accounting on cash basis, where cash movements are regarded as indicators of profitability. They monitor actual cash collections and disbursements but do not reconcile transactions the bank makes to their account, such as unrecorded charges, overdrafts, interest income or expenses, and bounced checks. The consequence of this is inaccurate cash balances on record.
- Failure to reconcile receivables with returns and withholding taxes. Do not confuse credit memos with sales returns and discounts, as well as creditable tax the customer had withheld, because it would result in an overstated accounts receivable balance. It may also cause an embarrassing situation where the cashier demands payment from a customer who has already paid.
- Misclassification of accounts. Accounting records without proper account titles tempt the bookkeeper into placing similar expenses under one account. For example, transportation, personal meals, and meeting expenses are booked under representation expense account when this could be properly classified under three different account titles. Doing so would lead to exaggerated representation expenses that could exceed the allowable limit set by the Bureau of Internal Revenue, and decreasing expenses while increasing taxable income.
- Recording prepayments and deposits as expenses instead of assets. A good bookkeeper should know when an item should be expensed or capitalized. Examples of capitalized items are rental deposit, business permit and fire insurance payments, and advances for a store space. (Some bookkeepers automatically record these as expenses received during the month instead of recording them as assets.) This would overstate the total operating expenses while understating net income if these items were booked as expenses during the month.
- Forgetting to set up accounts. This normally happens in transactions involving withholding taxes from the total amount payable to the supplier. An example of this is a franchisee paying his franchiser royalty fees. The franchisee’s bookkeeper may have properly withheld the corresponding tax on the royalty payment when he filed the remittance form with the BIR. But when she recorded the withholding tax, she might have forgotten to set up the account under payables, thereby erroneously creating a negative balance in the book, which would be misinterpreted as an overpayment.
- No monitoring of petty cash fund. Improperly monitored petty cash transactions usually end up unrecorded in the books at the end of an accounting period. To avoid an unbalanced fund, one must set a fixed amount for petty cash fund and replenish it every time it runs out. The bookkeeper records and classifies the expense transactions while topping up the petty cash.
- Failure to monitor liquidation of advances. The Employee Advances account is considered one of the most abused accounts, as borrowers usually fail to account for their disbursements on time. A policy should be put in place where advances are settled after a certain number of days. Let’s say in three day’s time, all expenses made must be accounted for and any excess returned. If not, deduct the unsettled advances against the employee’s salary.
- Incorrect supporting papers. Mistakes usually occur on the dates of purchase orders, delivery receipts, and receiving reports, resulting in delays in expense reporting.
- Forgetting to track reimbursable expenses. Out-of-pocket expenses where personal credit cards or checks are used should be reimbursed. Otherwise, it would overstate one’s income in the books.
- Lack of communication. A business owner must inform his bookkeeper of transactions that could significantly change the way they are recorded in the book. An example of this would be a verbal write-off of an account receivable from a customer in exchange for the latter’s services.
One surefire way to avoid committing these mistakes is to have a good grasp of sound bookkeeping practices. One can hone his skills by attending seminars, taking short bookkeeping courses, or getting international professional certifications like the Certified Bookkeeper Program. Bookkeepers, on the other hand, must also keep abreast of the latest tax laws and practice, because as they always say, no transaction ever takes place if it’s not on paper.