Top 10 Bookkeeping Mistakes
When financial statements are prepared, There are number of hindrances and errors which are to be encountered in order to provide accurate bookkeeping services from weaccountax accountants.
- Small business transactions: Ignoring supporting documents of small business transactions is considered as one of the deadliest sins of bookkeeping. The main concept of bookkeeping is useless if the recording of the transaction is without any evidence of the business transaction actually happening. Even during the times of financial external audits, supporting documents to even smallest of the transaction are considered to be important. It is reported as a weakness in controls if the proper record of the financial transaction is not being maintained. As it makes the business prone to financial fraud consolidated from numerous smaller frauds over a longer period of time.
- Cost-benefit analysis: Maintaining a bookkeeping system comes at a cost and there is a limit to which business can derive benefit out of it based on the nature of the business. If a business is driving lesser benefit when compared to the cost being incurred in implementing and running this bookkeeping system then it will be considered as a flaw in business planning and decision making.
- Personal and business expenses: Sometimes in small businesses, the financial transactions of the business and owners’ is being confused and are being mingled up as the same entity expenses. This results in wrong allocations of expenses and drawings from the business and often resulting in the miscalculation of the investment available in the business.
- Contractors and employees: Often the employees and self-employed contractors of the company are confused and wrongly allocated. Various regulatory bodies in various countries require a list of human resource and their details. This wrongly allocated can result in providing wrong details to the regulatory authority. Because the wrong data provided to regulatory authorities can cause fine and even imprisonment. Clearly, differentiation in this regard is highly required.
- Timely reconciliations: Bank reconciliations are often considered useless, this piles up the undetected entries in the bank statements the resulting in huge differences on the longer run. Because without bank reconciliation the cash and bank of the company can never depict the actual situation of the business.
- Petty cash: Petty cash, is often ignored and is not accounted for. Just because petty cash holds the smaller amount of cash doesn’t mean that financial reporting should not result from the movement in the petty cash accounts to ensure the authenticity of the financial reporting.
- Profit and cash: As the businesses start to grow there has to be a clear differentiation between the cash flow and profit reporting. It enables the business to monitor both aspects separately.
Identify the problem in each of the elements and deal with it accordingly. Often profitability seems to be normal but cash deficits can push the company into bankruptcy and vice versa.
- Internal controls: Ignoring the importance of internal controls can be classified as one of the most serious blunders of bookkeeping. As bookkeeping consist numbers and financials, it is very prone to errors and frauds. Adequate internal controls are necessary to preserve the integrity of the financial accounting system and its related reporting.
- Paperless Environment: As the businesses are moving towards paperless environment there are businesses which are adamant to stay on paper-based working. This approach makes it difficult for the company to manage data if the volume increases from a certain range. Because physical existence consumes more space as compared to the digital memory of the system.
- Cash / Accrual accounting: After a certain size, the best practice is the switch from the cash to accrual based accounting to ensure matching concept. Because when the transactions are correctly matched with the financial year, then it will produce better reporting.
As a conclusion, when these mistakes are timely identified and remove, this could improve the financial reporting by many folds.