December 19, 2015
Accounting is defined as the systematic and comprehensive recording of financial transactions pertaining to a business. It also refers to the process of summarizing, analysing and reporting these transactions.
Accounts give you all the information that is needed to take appropriate decisions about business. The entire financial health of the company depends on the accounting methods that are adopted. Some of the errors could be small and not affecting, but there are various mistakes if done can cost quite a bit in the long run.
Risk is an inherent part of any business. No matter how careful one is in reporting, it’s always open to mistakes. Sometimes certain accounting mistakes that seem to be small can have a big impact on the health, growth and longevity of a business. Thereby, accounting methods need to be correct in order to have a profitable business.
Some of the mistakes that one needs to avoid in the basic accounting done on daily basis are elaborated below. One needs to keep these on the do-not-do list, to generate the profits expected.
Mistake 1: Not hiring the right professional for taxes and other accounting
Many a times there is a wrong mind set of business owners that all accounting done on own is better. This is done as a cost saving measure. But this can sometimes cost an individual a big buck. There could be errors on the tax front where one may not claim for all the deductions that one is eligible for.
On the other hand, having a professional in place can help in being updated with the changing tax laws and having all the data in place for future planning. Being professionals they would take all the necessary steps needed for tackling different financial situations. Hence, having a professional is advantageous with regards to an added check on the finances, as success of small businesses depend on the accuracy and efficiency in maintaining the finances of the company.
Mistake 2: Not recording cash expenses and failing to keep expense receipts
Keeping a track of debit / credit cards as well as cheques is quite easy with the facilities through banks. Thereby, these are all recorded to calculate the profits at the end of the year.
However, the expenses that are done through cash are generally not recorded accurately. Due to this the income is generally overstated which is a loss to the entrepreneur. That is why, it is essential to keep a record of all the cash expenditures for calculations at the end of the year.
Many a times, you face the issue of having an expense in books but have no clue of what the expense was for. This happens when you do not keep a tab of all the business expense receipts, which leads to incorrectly reported tax expenses. If you do not actually keep the physical bill receipts, the advanced methods of technologies have various techniques of maintaining digital copies which can be tallied for all the expenses of the year.
Mistake 3: Data entry errors
Accounting is all about numbers. In the past, all the data entry was done manually which led to it being more prone to errors. However, nowadays although there are various software to do the manual part, the risk remains the same. The entire system does have entry of numbers to a particular level done through human intervention. Thereby, any errors in number punching or decimals could have an impact as the error is carried forward across the different financial statements.
Mistake 4: Not keeping track of receivables and payables
Primary aspect of proper accounting is to record receivables to assure that the funds to the business are regularly tracked. It is essential to issue an invoice and record the receivable whenever received. Unreconciled receivables create confusion and one may end up overpaying on taxes. The same is applicable also for the payables in order to avoid hassles at the time of book closures.
Mistake 5: Inconsistency in Accounting
In order to ease the task of accounting, there are various sophisticated accounting software used on daily basis. However, one needs to keep in mind that the entire organization uses same accounting rules or else multiple accounting methods could lead to difference in reporting methods across different levels of the organization.
Mistake 6: Not backing up records regularly
Accounting efficiency is one of the key requisites for smooth running of a business. However, it is not always possible to anticipate technical flaws, crash down of systems, which could destroy all the data in spite of maintaining the best of accuracy. That is why, along with maintaining the records it is essential to also take backups regularly. These unexpected events can send all the records and efforts to maintain them, down the drain in a fraction of seconds.
Mistake 7: Different book keeping mistakes
There are various book keeping errors which cumulatively lead to blunders in accounts. It is essential to save all expense receipts and record them. Also it is required to keep track of reimbursable expenses. It is important to do books and bank reconciliation on the fixed dates. Petty cash is another segment that needs to be looked at regularly for final calculations. Employee classification should be well defined for the different calculations in terms of disbursement of funds and tax implications.
Finally, book keeping should be done regularly so that the base of accounts is correct and no errors are replicated in the future transactions. One must remember that the key to effective and efficient accounting is to record everything.
Mistake 8: Not doing appropriate budgeting
For any business it is mandatory to know what you starting with and what you aiming at. Budgeting is very important to know what we have in hand to invest and upto what levels are we on the breakeven point. The sales task can be taken according to what we hold in hand to disburse.
Failing to effectively budget for a business makes it difficult to gauge different costs to the company. This can cause one to spend more than required on projects which may or may not produce equivalent return on investment.
Mistake 9: Not understanding the difference between profit and cash flow
One should have clarity that cash flow defines the in and out of money in a company. On the other hand, profits are derived after the deduction of all expenses for generating sales of the company. Accounting errors can occur if the cash flows are considered for the profits of the company without it has actually made any. Also one should remember not to consider the sales till the product is delivered as recording earlier sales could mislead the sales forecast.
Mistake 10: Not having knowledge of the Accounting Software
It is very essential to select the correct accounting software and have 100% knowledge about the usage of the same. If one does not know the functionality of the software, then they are prone to making mistakes.
Any business whether on a small or large scale is the revenue generator for the entrepreneur. Of this, accounting is the backbone, on which the present and future of the business lies. It is therefore absolutely essential to have all accounting systems in place and appropriately managed in order to have smooth running of the business and generating the expected profits from the same.
Our counsellors will get in touch with you with more information about this topic.