Bookkeeping is quite possibly the least favorite task of most small business owners. It does not produce a profit and it can be overwhelming. It is easy to focus your hours on those things that are bringing in the income. After all, that is what you started your business for, and your good at it! But bookkeeping is essential to the success of your business. Here are 5 common mistakes that you want to avoid:
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. Doing this will lower your overall profit and it gives you a false sense of the income that you will need to pay taxes on. You do not want to end up unprepared at tax time. It’s not a good feeling to end up with a big tax bill and not enough money set aside to pay it. You have worked hard. Save yourself the heartache of experiencing that. When you complete your bookkeeping payments to yourself, make sure they are categorized into an equity account called “Owner’s Draw”.
NOTE: If you become an S-corp, you will set up payroll and you’ll report those wages paid to yourself through a salary as an expense.
2. Transfers are not income – Many small business owners have a PayPal account and a checking account. When you sell a product or service using PayPal, there is a balance in that account which will need to be transferred to the bank account. When you transfer the money out of PayPal to the bank account, many cloud accounting programs will try to see that transfer the same way they see income, meaning that your income is incorrectly counted twice. To the software, it looks like a deposit because the total cash increased. When you reconcile your accounts, make sure you catch these transactions and categorize them as transfers instead of sales. Showing too much income means you would pay more than your fair share of taxes. We all want to pay our share, and not more than our share.
3. Reconcile your accounts each and every month – reconciling is not just for accountants. If you are doing your own bookkeeping, don’t avoid reconciling each of your accounts. Reconciling an account is similar to balancing your checkbook. Go line-by-line through your transactions to make sure that what’s in your bookkeeping program matches up exactly with the bank statement. If it doesn’t, don’t ignore it. This is where you research and find out why there is a discrepancy. Those discrepancies won’t just go away.
4. Save all of your receipts – You can even keep digital copies of your receipts. There are many apps that will take a picture of your receipt and send it right to your bookkeeping program. If you’re bookkeeping using a spreadsheet, keep all of your receipts. If you ever talk to someone who has gone through an audit, the first thing that they will probably tell you is to keep all of your receipts. Also, receipts will help you keep track of every expense your business incurs. Those expenses can reduce the amount of taxes you’ll pay. You don’t want to miss out on those expenses.
5. Don't use your business account for personal purchases – Keep your business and personal transactions separate. It will make your life soooo much easier if you know that every transaction on an account has a business purpose. You do not want to spend hours reconciling an account each month. And going back and racking your brain, trying to remember each personal transaction is just no fun. Now if you do accidentally make a personal purchase, it’s not the end of the world. You can record it as an “Owner’s Draw”.
This list is not meant to cause you to stress out. This is a great time to go back and review and make changes before tax time gets here.