CPA Teresa D. Davis has seen her share of small-business accounting mistakes. As a partner in the accounting firm Hill & Davis, Davis works with business owners ranging from landscape contractors to local professionals. Most of these small business accounting mistakes are simple to correct, but even easier to avoid once you’re aware of them.
The Top 3 Small Business Accounting Mistakes
Davis states that the top three mistakes she sees most frequently in her practice include failing to reconcile bank accounts on a regular basis, failing to apply payments to open receivables, and failing to back up data.
Who isn’t pressed for time? Skipping routine accounting tasks sounds like it will save time but can end up wasting precious time later when errors force you to unsnarl accounting tangles. Two out of three of Davis’ top accounting mistakes include items business owners often skip to save time.
“Failing to reconcile your bank accounts on a regular basis is a mistake I see a lot,” says Davis.
Another common problem Davis cites is failing to apply payments to open receivables. Many business owners simply record their bank deposits and fail to apply payments to receivables. This mistakes leads to incomplete or incorrect accounting data, showing open receivables when they are in fact paid. A similar mistake is recording check payments without linking them to accounts payable.
“Often I see clients wait until the end of the year to enter their data. Unfortunately, in their haste they fail to reconcile the bank accounts,” Davis says. “Failing to reconcile the bank accounts can result in lost deductions and/or incorrect numbers. It is best to enter the activity as you go along, reconcile the bank accounts as soon as the bank statement is available,” Davis advises. This will give you accurate cash balances and help you avoid gaps in your information.
Understand and Use All of Your Accounting Program’s Functions and Tools
Davis, a local QuickBooks Advisor, works with many business owners in her area setting up and using QuickBooks. She notes that many people are excited to use the program, but fail to learn how to use it properly. “I see situations where the client has billed a customer and when the payment is received it is deposited directly into the checking account,” she notes, for example. But “this does not remove the customer’s balance unless they ‘receive’ the payment first in the customer module,” she explains.
Lastly, Davis mentions something that is common to all small business data, not just accounting data: failing to back up data on an external hard drive. “Failing to back up … on a regular basis can be horrific,” she says. “Computers crash all the time, and usually when that happens we lose most of our input.”
To prevent this, Davis advises her clients to back up daily, if possible. “Hopefully you will never need it, but in the event your computer crashes, you will be glad you did.”
Cleaning Up Your Act
What if you’ve committed one of these three accounting mistakes? It’s not too late to change your ways. Moving forward, use these tips to stay on track with your accounting.
- Choose a day when you’ll enter data and record it on your calendar as a business appointment. That way, you’ve made a firm commitment to yourself (and your accounting personnel, if you have any) to update your records.
- Back up your files every time you update your accounting records.
- Make sure you apply payments to receivables in your accounting program. Don’t just enter it as a deposit in the bank — that won’t clear a receivable out of the system, and you’ll end up with a big mess to untangle at the end of the fiscal year.
With these tips and a little effort, you can easily avoid the most common small-business accounting mistakes.