Accounting Mistakes Made by Small Businesses

April 24, 2015 by Ed Becker

1.     Not knowing the difference between cash flow and profit

Many business owners look at the profit line and wonder why their bank account is not anywhere close to the same amount. Cash flow and profit are two very different things. Profit is revenue minus expenses, for a specified time period. Cash flow, and cash on hand, fluctuates as money ‘flows’ in and out from sales, receivables, payables, expenses, etc. Looking at the Profit & Loss Report does not tell you about cash flow or cash on hand.

2.     Not saving receipts of less than $75 

It is normal to forget to save a receipt once in a while. But to not save smaller receipts on a regular basis, or at all, can add up to a lot of money that you can deduct as expenses at the end of the year. Those small purchases should be paid either by business credit card and documented immediately or the receipts should be saved in a special small expenditure file for proof of any deducted expenses.

3.     Forgetting to track reimbursable expenses

If you purchase any items with a personal credit card or with cash, you need to do a reimbursement to document the expense. These can also add up very quickly and need to be justified as deductions for tax purposes.

4.     Not Balancing Your Bank Statements

This is a crucial task that needs to be done monthly, without fail. If every month there are errors that go overseen, they may not be found at all. This can cause your financial statements to have errors or be inaccurate. There could be very simple mistakes that could cost you a lot such as a transaction being entered incorrectly; for example as $50 not $500. If this is only detected six months later the bank may not give you credit for the mistake.

5.     Failing to properly identify employees and contractors

If employees are not classified correctly and you mistakenly treat them as independent contractors you could be solely responsible for all of their past due payroll taxes, including the employees share. There are guidelines by the IRS to help you classify your employees properly.

6.     Failure to accurately report payroll taxes

Reporting and paying payroll taxes incorrectly can result in large fines and penalties. This is not just in Federal payroll taxes; it also applies to your state’s department of revenue.

7.     No backup

Trying to be totally paperless sounds good, “on paper”, but is not completely feasible in reality. Even if you keep everything backed up on a computer, there is still the chance you may lose your information. The cloud is an option, but it is not 100% perfect either. Your bank usually will only offer access to records and statements a few months prior. Lastly, if you have an audit it could be disastrous to find out that you do not have documentation to prove items.

8.     Petty cash nonchalance 

Not keeping track of petty cash expenditures could quickly add up and cost you hundreds of dollars. Those petty cash purchases may seem small and insignificant. But they can add up very quickly, just like small reimbursable expenses. Also if you do not track where petty cash is being spent, you cannot expense or deduct it where it needs to go.