Is your bookkeeping a hot mess and you’re sick of spending HOURS trying to figure out what went wrong? Maybe you just started doing your own bookkeeping and you can already tell that things are MESSED UP.
If this sounds like you, you might be committing one of the 6 cardinal bookkeeping sins! I’m talking about the 6 most common bookkeeping mistakes that small business owners make AND how to fix them!
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Too many categories that are similar (4:09)
The first bookkeeping mistake I see many small business owners make, which is having too many categories that are too similar.
What this looks like is having one category called office supplies, another called miscellaneous supplies and another called materials. These are three categories that are slightly different in name but generally cover the same type of expenses.
The result? Your bookkeeping system is inconsistent and disorganized. When you look at your Profit and Loss report you’re overwhelmed by too many categories. And you never get an accurate picture regarding your money…which makes it REALLY hard to trust and use your numbers for decision making.
Here’s why this is happening:
Reason #1 – Bookkeeping programs come with template categories that don’t get deleted.
When you purchase Quickbooks Online, you receive a template file that includes expense categories they think you’re going to need. However, you don’t sit down and review those expense categories. Instead, you start using them without any thought! What you should be doing is formatting the templates so that they match your business needs.
Reason #2 – Biz owners don’t know their categories and create new ones.
People aren’t familiar enough with their categories when they’re doing their bookkeeping. While they’re reviewing their finances, n expense that comes up and they forget that they already have a category for that expense, and make a new category instead.
The Fix: Detailed Charts of Accounts Overview
Review all of your income and expense categories and take the following steps:
Step #1: Delete categories you aren’t using or don’t apply to your business.
Within your bookkeeping program, you’ll see something called chart of accounts. Go through that list of all of your income categories, expense categories, bank accounts, and so on. Delete the categories you aren’t using or don’t apply to your business. You won’t mess anything up as long as you’ve never assigned a transaction to them.
Step #2: Rename categories that are confusing.
If you have a category that’s called supplies and materials, and you own a tattoo shop, rename that category to “Tattoo Shop Supplies.” You’ll want to do that because the title “Supplies and Materials” is way too vague. Rename it, so you’re clear on what is supposed to go into that particular category.
Step #3: Combine similar categories and move transactions into a single category.
Say you have separate categories for office supplies, materials, and shop supplies. If your categories are too similar, it’s okay to start combining them. This step requires work because the first thing you have to do is re-categorize any transactions in vague confusing categories over to the new categories that you create. You’ll want to do this sooner rather than later!
Step #4: Check for missing categories and create new categories/subcategories as needed.
For some biz owners, it’s confusing when they have an expense that doesn’t fit into any existing category. Your last step is to look through all of your expense categories and determine if you need to create additional categories. Every business is different so make sure that your categories cover all of your transactions!
Incorrect categorizations (13:56)
The next bookkeeping mistake is categorizing your income or expenses in the wrong category, which is miscategorizing your transactions. Miscategorizations will make your bookkeeping inaccurate, and the whole point of bookkeeping is to have a clear picture of what’s going on in your business finances.
What happens is that some categories become inflated while others look deflated. Because of that, it’ll be difficult for you to spot trends that are taking place in your finances.
You could also be claiming deductions in the wrong category, and you never want anything with your taxes to be inaccurate. You want everything with your taxes to be as clean and accurate as possible.
Why is this happening? One, your categories are unclear or confusing. If you have too many categories, you’re going to end up miscategorizing your transactions. The second is that you don’t know what your categories are and you pick whatever category you remember.
The Fix: Get Clear About Your Tax Deductions
Research all of your categories and understand whether or not they’re a tax deduction. Maybe you’ve had expenses that you’ve been wondering if you can write them off. Ask these questions in a Google search (like “Can I write off my website expenses”), and the answer will pop up.
You can also consult with people about your tax deductions! You can pay someone for an hour to talk with you about your tax deductions so you get clear on what you can and can’t write off.
After you’re clear on your categorizations and your tax deductions, make a master income and expense category cheat sheet. Print it out and keep it next to you every single time you do your bookkeeping. Instead of picking a random category, consult your cheat sheet.
Not reconciling bank accounts (19:42)
Here is the biggie of bookkeeping mistakes: not reconciling your bank accounts.
What is reconciliation? That is the process of checking if your bookkeeping matches your bank statements.
Every month you go through this process to ensure that all the transactions in your bookkeeping file match what’s on your bank statement. In an ideal world, your bookkeeping and your bank statement match entirely. If your bookkeeping and your bank statement matches, that means that you’ve done your bookkeeping accurately
The other reason we reconcile is to catch mistakes. Reconciliation is where you figure out what went wrong. Most people skip reconciliation because they’re intimidated by the process. And it’s true- sometimes reconciliation can be a pain in the ass.
BUT- Not reconciling your accounts means you run the risk of misreporting your information because if you don’t reconcile your accounts, you have no idea if your bookkeeping is accurate.
The Fix: Go back and start reconciling.
The thing about reconciliation is you can’t just start this month and reconcile moving forward. It has to go back to the very, very, very beginning. This is a non-negotiable task. If you want to ensure your data is correct, then you’ll need to reconcile.
If going back to the beginning of your bookkeeping is too daunting, consider hiring a bookkeeper to help you catch up your reconciliations. This takes the work load off of you, while cleaning up your bookkeeping.
Deleting personal transactions (24:29)
Let’s get into bookkeeping mistake number four, which is eliminating personal transactions. What happens is that people remove their personal transactions instead of categorizing them as an owner’s draw.
Maybe you accidentally used your business card for a personal thing. Instead of giving it the proper categorization, you delete it.
If you’re deleting your transactions, your accounts aren’t going to reconcile because what’s in your bookkeeping program doesn’t match your bank account. According to your bank account, that transaction occurred, which means you can’t just ignore it in your bookkeeping.
If you do, you’ll have a whole lot of problems. One, you’ll never have your bookkeeping reconciled; and two, you run the risk of looking suspicious if you were ever a subject to an audit. You cannot just delete something and pretend like it didn’t happen. Bookkeeping is a very accurate process.
The Fix: Categorize Personal Deposits and Expenses as Owner Contribution or Draw
The reason we use owner contribution or owner draw is that these are equity accounts. Equity accounts don’t show up on your Profit and Loss report. When you use this categorization, what you’re doing is acknowledging that yes, this transaction happened but it shouldn’t impact your income or expenses.
The transactions remain in your bookkeeping system. You don’t pretend like it didn’t happen. You’re telling your bookkeeping system that this was a personal thing. And you don’t look like a sketchball deleting transactions.
Randomly deleting transactions (32:52)
Our next mistake, which is deleting transactions randomly. Deleting transactions randomly looks like you’re removing transactions whenever something gets confusing or messy.
Deleting a transaction can cause a ripple effect across your entire system. Many things in your bookkeeping system are linked together. If you randomly delete things, you’re breaking the link and it may affect another transaction.
Here’s an example of what I mean: I had a client who had a payment received on an invoice. His client paid the invoice, but not in full. He got the check for his invoice. We applied the amount to the invoice and the check was deposited. The money went into his bank account and we reconciled the month the following month.
For some reason, he decided to delete the payment from the invoice. BUT he deleted a reconcile transaction, so what that means is the next month when I went to reconcile, the opening balance was completely off. There was no way in which I would have been able to reconcile the account.
The Fix: Do a Three-Point Check Before Deleting
Do a three-point check to determine what your transaction is linked to before deleting it. Before you do anything, ask these three questions.
Question #1 – Is this a reconciled transaction?
Check if you reconciled the transaction. If you have, you either need to undo the reconciliation, or you need to adjust it before you remove it. You can’t just delete a reconciled transaction.
Question #2 – Is this attached to an invoice?
You might bill people for something that you’ve purchased on their behalf. If you delete that and that is on someone’s invoice, then that’s going to cause a problem with their invoice. Here’s an example.
Let’s say that you bought something for $20 for your client. You made it a reimbursable expense. Then you invoice them for that $20 item. Then they paid their invoice. You go back, and you decide that you want to delete that $20 item. What happens then is that client is going to have a $20 credit because suddenly they’ve overpaid their invoice. Are you starting to see how things are linked together?
Question #3 – Is it a transfer?
If it is, it’s going to impact two accounts: the account your transferred the money FROM and the account you transferred the money TO.
Say you transfer $500 to your savings account from your checking account. If you delete it out of your checking account, you’re removing it from your savings account too, because that’s the link that they have together. If you’ve reconciled your savings account, you’ll have a bucket load of problems trying to figure out what you deleted.
If the answer is no to all three of these questions that I just shared with you, you’re safe to delete it.
Duplicate Transactions (42:00)
When you have duplicates, you’ve entered the same transaction in your bookkeeping records multiple times, usually by accident.
This problem stems from not understanding the movement of money and the way your accounting categories are linked. You need to know how the money moves to avoid duplicate transactions. The more literal you look at the process (by following what is ACTUALLY happening with your money) the less likely you are to make this bookkeeping mistake.
The second reason this happens is that people enter an expense in manually and enter the information incorrectly. In this case, the manually entered transaction won’t match it with the downloaded transaction. Your bank will download the same transaction and instead of matching the two, so they integrate into one instead, they will become duplicate transactions.
Duplicate transactions are dangerous. First, because you get into all that deleting nonsense that we just talked about, which magnify the problem. Second, if you’re not careful and you’re duplicating your transactions, you’re going to be over-reporting your income and your tax deductions- which the IRS def won’t be happy about.
The Fix: Reconcile Your Accounts and Delete Duplicates After Doing Your Check
To fix duplicate transaction, first, reconcile your accounts! This is how you will identify if you have duplicate transactions in your bookkeeping.
If you do have duplicate transactions, you will need to delete them ONLY AFTER doing the three-point check I listed above. To be honest, this can be more time consuming than doing your bookkeeping each month!
Avoid duplicates by ongoing reconciliation, so you’re not going back each year dealing with them. That’s a pretty easy fix. It’s labor intensive, but you want to do it consistently.
Now that you know all about these bookkeeping mistakes, I’ve created a special bookkeeping tasks list to help you so you can avoid these mistakes and stay on top of your business finances the easy way. Download it below!