[Updated 16 February 2024]
Regrettably, many avoidable but common accounting errors persist. As a small business owner, you likely grasp the substantial ramifications that accounting mistakes can have.
In the long run, even seemingly minor missteps can wield significant influence your business’ success. The reality is minor accounting errors and failures are especially common in newly formed businesses.
Let’s delve into five common accounting errors that small to medium sizes businesses encounter. Our insights draw from our own experience working with numerous small to medium sized business.
We’ve also looked into data from some of the most well-known and respected accounting organisations to support our conclusions.
Hopefully our practical tips will help you avoid these common accounting errors.
#1. Discarding Receipts
Discarding your expense receipts constitutes one of the most common accounting errors we see.
Countless business owners habitually dispose of receipts for business transactions when, in reality, they should preserve them diligently.
Don’t let valuable receipts end up in the trash! Discarding receipts can lead to missed deductions and financial headaches
Neglecting this practice can lead to complications later, impacting areas such as taxation, overall account management, and even your cash flow.
Have you ever found yourself scrutinising your bank statements without clearly recollecting specific expenses? If you have, you may already have felt the repercussions of this issue.
“Without good records, you’re flying blind.” – Richard Branson
Obviously, businesses routinely make purchases for supplies, stationery, materials, equipment, and occasionally personal expenses.
While some transactions are straightforward, many others are not. Especially those involving small, one-off payments for obscure items that are easily forgotten.
Regardless of the transaction’s size, maintaining the receipt is important for organisational integrity. Failing to retain these receipts can result in inadvertent errors during tax filing.
Such oversights could lead to unexpectedly higher tax liabilities or even penalties.
A prudent approach involves preserving every receipt for every purchase made.
Different countries have different rules for what constitutes a valid receipt. Some establish thresholds where proof of purchase, such as a bank statement entry, suffices.
Receipt-Keeping Guidance
For further receipt-keeping guidance, consider implementing one of the following strategies:
- Use your business debit or credit card exclusively for business-related transactions, avoiding any personal purchases.
- Use different colour envelopes to organise and store receipts and vouchers conveniently. Develop a habit of promptly placing receipts into the designated envelope. Avoid scattering them across various locations.
- Designate a specific day each week to review all receipts within the envelope. Input them into accounting tax system. Or save them to the cloud for later integration with your accounting software.
- Leverage Xero accounting software to automate the addition of receipts when you receive them, ensuring a streamlined, swift, and efficient process.
#2. Overlooking Cash Expenses
As we’ve emphasised before, it’s important for business owners to maintain meticulous records of all expenses. This practice helps offset as many of your expenses as possible from your taxable income.
It will give you a clearer understanding of your actual profit margins.
However, there’s a small caveat to consider. Transactions made via debit and credit cards, or cheques are typically seamlessly integrated into your bank account. You can automate them via Xero into your business accounts.
But what about your cash payments? These can easily slip from memory.
In many instances, numerous cash transactions are inadvertently omitted when compiling accounts. Consequently, this often leads to overstating taxable income and missing out on tax benefits from expenses.
To circumvent these common accounting errors, devise a method for documenting all cash payments. Remember to request receipts for cash purchases and promptly add them to Xero.
#3. Neglecting to Track Your receivables
While receiving payments can be a cause for celebration, it’s not without its responsibilities. It’s important to maintain a vigilant eye on receivables. Failing to do so can result in various challenges.
Each time you issue an invoice, a receivable is generated, representing the amount owed by one of your customers. It’s imperative to promptly mark invoices as “paid” upon receiving corresponding payments.
Despite its apparent simplicity, this step is often overlooked by many businesses.
Feeling lost in accounting jargon? Don’t worry, you’re not alone! Understanding complex terms can be a challenge for many business owners
One consequence of this oversight is delayed reconciliation of customer deposits and payments. Especially if your accounts are already lagging due to a hectic schedule. Allowing such backlogs to accumulate can spell significant trouble as tax filing deadlines approach.
Your accounts team may find themselves grappling with discrepancies between revenue accounts and recorded receivables. Rectifying them often entails hours of meticulous work, combing through paperwork to ensure accuracy.
The process could have been much simpler had things been kept organised from the outset.
“A sale isn’t a sale until you collect the money.” – Harvey Mackay
Errors in this area could even result in your business overpaying taxes. Ultimately, staying on top of receivables and maintaining clear records will save you considerable time, money, and effort in the long run.
Regularly recording your payments will help ensure smooth year-end operations. If you find this task tedious and prefer focusing on other business aspects, you’re not alone.
That’s why many small business owners opt for virtual bookkeeping services.
Additionally, encourage online payments to streamline the entire process. Automating payments, invoicing, and receivables, will reduce your workload and improve efficiency.
#4. Not using a professional accountant
Many small businesses often try saving money by managing their own accounting and tax affairs.
However, a qualified accountant can generally save more money in the long run. They can identify additional deductions and prevent underpaying taxes, potentially avoiding fines.
A skilled and experienced accountant provides ongoing guidance, implementing optimal strategies for your finances. They stay updated on tax law changes and assist in preparing for fluctuating tax rates.
“Hire an accountant, not because they can save you money, but because they’ll make sure you’re not losing it.” – Unknown
Hiring a virtual bookkeeper alongside an accountant can mitigate common accounting errors and alleviate workload. They will help prepare and provide an extra pair of hands with additional tasks.
Accurate bookkeeping is critical for your business success and should never be neglected.
#5. Poor Communication with Your Accountant
Miscommunication with your accountant is common, especially if you’re new with accounting terminology.
Business owners may struggle to grasp terms like “cash realisable value” or understand accounting acronyms. However, your accountant will guide you through financial complexities, manage risk, and identify growth opportunities.
“Your accountant isn’t just there to fill out forms; they’re there to help you navigate the complexities of finance, manage risk, and maximise opportunities for growth.”
To address this issue, ask your accountant to explain concepts in layman’s terms. Don’t hesitate to seek clarification—it’s your business. And you’re paying for their services.
Your accountant’s job is to simplify complex ideas for you. By addressing communication barriers, you can collaborate more effectively. You will help avoid some common accounting errors, empowering you for greater success.
Ready to tackle common accounting errors and take your business to the next level? Reach out to your accountant today for personalised guidance and support.
I agree with your points about communicating with my accountant. I used to think that my accountant was talking gibberish. I now insist that they talk to me in plain English!