If you could boil down good accounting to one thing, it would be organization. It’s all files, tax returns, income statements, bank statements, invoices—documents everywhere. It’s on the accountant to keep everything organized.
Every year around tax time, hundreds of thousands of people seek out accountants for help. Whether finding more deductibles or figuring out the specific tax protocols for an S corporation business structure, accounting covers a lot of ground—and it’s easy to make mistakes that could end up costing you.
The following ten items on this list are the most common accounting mistakes. Learn what they are so that you can avoid them.
1. Not Following Proper Accounting Procedure
There are formal accounting and bookkeeping procedures that all must follow. These protocols apply even if you aren’t a CPA. You need specific information, like the provider’s name, EIN (Employer Identification Number), social security number, signed contracts, invoices, bank statements, and more.
You should treat all of this information with the utmost professionalism and confidentiality. You must respect specific rules concerning your vendors, clients, and others. If you do everything according to the same list of procedures, then you ensure that nothing gets left out, done improperly, or mishandled.
How to Avoid It:
The best thing you can do to ensure you’re following proper accounting procedures is to study them. Contact your local certification authority and ask where you can find your state’s up-to-date rules and regulations.
Then, create checklists and step-by-step systems to follow for all future jobs.
2. Not Separating Business From Personal Accounts
In 2021, the Department of the Treasury reported that the tax gap totaled an astronomical $600 billion. The staggering difference between the taxes owed and paid by individual and business tax filers is sure to impact the nation’s economy.
But much of the time, the tax gap isn’t because of a refusal to pay. Instead, it’s people who have filed incorrectly.
For small business owners, this mistake is all too easy to make. If you’re buying a car for work, but you use it on the weekends for trips, where do you file that expense?
It’s a harmless mistake, but the IRS won’t look too kindly on it. You could face audits, penalties, or even jail time if they discover the failure to pay was intentional.
The number one rule of business is to separate your business accounts from your personal accounts. Mixing business expenses with personal expenses can save you money in the short run via your return, but you’ll pay for it in the long run.
How to Avoid It:
Keeping a budget spreadsheet or using accounting software will help you separate these financials when tax time comes around. Keep each budget in a separate folder, so you don’t cross documents. If you’re having difficulty because you used personal funds to finance your small business, this situation is where a good CPA comes in, who can tell you what goes where.
3. Lack of Organization
The overarching theme of all these common mistakes is a lack of organization. But this error deserves a dedicated discussion.
Accounting all comes down to being able to sort quickly through a mountain of documents. And most likely, they’re all going to look the same. If you run a business, you will have multiple clients, all handing you documents that look virtually identical except for name and number changes.
Your paperwork alone can be overwhelming if you’re doing your own finances. If you aren’t organizing, storing, sorting, and tracking all the documents you need to file correctly, you won’t be able to do it at all.
How to Avoid It:
There’s no one way to organize well. The best thing that anyone can do is work to develop a personalized organizational system. That could mean using spreadsheets, folders, files, shelves, sticky notes, flags, highlighters, and bookmarks.
It could also mean using accounting software or finding bookkeeping templates. It comes down to what works best for you, but you want to get a head start so that you aren’t scrambling come the tax filing deadline.
4. Not Double-Checking Information in Automated Systems
Automation is everywhere. It’s become such a ubiquitous tool in the financial world that you may not even realize its role in your accounting and financials. Banks rely on automation to count, sort, and withdraw money. CPAs rely on it as well to generate amounts and cross-check balances.
Generally, when automation goes wrong, it happens around incorrect payee names on transactions. There can also be transactions posted to the wrong accounts. If payee names are not correctly listed on forms like the 1099, the IRS will deny your return.
How to Avoid It:
Be mindful of which parts of your process use automation and which don’t. For automated processes, simply be aware and triple-check every calculation.
5. Sloppy Record Keeping
Before computers, record keeping was all folders, binders, and documents. Now, with the advent of the internet, almost all your documents can be digital.
Digital record-keeping is just as time-consuming and complex as paper record keeping. And it’s subject to all new dangers. Where paper records could be lost, damaged, or stolen, digital records could be corrupted, accidentally deleted, or improperly labeled, and thus unsearchable.
It’s not common for tax returns to get audited—the IRS audit rate is a little over 8%, and usually for income brackets on the extreme ends of either) or over $10,000,000. Still, they can demand returns from the past three years. If that happens, you must be able to promptly produce whatever documents are necessary. That means your record-keeping game has to be on point.
How to Avoid It:
You can use many software programs and apps to finesse your digital filing process. Even if you don’t want to use advanced technology, you should keep hard copies of all filings and store them and all necessary documents in a central location. Name everything, use color-coding, keep everything organized in one central place, and have your returns on file for at least three years.
6. Changing a Closed Period
A closed period is the period after you file and before the return is made public. It’s called “closed” because you can’t make any more changes at that point.
The closed period usually applies to businesses—to the time before they submit financials and when those financials are disclosed. For company or corporate financials, it’s imperative to respect the accuracy of closed period dates.
If you miss or otherwise mess up those dates, the integrity of the company’s financials could be at risk.
How to Avoid It:
If you use accounting software, it will keep you on track with closed periods. You can set a password on your books that seal each accounting period. You would have to unseal it with a password to make changes.
7. Overstating Revenue
This error can be costly. An auditor will not assume that overstated revenue resulted from a mistake. More likely, they will assume that you overstated revenue deliberately to inflate earnings or the company’s equity.
You could be on the hook for serious damages if the IRS finds you to be willfully overinflating numbers on tax filings.
At the same time, it’s incredibly easy to overstate revenue on filings accidentally. One document filed in the wrong folder or one extra zero entered in the financials can make a mess of your books.
How to Avoid It:
Again, ensure you’re using a workflow that keeps you organized. Some automated bookkeeping software programs are so advanced that they can be counterproductive to the goal of organization. Make sure you exercise enough control in your organizational system.
8. Failing to Reconcile Accounts
It can be easy as you begin processing information and updating financials to stay focused only on your work. Any good CPA will tell you that one of the most important checks you must incorporate into your process is regularly reviewing bank balances.
As you work, that balance can go up and down by tiny fractions. But as you get deeper into it, the gulf between the projected amount in your accounting and the actual amount in your/your client’s bank account can widen.
How to Avoid It:
There’s no flashy or complicated fix to this problem. You just have to remind yourself to check. Setting a reminder in your calendar for every quarter is a good way to ensure you perform these routine checks.
9. Not Utilizing Accounting Software
Accounting software is your friend. It can tabulate instant figures, cross reference dozens of documents in a single second, and find documents, all activities that would have taken you minutes, even hours, if everything were all paper.
But the software is only as good as the accountant. You need to know how to use it correctly for your filing status. An individual filer using a 1040EZ will have few calculations or lines to fill out. However, an S corporation or C corporation will have differing rules for reporting salaries, dividends, and more. You have to know the software and the laws regulating the items you need to pay taxes on and how.
How to Avoid It:
Some accountants and CPAs will keep a paper log or legend that accounts for their accounting software’s internal logic. These kinds of programs use highly sophisticated algorithms that can be difficult to understand.
Spend time with your accounting software to understand how it works. Like all computer programs, it just takes some getting used to, but once you do, accounting software can be your best friend.
10. Entrusting Too Many People with your Financial Information
If you’re doing your own financials, that’s great. Make sure you can do it properly on your own, though.
If you’re like most people, you need to seek help when tax season rolls around. When you do, try and keep the number of people you let in on your most personal financial information limited. If too many people have access to your finances, there’s a higher chance that work will be duplicated, needlessly modified, and overdone.
How to Avoid It:
Keep it clean and simple. Hire a single CPA who comes with a trustworthy recommendation. Hand over all your documents, organized in an accessible manner.
Happy Finances
Keeping your accounts organized and above board is no easy task. But with the help of a qualified professional, who understands that organization is vital, you have nothing to fear.
MI Tax CPA has you covered whether you’re looking for personal tax services, business tax services, or a CPA to handle your personal or business finances.
MI Tax CPA is a full-service CPA firm based in Michigan. Through online tax services and highly trained personal CPAs, we can explain the nuances of your financials and find ways to save you money.
