It’s no secret that bookkeeping is probably the least favorite task of most small business owners because it doesn’t produce any profit and can be overwhelming. Outsourcing this piece of your operation can be beneficial, but doing it yourself has its benefits too. Doing your own bookkeeping can be pretty tricky unless you have an accounting background or know someone who does, but that shouldn’t hold you back. I’m sharing the five most common bookkeeping mistakes I see when reviewing clients’ work, how you can fix them and have peace of mind you’re on the right track.
1. Payments to yourself are not an expense
If you’re a sole proprietor or single-member LLC, make sure you do not categorize payments to yourself as an expense. This lowers your overall profit and gives you a false sense of the income you’ll need to pay tax on. When you complete your bookkeeping payments to yourself should be categorized into an equity account called “Owner’s Draw.”
Note: if you become an S-corporation, you will have to set up payroll and you will report the wages paid to yourself through a salary as an expense.
2. Reconcile your accounts each and every month
Many new small business owners have never reconciled an account before and think that it’s a mysterious accounting term that only accountants have to worry about. I have good news – it’s not as scary as you think and you can do it!
Reconciling an account is similar to balancing a checkbook, all you have to do is go line-by-line through your transactions to make sure what’s in your bookkeeping program matches up exactly with the bank statement. #bookkeeping… Share on X If it doesn’t, don’t ignore it. Now is the time to figure out why because this issue will not go away and your books will not be accurate for tax time.
Many bookkeeping programs (Xero, Quickbooks, Wave) have tools built in to make this a quick and easy process. If you’re using a program that doesn’t have a reconciliation tool (such as Excel), I suggest printing out your monthly bank statements for each business account. As you work through your list of transactions give each item a category (advertising, contractors, meals, travel, etc.) and mark it off your bank statement.
3. Transfers are not income
Many small business owners have a PayPal account (used for business) and a checking account. When we sell a product or service using PayPal there is a balance in that account which we need to transfer to our bank account. When we transfer our money out of PayPal to our bank account many cloud accounting programs see that transfer the same as they see income, meaning your income is incorrectly counted twice. To their software, it looks like a deposit because the total cash increased. When you reconcile your accounts make sure to categorize these transactions as transfers instead of sales or PayPal sales.
4. Save all of your receipts
If you have ever talked to someone who has gone through an IRS audit, one of the first things they will advise you on is to save all of your receipts. That doesn’t mean you have to have paper piling up in your office, you can keep digital copies of your receipts. Many bookkeeping programs are incorporating the ability to take a picture of a receipt with your phone and link it to the actual expense in the program. If you do not keep your receipts electronically, file them in folders by month and year. This will make your life much easier in the event that you ever get audited. Plan to keep these receipts for seven years.
5. Never use your business account for personal purchases
Want to significantly reduce the amount of time spent on categorizing and reconciling your accounts each month? Keep all of your business and personal transactions separate. It makes life so much easier if you know that every transaction on an account has a business purpose and you do not have to go back and refresh your memory on your personal transactions each month.
If you accidentally make a personal purchase on a business card, it’s not the end of the world. You can reimburse your business account for the purchase, or you can record the purchase as an “Owner’s Draw.”
If you’ve reviewed your bookkeeping and processes and find yourself doing one or more of these common mistakes, don’t stress out. Now is the perfect time to go back and review your bookkeeping and make any corrections before tax time gets here.
Amy Northard is the Accountant for Creatives®. She is a Certified Public Accountant (CPA) who specializes in working with creative small business owners to make taxes and bookkeeping less stressful. She has a passion for helping small business owners wade through all the financial things it takes to start and operate a business so they can focus on their craft. In addition to preparing tax returns and bookkeeping for clients all over the U.S., Amy enjoys teaching small business financial basics through her online course Be Your Own CFO.