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Bad Accounting Practices to Avoid

Keeping your company books and financial records in order is a time consuming process that is a challenge for all business owners. Here are common accounting problems we often see when we take on new business clients. How many of these issues affect your business?

Not keeping the accounting records up to date. Waiting too long to record information in your accounting system actually requires more time to get back on track. Complex entries get even more complicated as your ability to recall transaction details diminishes over time. Set a goal to have all transactions entered every month at a minimum.

Not performing timely bank reconciliations. When you receive your bank statements, ensure they are reconciled to your books within a day or two. Bank reconciliations almost always identify errors. Delaying bank reconciliations will add unneeded complexity and decrease your chances of correcting an error in a timely manner.

Mixing in personal expenses. Having non-business costs included in your business accounts creates several problems. First, your financial statements will not accurately portray your business performance. Second, personal expenses are a drag on your available cash. Third, the IRS is quick to deny legitimate business expenses as tax deductions if it perceives that personal expenses are blended with business expenses. Common sources of non-business expenses to watch for are charges you make on credit cards and expense reimbursements to owners.

Entering capital assets as expenses. Because capital assets provide long-term value, they are entered on the balance sheet and depreciated over multiple years. Misclassifying a capital asset as an expense will torpedo your net income for that period and potentially create an audit problem. To avoid this, review large purchases and comb expense accounts likely to be hiding capital assets during your month-end review.

Mishandling sales tax. Many businesses incorrectly record sales tax they receive as revenue. Sales tax you receive should be entered as a liability until you remit it to the proper tax authority, ultimately avoiding your income statement altogether. This is because it is not your money. You are holding that money in trust for each respective state. On the other hand, sales tax you pay on purchases should be booked as an expense.

Not having proper documentation. Most business owners know that you need to save invoices and receipts for sales and purchases, but what about documentation for adjustments and journal entries? Proving these is just as important. Contracts, time sheets and shipping documents are some examples of substantiation required to support your financial statements.

Spending too much of your valuable time. Don’t get bogged down worrying about the inner workings of accounting rules and tax laws. Partnering with an expert to handle your accounting needs can free you up to use your expertise where it’s needed the most — running and growing your business.

- Mark S Gleason CPA

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