The occasional bookkeeping error is inevitable, but as errors add up, you can find your small business in real trouble at tax time. Keep an eye out for these common payroll errors and other accounting mistakes, and implement policies to identify and prevent them from occurring in the first place.
As small businesses grow, the increasing complexity of cash flows can cause you to overlook transactions in your record-keeping, particularly for small or infrequent transactions. While it may be common for small businesses to toss receipts into a shoebox and figure things out later, this can lead to accounting headaches at the end of the year and increases the likelihood of missing entries. To avoid this, set up a strict plan for entering every transaction as it occurs, especially for funds such as petty cash. Save your receipts for the CRA, but keep a digital record too.
Failure to Account for Employee Incentives
In most cases, the CRA considers any type of employee compensation as taxable. This includes cash prizes, employee benefits and non-cash rewards, but the CRA does allow some exceptions for non-cash gifts and awards. You do not have to claim trivial items, such as a mug or plaque, and you can exempt the value of a gift up to a $500 a year. Any value over $500 is taxable, however, so make sure you include this in your payroll tax liability calculations.
Recording Transactions in the Wrong Period
For most small businesses, the CRA requires you to use accrual accounting to calculate your earnings when you file your taxes. This means you should record revenue and expenses when you incur them, whether or not cash or other assets have exchanged hands yet. If you sell goods or services on a payment plan, you must recognize the sale at the time it occurred. If, instead, you record it as you receive payment, this could cause the revenue to fall into the wrong period, which can skew your numbers at the end of the year.
It is also possible to accidentally record entries during prior periods due to entry errors. If you can, lock prior accounting periods so you can’t accidentally make changes to past periods, or check your past balance sheets against your system’s current date to make sure past periods didn’t change. Checking your balance sheet is a good way to identify other errors as well, such as keying a transaction to the wrong account.
Failing to Create a Backup
Your digital records are only as good as your last backup, so back up your accounting records frequently. Forgetting to back up your books can be devastating when a hard drive fails, so set up your system and accounting software for regular automatic backups. You can do this to a separate drive or server, or you can rely on an online cloud storage service, which also offers the convenience of access from anywhere.
Ask for Help
Small business owners often have to wear many hats, but sometimes it’s best to know your limitations. Accounting is the backbone of your financial planning. Even small errors can have devastating consequences at tax time, and miscalculations of revenue and expenses can put the financial health of your business in danger. Not seeking professional accounting services or paying a competitive salary to internal accountants may save money in the short-term, but weigh those savings against the possible risks if bookkeeping errors go undiscovered.
Also, make sure you make good use of the tools already at your disposal. Quickbooks has a number of warning features that alert you of possible errors, so take the time to investigate each one thoroughly. Take the time to set up good accounting practices and carefully review your records as you go and you can avoid these payroll and accounting errors.