by Austin Miller
The term “bookkeeping” has the tendency to conjure up images of backroom deals, sports betting, and horse races. In the business world however, bookkeeping is as far away from the perilous waters of betting as possible. In fact, bookkeeping is perhaps the most important step a small business owner will take in order to ensure their company is compliant with the U.S. tax laws. Proper bookkeeping will help business owners be prepared should they be audited by the IRS, and improper bookkeeping will, well—you know the deal.
Bookkeeping is not only a way to achieve and maintain compliance—but it’s also essential to good business practices i.e. ensuring a good ROI. Keeping your books properly will help you see where your money’s going and ensure that you don’t miss out on any deductions that can easily save you thousands of dollars. In order to implement good bookkeeping practices, it’s important to know how to avoid common pitfalls.
Common bookkeeping pitfalls
The infamous “shoe box”
Simply put, if your receipts are sitting in a box somewhere, then you haven’t even begun to keep your books. There is really no way to reconcile this pitfall except for to suggest that business owners abandon this practice and implement correct accounting principles from the beginning. Trust us when we say, it’s a lot easier to start documenting your transactions from the start, than to go through a year of coffee stained receipts to try and categorize transactions you may or may not remember.
Do you have unreconciled transactions on your books? Your books cannot be complete until all transactions that occurred in 2015 are categorized correctly. Solution? Think and act chronologically.
Do you have loan payments on your books? You may not have accounted for the principle and interest portions of the payments correctly. If you have categorized the whole payment to a single expense, your books are probably incorrect. Make sure you always account for the principle, as well as interest.
Your books may have inaccurate values for inventory and Cost of Goods. This can be due to a miscount or, just as common, theft. This is especially important for business owners who have a physical product. Always stay current on inventory, and December 31 is always a good date to do a proper inventory check. This is a crucial step as you aim to properly keep your books.
Like a bicycle wheel, you’re payroll needs truing. Such maintenance requires that your income statement show payroll at gross but without a manual adjustment to the standard bank feeds, this account is probably only shown at net payroll.
Accrual basis bookkeeping
There are numerous accounts that need to be manually updated at year-end. This task is often far too difficult if you do not have an accounting background. It’s best to discuss this process with a CPA or accountant.
Common bookkeeping strategies
If you’re looking at these pitfalls and thinking you need to change the way you do business, here are you’re three main options.
Traditional route—Hire an accounting firm
- Pros: They most likely know more than you do and can help keep you compliant and take advantage of deductions.
- Cons: Hourly fees, slow response rate, low-tech, and expensive.
Semi-traditional—DIY software, like Quickbooks
- Pros: Incredibly robust software, great for accountants.
- Cons: Not designed for non-accountants. Although a solid tool, a tool such as this not in the hands of an expert is not every effective. Users still have to deal with the headache of entering in data, and knowing tax laws like the back of their hand.
Fully automated—Software and service companies, like Bookly
- Pros: No contracts, no paperwork, and no hourly fees. Users get access to a personal bookkeeper and a CPA. Users don’t have to deal with any of the traditional headaches i.e. navigating tax law, regulations, or data entry. Allows business owners to focus on what they care about most.
- Cons: More expensive than DIY software, however, missing out on tax deductions and spending hundreds of hours entering data is most likely more costly.
If you’re behind on your bookkeeping there is no need to panic. Business owners have plenty of options to catch up before the “big day.” The most important thing is to be aware of proper bookkeeping techniques as well as common pitfalls so that you can avoid losing precious time and money. A fully-automated accounting solution offers the most benefits, but regardless of which bookkeeping solution you choose, when it comes to compliance—working with any type of professional solution is dollars to donuts better than stuffing your receipts in a shoebox.
Austin Miller is the head of marketing at Bookly. Bookly provides cloud-based bookkeeping for small businesses. When he’s not busy creating content, he’s either reading, duck hunting, or pursuing his Ph.D. in AnthonyBourdainology.