12 Common Bookkeeping Mistakes to Avoid

Here is our list of the top bookkeeping mistakes. 

Bookkeeping mistakes are common errors and blunders that are made when balancing the books and keeping track of a company’s expenses. Examples include inconsistent account reconciliation, incorrect categorization of expenses, and failure to back up financial data. The purpose of this list is to highlight common mistakes in bookkeeping and provide solutions to help businesses thrive.

These ideas are similar to examples of bookkeeping basics, the best accounting software, and  online bookkeeping services for small businesses. 

This list includes: 

• best practices in bookkeeping
• bookkeeping for small businesses
• bookkeeping problems and solutions
• accounting services
• hiring a bookkeeper

Here we go!

List of bookkeeping mistakes

In the world of bookkeeping, even the smallest mistakes can lead to undesirable consequences. From poor record keeping to improperly categorizing expenses, there are many mistakes to look out for. 

Without further ado here are some common bookkeeping mistakes to avoid at all costs. 

1. Lack of organization

When it comes to bookkeeping problems and solutions, lack of organization may be one of the most common issues. For example, if a business owner takes on the task of balancing the books, they must have a secure location where they can keep all financial documents organized and categorized. Failure to do so can result in lost receipts, missed or overlooked transactions, and inaccurate reporting. 

Here are a few tips for keeping a well-organized bookkeeping system: 

• Maintain a clear and easy-to-follow filing system for physical and digital documents. 
• Categorize all documents correctly and logically. 
• Update financial records regularly to ensure accuracy. 
• Consistently work on data entry to avoid backlogs. 
• Consider investing in accounting or bookkeeping software. 
• Automate processes to reduce the risk of manual errors. 

Staying organized in bookkeeping will help ensure accuracy and improve efficiency in your internal processes.  

2. Inconsistent account reconciliation 

Reconciling accounts is one of the most fundamental tasks of bookkeeping. A general rule of thumb is to reconcile accounts at a minimum of once a month. Forgetting to reconcile accounts consistently can lead to roadblocks and financial issues. 

Reconciliation is essential for all businesses. This practice ensures accuracy, providing the most accurate representation of your company’s financial standing. Additionally, reconciliation identifies potential errors or discrepancies in reporting. Catching these errors early on allows business owners to promptly resolve any issues that arise. 

Here’s a quick guide to proper reconciliation: 

1. Gather all records, including bank statements, accounts receivable, and accounts payable. 
2. Compare transactions, looking at both your bookkeeper’s records and external statements. 
3. Identify and investigate any errors or issues that arise. 
4. Based on your reconciliation findings, make adjustments and updates to your financial records as needed. 
5. Document all findings from the reconciliation process in detail. These records may be needed for future reference or auditing purposes.  

Making sure that your business’s bank statements are reconciled once a month is one of the best ways to minimize errors and spot any issues before they escalate. 

3. Insufficient record keeping 

One of the most important roles of a bookkeeper is to maintain accurate financial records for a company. All expenses, large or small, must be recorded and logged into reports. Doing so ensures that a business remains compliant with various tax regulations while staying organized in its day-to-day financial management. 

Failure to keep sufficient records can result in serious issues, such as inaccurate financial reporting, audit challenges, and lack of transparency in a business’s financial performance. All of these consequences can factor into poor decision-making on a leader’s behalf. 

Maintaining organized financial records can be difficult for beginners. Here are some tips to help business leaders ensure sufficient record-keeping: 

• Record all financial transactions promptly. 
• Consistently log and document income and expenses. 
• Save all receipts from company transactions, including petty cash receipts. 
• Implement an organized filing system to organize all documents and receipts. 
• Use digital tools and software to streamline your processes. 
• Regularly back up financial data to avoid losses. 

Maintaining thorough financial records is crucial for all businesses. Maintaining accurate records is often considered the backbone of good bookkeeping. Hiring a bookkeeper is one of the best ways to ensure the most accurate and detailed record keeping to ensure your company is in optimal financial health.  

4. Mixing personal and business expenses 

Comingling personal and professional expenses can quickly become a nightmare. Mixing these expenses will make it difficult to keep personal and business spending organized and separated. This becomes an even bigger issue if your business is audited. 

This is why one of the best practices in bookkeeping is to never use personal funds to cover business expenses. Instead, consider these tips: 

• Open a small business credit card.
• Keep all business finances in a small business bank account.
• Differentiate business bank cards from personal bank cards.
• Keep business bank statements on hand for easy access.

Mixing personal and business spending can lead to messy bookkeeping. By avoiding this mistake, you will ensure that your books are always accurate and organized. 

5. Incorrect categorization of expenses

When it comes to balancing the books, organization is key – and maintaining a chart of accounts is one of the best ways to stay organized. In bookkeeping, a chart of accounts is defined as a list that contains all financial accounts and reference numbers. This list is grouped into categories, such as assets, liabilities, equity, revenue, and expenses. 

Keeping your chart of accounts organized is crucial. Incorrectly categorizing expenses and transactions is a recipe for disaster. Furthermore, misclassifying transactions can lead to inaccurate financial records. Some of the most common errors in categorizing expenses include duplicating categories or entering expenses into the wrong categories. 

These are some best practices to help business owners accurately categorize transactions: 

• Create a detailed and organized chart of accounts.
• Review and update categories consistently.
• Train bookkeeping staff on proper categorization methods.
• Consider using accounting software with automation features.

Following these best practices and keeping all categories organized can help businesses minimize the risk of inaccurate financial records. 

6. Failing to back up financial data 

It is always a good idea to back up all financial data related to your company. Failing to do so can put your company at risk of data loss. Losing important data, such as financial records, can lead to a complete disruption of your company’s operations, as well as bring up potential compliance issues.

One way to mitigate these risks is by implementing consistent data back-ups using a cloud-based solution. Cloud-based solutions are versatile and flexible, allowing users to securely access data from any location. These services also come with advanced security measures to protect confidential company data and documents. 

Implementing regular data back-ups via a cloud-based solution is one of the best ways to keep your data secure while avoiding errors. 

7. Disregarding financial statements 

Financial statements provide a deeper look into your business’s finances. Not reading or paying attention to these statements can set your company up for failure. For example, you could miss out on opportunities to generate revenue or maximize tax deductions. 

Financial statements can benefit your company in many ways. For example, these statements can help business owners: 

• Stick to a budget
• Observe financial trends 
• Apply for bank loans
• Track spending 
• Find areas to save money

Staying on top of financial statements can help business leaders make smarter financial decisions for the business. Plus, different accounting services are designed to help business owners stay on top of financial statements. If you are unsure of how to read financial statements, an accountant or bookkeeper would be a valuable asset to your team. 

8. Forgetting to save receipts 

No matter the price, saving receipts is essential in proper bookkeeping. Even small receipts can provide proof or backup documentation of critical transactions. These receipts will truly come in handy when bookkeepers and accountants file the company’s taxes and claim deductions. 

A general rule of thumb is to save receipts for at least seven years. You can save physical copies of receipts if needed. However, receipts can also be saved digitally. In fact, there are lots of apps and online tools designed to keep your receipts safe.   

9. Improperly classifying employees 

Classifying employees correctly is crucial in avoiding potential tax penalties, and even lawsuits. This is why it is important to classify employees correctly. For example, you can classify your team according to full-time staff, independent contractors, freelancers, and consultants. 

If you are not sure if someone on your team is an employee or contractor, you can ask yourself the following questions: How does this individual receive their pay? Does this worker receive benefits? Does the company pay taxes on this worker’s behalf? 

Employees earn a regular wage, receive benefits, and have taxes taken out of their paychecks. Additionally, employees oftentimes adhere to a strict work schedule set by their employer. Independent contractors, on the other hand, receive their pay based on the projects they complete. These workers pay their taxes and work based on schedules they set for themselves. Independent contractors are considered self-employed by the IRS. 

Accurately classifying employees is essential, especially in bookkeeping for small businesses. Mistakenly classifying a full-time employee as a contractor can not only ruin your books but can also lead to more serious consequences. In fact, classifying employees incorrectly can lead to various fines from the IRS. 

10. Disregarding petty cash transactions 

Although most company transactions should be made via business bank accounts, a best practice is to have some petty cash on hand. Petty cash is defined as an amount of cash that can be used for small purchases and expenses. Although the amount may differ across companies, the purpose of these funds is to cover any regular or unexpected expenses that arise. 

A common bookkeeping mistake is ignoring or disregarding your business’s petty cash transactions. Regardless of the form in which the funds are withdrawn, all transactions must be properly recorded to avoid any issues. 

When it comes to these bookkeeping problems and solutions, using a petty cash box is a great way to steer clear of mistakes. Each time money is taken from the petty cash box, be sure to log the amount as well as the purpose for which it was used. Additionally, it is equally important to save receipts for any transactions made using petty cash. 

11. Not staying up-to-date on tax laws and regulations 

As a business owner or bookkeeper, it is crucial to stay in the know when it comes to tax laws and federal regulations. Overlooking these laws can have serious consequences, including penalties and fines. 

Staying up-to-date on tax laws and federal regulations is necessary to maintain accuracy in your business’s financial reporting and compliance. Outdated tax laws may cause you to miss out on possible deductions, which could affect the company’s overall financial health. Luckily, most accounting services are equipped to bring these updates to your attention and find ways to integrate them into your company’s bookkeeping processes. 

Implementing quarterly training sessions, as well as meeting with tax professionals and conducting annual tax reviews, are great ways to keep your business informed about tax law changes while ensuring compliance at all times. 

12. Relying on manual processes 

While manual accounting systems may seem simple, oftentimes, these processes can be a hindrance to bookkeeping for small businesses. Relying solely on manual bookkeeping methods can put your company at risk of various limitations and inaccuracies. 

Manual data entry can be tedious and time-consuming. Plus, this practice is especially prone to human error since most spreadsheet programs do not have the functionality to identify incorrect data entry. Switching over to well-known accounting software can be a more suitable fit in today’s fast-paced environment. 

Some benefits of accounting technology and software include: 

• Task automation 
• Enhanced accuracy
• Streamlined financial management 
• Real-time financial insights and data 

Choosing the right software depends on your business’s unique needs. However, it is best to focus on integration capabilities, security measures, and user experience. 

Transitioning to accounting software can help businesses avoid errors and improve accuracy in reporting while streamlining the process significantly. 

Conclusion

Proper bookkeeping is the cornerstone of a company’s financial stability and success. However, there are many errors that business owners can fall into, from inconsistent account reconciliation to not staying updated on tax laws and regulations. Being aware of common bookkeeping errors – and recognizing innovative and useful solutions – can help bookkeepers and business owners get ahead of potential issues and avoid problems down the line. 

Next, check out bookkeeping vs accounting, free and paid online bookkeeping services, and reasons why bookkeeping is important. 

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Author: Julia Kelly

Co-founder at Rigits

I write about how small business owners can better understand and utilize their financials for growth.

Julia Kelly