Bookkeeping is the systematic process of recording and organizing source documents for all business operations and financial transactions, such as purchases, sales, payments, and receipts. It is a vital process that makes it easier for businesses to budget accurately, prepare for tax returns, as well as achieve regulatory compliance.
While record-keeping is a relatively straightforward process, many business owners see it as a tedious and mundane task that can take up a considerable amount of their time. This is among the reasons why most of them tend to overlook bookkeeping when operating their business. But poor bookkeeping practices can adversely affect their organization’s financial health.
To avoid experiencing the costly consequences of bookkeeping mistakes, you need to employ the best record-keeping practices and prevent making these common bookkeeping mistakes:
Not keeping receipts for small transactions
As you can often view your purchases on your bank or credit card statements, it may not seem like a big deal if a receipt for a meal or parking is missing. However, these receipts for small transactions are essential not only in tracking your business expenses but also in backing up your tax-deductible claims.
It is imperative to keep copies of every receipt of your business expenditures, no matter how small they are, to avoid costly disputes with the Canada Revenue Agency (CRA).
Mixing business and personal expenses
When you have just started off your small business, there will be times where you may find yourself paying occasional business purchases using your personal bank account or credit card; or making a personal purchase using business funds.
Mixing your personal and business expenses can make the process of recording and categorizing transactions difficult and confusing for you and your bookkeeper. It also makes it easier to lose track of your business’s financial status – how much your business is moving and earning.
Failing to perform reconciliation
Confirming that your books and bank statement match each other is a crucial part of the bookkeeping process. Reconciliation is a fundamental process that can help determine your business’s financial health.
The reconciliation procedure involves comparing your books with bank statements and identifying discrepancies between the two records. Generally, the ideal time to perform books and bank statement reconciliation is every month.
Failure to perform bank reconciliations puts you at risk of falling victim to fraud and unauthorized withdrawals. It also prevents you from addressing and eliminating bookkeeping errors before these become a significant financial setback, which can hamper your business’s operations and growth.
Poor management of petty cash
Many small business owners think of petty cash as free money that can be used to purchase anything that qualifies as an item of business expenditure. While this is partly true, as this fund is used to buy office supplies and break room supplies, among other incidentals, petty cash is not a personal wallet for business owners.
The term “petty cash” refers to the small amount of cash that businesses keep on hand to cover infrequent, minor expenses that must be paid in cash.
Though these are small amounts of cash kept for small, unexpected purchases, it is still essential to manage and keep track of every cent of this money. Miscellaneous incidentals paid with petty cash must be included in the cash flow to accurately track the business’s financial health and performance.
Using manual bookkeeping systems
Some business owners still want to use conventional or paper-based record-keeping systems because these are less expensive to set up, data loss or corruption is less of a risk, and easier to manage when correcting entries. However, like other manual systems, conventional bookkeeping systems are inefficient for most modern companies operating in this digital era. Manual record-keeping procedures can be a daunting task and can take up time, the time you and your employees could have used to seek growth opportunities.
As technology advances, your business also needs to follow suit. Leveraging free accounting software for small business allows you to efficiently track your business expenditures, boost your business operations, and gain a competitive edge among other industry competitors.
The bookkeeping process helps you track your business’s financial transactions as well as monitor its progress. Therefore, you need to ensure that all financial transactions and other accounting documents are accurately and correctly recorded, categorized, and organized in your journals and general ledger.
Furthermore, as a business owner, you also have to employ the best bookkeeping practices. Such practices include regular reconciliation of books and bank statements and proper management of petty cash.
You can also utilize modern database management and record-keeping solutions to make the bookkeeping task much simpler and more manageable. Companies like KIPPIN offer accounting and bookkeeping services to help businesses effectively generate balance sheets, categorize transactions, track sales, record disbursements, and monitor liabilities.
KIPPIN is a cloud-based mobile bookkeeping service tailored to simplify the accounting needs of businesses. We align our clients to top Bookkeepers and Accountants on our platform. We also provide a software-only solution, allowing our clients to manage their own books and automate the accounting process using our accounting platform.