Doing your own bookkeeping can be pretty tricky unless you have an accounting background or know someone who does, but that shouldn’t hold you back.
I’m sharing the five most common bookkeeping mistakes I see when reviewing clients’ work, how you can fix them and have peace of mind you’re on the right track.
1. Recording payments to owners as an expense
If you’re a sole proprietor or single-member LLC, make sure you’re not categorizing payments to yourself as an expense. This lowers your overall profit and gives you a false sense of the income you’ll need to pay tax on. Instead, record these payments to an equity account called “Owner’s Draw.”
Note: if you’re an S-corporation, you will still report the wages paid to yourself through a salary as an expense.
2. Not reconciling your accounts each month
Think of reconciling like balancing a checkbook. You’re going line-by-line through the transaction detail to make sure what’s in your bookkeeping program matches up exactly with the bank statement. If it doesn’t, now is the time to figure out why. Sometimes transactions just don’t import and sometimes duplicate transactions will import (very common with PayPal).
Most cloud bookkeeping programs (Xero, Quickbooks, Wave) have tools built in to make this a quick and easy process. If you’re using a program that doesn’t have a reconciliation tool, I suggest printing out your monthly bank statements for each account.
Then, as you see the transaction or give it a category on the computer, mark it off your bank statement.
Anything that appears in the bookkeeping program but not on your bank statement needs to be looked into and same goes for the opposite.
3. Reporting transfers as income
I’ll explain this one with a personal example.
I have a PayPal account and a checking account. Every so often, I transfer the balance of what’s in my PayPal account to my checking account.
Most cloud accounting programs see that transfer the same as they see income. To their software, it looks like a deposit because the total cash increased.
When I categorize these transfers in Quickbooks or Wave, I have to manually tell the program “hey, I took this money out of PayPal (so that balance needs to go down) and put it into my checking account (so that balance needs to go up).”
4. Not saving receipts
Whether something cost $1 or $1,000 you’ll need to save that receipt if you want to count it as a business deduction.
You can keep digital copies of your receipts or paper copies and some people like to do both. Many bookkeeping programs are incorporating the ability to take a picture of a receipt with your phone and link it to the actual expense in the program.
I’ve also heard from clients that love using Evernote to save and organize their receipts.
Whatever method you choose for organizing and saving your receipts, just make sure you can easily find what you need in case you’re ever to get audited. Plan to keep these receipts for seven years.
5. Using your business account for personal purchases
This is super easy to do, especially if your business bank card looks a lot like your personal bank card. I just noticed that I accidentally made this mistake a few weeks ago and used my business card to buy groceries at Trader Joe’s.
Luckily, it’s not the end of the world. You can reimburse your business account for the purchase, or you can record the purchase as an “Owner’s Draw.”
The biggest thing here is to not use your business card on a regular basis (or ever if you can help it) to make personal purchases.
Some people get in the mindset that it’s like paying themselves and it skips the step of having to make a transfer to their personal account. This is a slippery slope and can lead to messy bookkeeping and blurring the line between your personal assets and business assets.
If you’ve reviewed your bookkeeping and processes and find yourself doing one or more of these common mistakes, don’t stress out. Now is the perfect time to go back and review your bookkeeping and make any corrections before tax time gets here.