Table of Contents
- Not keeping track of cash
- Not tracking purchases correctly
- Failing to record payments accurately
- Ignoring depreciation
- Forgetting about bad debts
- Counting income incorrectly
- Overlooking credit card charges
- Mistaking the difference between profit and loss
- Missing out on discounts and rebates
- Making mistakes in calculating payroll
Accounting errors cost businesses millions of dollars every year. It doesn’t matter how small or large your company is, if you make these common accounting mistakes, you will lose customers and revenue.
This post will cover common business accounting mistakes that cost companies thousands of dollars per hour. These costs include lost customer data, wasted employee time, and even fines from regulators.
If you’re a CPA firm, you should be able to spot these common accounting mistakes before they happen. But if you’re not sure, here are 10 common business accounting mistakes that will cost you money and time.
Not keeping track of cash
Cash is the lifeblood of every business. Without cash, there would be no way to pay employees, buy supplies, or purchase inventory. Cash should always be tracked separately from other accounts because it represents a separate asset.
Not tracking purchases correctly
If you want to know how much money you spent during a certain period, simply look at your bank statements. You’ll notice purchases being listed under a particular category (for instance, “groceries”). These categories are often based on the type of product purchased.
Failing to record payments accurately
When you receive payment for goods or services rendered, take note of the date and amount. Then write down the details next to the appropriate line on your books. Also, remember to enter the receipt of funds into the books as soon as possible. Waiting too long could result in double taxation.
All assets lose value over time. In order to calculate the true cost of an asset, it must first be depreciated. Depreciation refers to the reduction in value of equipment or buildings over time. To figure out how much an asset is worth today, divide the original cost of the asset by the number of years remaining on the useful life of the asset. All businesses need to track depreciation. Otherwise, they won’t know how much money they’re spending on maintaining their property.
Forgetting about bad debts
Many companies try to collect outstanding debt. But some creditors aren’t willing to pay back what they owe. So, if you continue trying to collect money from them, you run the risk of incurring losses. Write off the entire amount owed to the creditor as a bad debt. Bad debts are written off after 12 months, unless you’ve filed bankruptcy.
Counting income incorrectly
Income isn’t just limited to salary and wages. Any form of compensation counts as income. Examples of forms of income include tips, commissions, bonuses, dividends, interest, and royalties. Income also includes things like rent and property tax refunds. Make sure you count everything. Don’t forget to add together all of the incomes received during a specific period.
Overlooking credit card charges
You don’t have to worry about getting hit with late fees when you charge something to a credit card. However, you still need to write down the corresponding amounts on your books. This will help you avoid having to pay interest and penalties later. Be careful not to exceed your credit limit, though. Doing so could lead to higher fees and additional interest payments.
Mistaking the difference between profit and loss
Profit is the excess of revenue over expense. Loss is the opposite — the deficit between revenue and expense. Profit and loss are very closely related, so it’s easy to confuse the two. An example of profit and loss confusion is when a company reports a loss, while actually earning more money than expected.
Missing out on discounts and rebates
Discounts and rebates are ways to reward loyal customers. They are typically offered by manufacturers to consumers who purchase a certain number of products. If you miss out on such offers, you could miss out on thousands of dollars in potential savings. Keep a list of discount codes and rebates in case you ever find yourself in a position where you qualify for one.
Making mistakes in calculating payroll
Payroll is the calculation of how much money to pay workers for the hours worked. Payroll calculations involve determining gross pay, deductions, overtime, and benefits. Gross pay is calculated by adding together the base wage plus any bonus, commission, or tip. Deductions refer to the amount taken out of gross pay to cover health insurance premiums, social security contributions, retirement plans, vacation pay, and sick days. Overtime pay is calculated by multiplying the hourly rate by 1.5 times the regular working hours. Benefits are also included in payroll calculations. Depending on the situation, employers can offer medical coverage, pension plan contributions, 401(k) matching programs, tuition reimbursement, and other perks.
In conclusion, if you are a CPA Firm or EA, it is important to understand your financial position at all times.
You should have at least one person responsible for keeping track of all financial transactions so that you are always aware of how much you have spent and how much you are likely to spend in the future. This person should also be able to keep track of how much you have received from your customers, suppliers, and other businesses.
This will help you to understand where you stand financially and keep you on top of your finances so that you can make informed decisions and take advantage of opportunities.