Everybody makes mistakes. Often they are small innocuous ones, like leaving your keys in the car or forgetting your great uncle’s birthday. However, if you are self-employed and doing your own finances, mistakes here can be the difference between running a successful business and allegations of fraud. Our advice on the five most common accounting mistakes can help keep you in good financial shape.
1. Not Recording Low Income Projects
Easy to forget, small transactions can often simply slip into your bank account and never be thought of again. Something like a small freelance job that brings in maybe $30. The issue here is that in the event of an audit, these little discrepancies will be highlighted and could add up to a large penalty. It is important then, to always record your business transactions, no matter how small.
2. Not Keeping Your Books Up To Date
A mismatch between your financial records (usually simply called books) and your bank transactions is a massive red flag to any taxman investigating your finances. Though usually it is nothing more than an honest mistake, it can unfortunately make it look as though you have something to hide. Keeping on top of your books and updating your records as and when transactions are made will help you keep your numbers manageable. It is much more difficult to try and explain where a sum of money went several years ago than it is to simply update your books accurately as you go along. Other potential hazards of out of date books include missing budget marks, overspending and missing payments to suppliers.
3. Not Keeping Receipts Or Invoices
When your financial records start to grow in volume, it can be tempting to try and keep things tidy by shredding old receipts and invoices that you think you no longer need — but this could end up being a mistake. All these documents are essentially legal evidence of financial transactions by your business, and by destroying them you are destroying the evidence that things are being done in a fair and legal way. The IRS is one of the few places where you must produce evidence or else you will be presumed guilty. You must hold onto documents that relate to your company’s finances for at least seven years, though sometimes an even longer timespan is advisable.
4. Mixing Business (Accounts) With Pleasure
A very common mistake amongst the self-employed, especially when operating a small business, is maintaining a single bank account, one that is used for both business and personal finances. This can make keeping track of business purchases difficult and also incurs extra difficulties in the event of an audit, as the IRS has to decipher what is business and what isn’t. It is far simpler to keep two accounts, one for business purchases and income, and another one for personal spending.
5. Waiting Too Long to Consult An Accountant
Once problems begin to occur, there is a definite temptation to battle through on your own. It’s quite common to assume that if you’ve started your own business, then surely you can solve a few financial problems. The fact of the matter is though, developing sound financial skills and knowledge is hard work, accountants have to train for years to claim the right to call themselves just that. If there are signs that you are losing track of your finances, don’t waste time trying to dig yourself out of a hole — instead get in touch with a reputable accountant immediately.
Russell Smith is an experienced chartered accountant with over a decade of experience running his own business.