Accurate bookkeeping is essential to operating a successful small business. The problems created by inadequate bookkeeping practices can have significant, long-lasting consequences. Here are four common pitfalls — and how to avoid them with the right knowledge and tools.
Commingled bank accounts
It’s important to maintain a separate dedicated bank account for business transactions. Using the owner’s personal accounts for business purposes can have legal and tax implications. Separate accounts also make it easier to track business expenses and prepare tax returns.
With a separate bank account, you can set up payments for recurring business expenses. It’s also important to review and reconcile your business records to bank statements on a regular basis.
The use of personal credit for business expenses
Drawing from personal credit sources provides quick access to funds when you’re launching a new venture. However, they often come with high interest rates and fees. Using personal credit for business expenses also makes it harder to separate personal and business expenses for accounting and tax purposes.
To get a business credit line, you’ll need to contact your bank and complete an application. While the application process may take some time, it’s worth the effort. Credit lines help establish a credit history in the company’s name, which is essential as the business grows and needs additional capital to purchase major assets and pursue investment opportunities.
Lax recordkeeping practices
Accountants dread when a small business owner shows up to tax preparation meetings with a shoebox of receipts — or no documentation at all. Well-prepared owners have organized records, including paper filing systems, digital storage, and backup solutions, to substantiate expenses for tax and accounting purposes.
By retaining original source documents — such as receipts, invoices, bank statements and contracts — you can track the business’s financial performance and file state and federal tax forms with ease. And you’re prepared if the IRS challenges any deductions or credits you claim for business-related items. Without source documents, the IRS is more likely to disallow business tax breaks and assess penalties and fines.
In general, business records must be retained for a period ranging from three to seven years, depending on the nature of the record. Contact us for specific record retention guidelines.
Not Hiring an Experienced Bookkeeper and Professional Accountant
Many business owners, regardless of the size of their business, don’t get bookkeeping and accounting help from professionals. Instead, they do all the work themselves or get someone inexperienced to do the job. There’s a danger of messing up your financial records or missing tax deadlines when someone inexperienced handles bookkeeping and accounting. Despite this, there are business owners who don’t see hiring bookkeepers and accountants as an investment but rather as a waste of money. It also speaks volumes about how they value their time.
The most practical solution is to hire an experienced bookkeeper and a professional accountant. Bookkeepers will prepare your books and financial statements, while accountants will guide you through taxes and financial decisions. Hiring trustworthy professionals to do the work for you ensures proper recording of your financial transactions, proper handling of your finances, and compliance to financial and legal requirements.
We can help
Implementing sound bookkeeping practices can empower you to improve your business’s financial management and increase confidence in your financial reporting. It reduces the stress of running a business and provides essential information for your business to thrive in today’s competitive markets. Contact us to help build a solid bookkeeping foundation.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation.
