Bookkeeper explaining bookkeeping mistakes to elderly business leaders.

Bookkeeping Mistakes That Make Financial Clarity Impossible

Cassidy Jakovickas

May 15, 2024

There’s an old anonymous quote about mistakes that says, “You must learn from the mistakes of others – you will never live long enough to make all of them yourself.” This is especially true of bookkeeping mistakes. While you can learn from hard-earned mistakes in your accounting, it’s equally vital to learn from the mistakes of others. Here are the most common bookkeeping mistakes that can cause you to lose control and clarity of your company’s finances.

Mistake #1: Not Keeping Expense Receipts 

A Mr Krabs Blur meme showing why small business owners should keep business expense reciepts.

Keeping receipts is a good bookkeeping and record-keeping practice that often goes unignored. We started with this one because it can cause many problems while tax planning.

Many business owners assume they can discard receipts and rely on bank statements or credit card statements when they need to show proof of business expenses. But according to the IRS webpage, “What Kind Of Records Should I Keep?”, valid documentation for expenses must include the following details:

  • Payee
  • Amount paid
  • Proof of payment
  • Date incurred
  • Description of item or service purchased that shows it was a business expense

If you don’t save your receipts, it becomes extremely difficult to accurately distinguish deductible expenses from non-deductible ones. If you’re audited and can’t produce all the necessary documentation to substantiate deductible expenses, you could face penalties or find your deductions disallowed.

Mistake #2: Mixing Business Expenses With Personal Expenses

A meme showing why it's bad to mix business and personal expenses.

Another particularly damaging mistake in bookkeeping is mixing personal and business expenses, a practice known formally known as commingling. Not separating business expenses from personal ones makes it difficult to gauge your company’s actual financial performance. If you don’t know which costs are truly related to your business, you’ll end up creating inaccurate budgets and forecasts that lead to poor, uninformed business decisions.

On the tax side of things, commingling expenses makes it difficult to distinguish deductible expenses from non-deductible ones. This can either lead to overpayment or underpayment of taxes and, if deductions are discovered to be wrongfully claimed during an IRS audit, penalties and fines.

Keeping expenses separate also maintains the legal protection of certain entities like limited liability companies and corporations for shareholders of business entities.

How to keep personal expense items separate from business finances

  • Separate bank accounts between business and personal expenses. Having a separate checking account for your business makes it easier to organize receipts, spot deductible expenses, and track reimbursable expenses.
  • Implement a business expense reimbursement policy that documents how you can be reimbursed in the event you have to use personal funds for business purposes.
  • Keep business assets like property, equipment, and vehicles separate from personal assets. Don’t use business assets for personal reasons or vice versa.
  • Keep proof documents for all business transactions, including receipts, invoices, and bank statements.
  • Use accounting software where you can maintain separate records for business accounts.
  • Take a salary or regular owner’s draw instead of sporadically dipping into business funds.

Mistake #3: Not Regularly Reconciling Financial Records

Failure to regularly reconcile your financial records leads to inaccurate financial statements that don’t reflect your company’s true financial position and lead to bad financial reporting and forecasting.

Regular reconciliation helps you quickly detect errors such as double entries, omissions, transposition errors, and other data entry errors. On the other hand, mixing business and personal expenses makes it extremely difficult to spot unauthorized transactions and other accounting fraud.

Like paying more than your share of taxes? That’s exactly what can happen when you fail to review and reconcile each bank statement and credit card statement with your business’s finances. You can also miss out on valuable tax credits and tax deductions because you don’t have a clear picture of your business activity.

When you’re trying to secure business financing, accurate and organized financial statements are vital. Lenders and investors require accurate financial statements. If your records are not regularly reconciled, it may raise concerns about your financial management, impacting their decision to invest or lend.

How to properly reconcile your company’s financial records

  • Schedule time to review and reconcile your financial records. Depending on the size and complexity of your business, this can be on a daily, weekly, or monthly basis. For most businesses, a monthly review is perfect. 
  • Reconcile all of your accounts, such as bank statements, credit card statements, loans, and payroll. 
  • Separate duties so no one person controls the entire bookkeeping process. This is a vital step related to internal controls that business owners usually don’t appreciate until they’ve learned the hard way.
  • Hire an accountant or bookkeeper if you don’t have enough time. If you already have an accountant, but you’re still noticing mistakes, you may need to give your bookkeeper more support.

Mistake #4: Incorrectly Categorizing Transactions

Mislabelling transactions muddles your financial records and reports and makes it hard to know your company’s true financial position. This one is pretty straightforward and usually comes when you either don’t have an open line of communication with your accountant or bookkeeper or they don’t have a true understanding of your business. Either way, the result is the same. Financial transactions get put into the wrong income and expense categories.

How to correctly categorize business transactions

  • Educate your bookkeeper or accounting on typical expenses that come up repeatedly in your business activities and explain how it relates to business activities. 
  • Use bank rules or similar automated accounting features in your accounting software to automatically sort transactions into the correct category. You can see an example of bank rules in action here.
  • Keep your income and expense category usage consistent and re-categorize transactions that aren’t the best fit for a particular group.

Mistake #5: Working your bookkeeper beyond their limits

Even the best bookkeepers have their limits. Too often, however, we’ve seen many cases where a bookkeeper is pushed by a small business owner to handle duties for which they’re not fully trained. Or, an office manager or administrative assistant starts double-timing as a bookkeeper without receiving the necessary training. Don’t get me wrong: Plenty of free resources do a great job of teaching you the basics of accounting. But theory is a crappy replacement for practical experience. Youtube can only get you so far. At some point, you’ll need to outsource your bookkeeping to a more experienced bookkeeper or hire an outsourced CFO to train and guide your bookkeeper so they don’t have to earn the entirety of their bookkeeping experience the hard way.

Mistake #6: Failing To Consider Sales Taxes

Ignoring sales taxes can result in significant fines and interest charges from unpaid or underpaid taxes. Sales tax collection due to nexus laws and varying tax rates by region and municipality. The financial impact of neglecting sales tax can be substantial, often far exceeding the initial amount of sales taxes that were due.

To ensure you are compliant with sales tax concerns, it’s best to:

  • Register for sales tax in your state.
  • Determine your nexus (both physical and economic).
  • Calculate your tax rates.
  • Automate sales tax compliance with software like Avalara.
  • Train staff on how to verify sales tax compliance in billing, accounting, and sales procedures.
  • Consider working with an outsourced accounting firm to receive expert help with complying with, and reporting, sales tax for your business.

Bookkeeping Is The Foundation, Good or Bad

Being an accountant, I know firsthand the amount of work that goes into proper bookkeeping and accounting. Depending on the accuracy of your bookkeeping, you can either have a fine-tuned tax strategy and clear financial reporting or muddled financial reports and penalties for tax mistakes. It’s up to you. If you need help with accounting and bookkeeping services, contact us today!