Top 3 Small Business Accounting Mistakes To Avoid

By on November 28, 2012

Did you know that the average small business is fined between $900 and $2000 for bookkeeping and filing errors they make throughout the tax year. For a large, multinational corporation, these fines may be pennies. But for a small business who relies on every penny it earns, these fines can add up very quickly. The United States Tax Code can be extremely complicated, especially for business owners who did not go to school to be accountants. And when you make mistakes, the IRS will be far from understanding. Read on to find out the top 3 accounting mistakes made and how you, as a small business owner, can avoid making these mistakes.

Using the Wrong Accounting Method Based on the Size of Your Business
When you open your doors, you need to decide which accounting method you are going to use and stick with that method throughout the entire tax year. In the world of business accounting, there are two different accounting methods you can choose from: cash accounting and accrual accounting.

If you do not have an inventory, you are a service provider, or you are a sole proprietor, opting to go with the cash method is best. Most small business owners will opt to choose cash accounting methods because it is simpler and only takes transactions into account when cash changes hands. But as your business grows and you need funding, lenders and finance managers want to see the difference between your revenues and your expenses. This is when accrual accounting comes into play. With accrual accounting, you can match revenues and expenses and see which months you profit and which months you do not.

Mixing Your Personal Expenses and Business Expenses
When you own a small business, your personal finances are separate from your business finances. Failing to separate the two can cause major problems with the IRS. You need to take time to keep everything that is personal separate at all times, even if you are the only person working for your company. Make sure you have a business checking account, deposit your business income into your business account, and reinvest back into your company. Once you see how much you earn each cycle, you can determine how much you need to earn to cover expenses, take home pay, and reinvest in your business. If you fail to separate personal expenses, business expenses, and income, filing your taxes will become more than just an annoying chore.

Bank Account Reconciliation
All large businesses require their chain managers to perform a bank account reconciliation on a weekly or monthly basis. You should follow suit and make sure that you are doing this as well. When you perform a reconciliation, all you are doing is comparing your bank statements to your books to verify that all of the balances and deposits match. If you do find discrepancies, you should contact your bank immediately to resolve the problem. Doing this each and every month right when you receive your bank statements can save you a big headache when it comes time to file your taxes.

Accounting mistakes can cost you more than just time, they can cost you money. As you may know from experience, problems with the IRS do not go away, they simply become compounded. Make sure you do everything in your power to keep your books up-to-date throughout the year and avoid making these common yet costly mistakes. If you do your own accounting or you hire a professional, review everything to make sure these are mistakes that you have taken time to avoid and you will have peace of mind.

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Reggie Dalton is a corporate accountant and guest author at Master of Accounting, where he contributed to the Top 10 Best Online Master of Accounting Degree Programs.

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