Time is ticking as we March towards the Ides, the time of year when many begin losing sleep over bookkeeping woes. Without fail, compiling year-end data for an annual tax filing will uncover errors and deficient documentation that must be retroactively corrected. This article will address common bookkeeping errors, how to fix old mistakes in time for the upcoming deadline for filing taxes (either March 15 or April 15, depending on a business’s legal entity type), and strategies to avoid bookkeeping mishaps in the future.
Pinpointing the Problems
No matter the industry or operational structure, all businesses face many of the same universal accounting aches and pains. This article will examine these common bookkeeping mistakes from the lens of an interior design business, which has great potential for errors due to the massive volume of data points, transactions, and ownership transfers that are essential to operations.
Because of the sheer number of data to be recorded, simple data entry mistakes or negligence are a leading cause of imbalanced books for interior designers. Data entry mistakes are easy to make but very difficult to find when working backward from a top-down view of annual, or even quarterly, financial statements. The process involves troubleshooting the possible scenarios of why an equation does not add up, then combing through thousands of data points to uncover the culprit.
Improper categorization of assets and liabilities is another common accounting mistake that can dramatically impact the accuracy of a balance sheet. Assets are things that a company owns or have invested in that will benefit the company in the future, including cash. Liabilities are what is owed by a company, including debt from loans, for example, as well as goods and services that a business is contractually obligated to provide. Single-member LLCs must be particularly careful not to record payments to the business owner as an expense, as doing so will falsely lower the business’s total taxable income. Instead, these payments should be recorded to a separate account named “Owner’s Draw.” Similarly, and particularly relevant to small business owners, cash that is transferred from one account into the business checking account should be recorded as a transfer, otherwise a bookkeeper or bookkeeping software may assume the increase in cash represents income.
The next common bookkeeping pain point comes from inconsistent, or worse, a complete lack of bank reconciliation. While the task is tedious, bank reconciliation is quite simple. It is the process of reviewing a bank statement of financial transactions and account status and matching it line for line with the business’s internal records. Every bank will provide these statements monthly, and best practice is to reconcile the internal books at least as often. It is during this internal review process where you will find mistakes in your own records, and the less time that passes between making the error and suspecting an error, the less time it will take to work backward and find what can be akin to a needle in a haystack. Online banking allows users to see transaction data in real-time, so it is possible and highly recommended to not wait until the end of the month and instead reconcile on a weekly basis. For more information on how to complete bank reconciliations and credit card reconciliations in Design Manager, click on the provided links to see step by step webinars that explain the process from start to finish.
Sales tax is another sticky area for bookkeepers and a particularly relevant one for interior design businesses. It is the responsibility of the business to keep track of the sales taxes owed to the government, whether or not the business charges sales tax to its clients. Tax is a highly specialized area where a trained professional is needed to help a business determine and execute the correct strategy. However, it takes diligent, daily oversight, which will most likely fall on the business owner or an employee who is not a tax expert. It is imperative that the person taking on that daily responsibility understands the strategy implemented by the professional and knows the federal and state laws. For example, a business cannot collect sales tax in states for which it does not have a tax license; however, the transaction must still be reported in the state tax filing, in most cases.
One more common mistake that small business owners make is mixing personal and professional finances. Keep expenses as separate as possible by maintaining separate bank accounts and credit cards, and document all business expenses for which owners and/or employees must be reimbursed after paying out of personal funds.
With so many details to track and bookkeeping pitfalls to watch out for, do not forget to back-up all of your records on a regular basis. All of the potential accounting pitfalls discussed thus far would be minor in comparison to losing the books altogether. All business records should be replicated and stored securely at least monthly, although weekly is better. Fortunately, if you are using Design Manager Cloud your information is backed up automatically every night.
Healing Bookkeeping Blemishes of the Past and Steering Clear of Future Mistakes
Understanding what causes accounting errors and the resulting imbalanced books is the first step on the road to recovery. Tackling the process of fixing accounting mistakes retroactively requires help from a professional bookkeeper, so schedule a meeting with your accountant for as soon as possible, and consider hiring additional accounting and tax professionals to help get your books in order before the tax deadline. When you and your bookkeeping professionals do find and fix mistakes, it is important to correctly classify each change. A correction entry is a journal entry that explains a correction made to a business’s general ledger. One small change to the general ledger can have a dramatic effect, so it is imperative to thoroughly re-read all financial statements after making corrections.
Once your books are back in order, focus your energy on setting a standard process for handling accounting duties to avoid these common, but costly, errors in the future. Using accounting software that is tailored to the specific accounting needs of interior designers, like Design Manager, will go a long way in helping to provide a framework for organization. For example, in the business of interior design, project management and accounting procedures are closely linked and follow a sequential pattern throughout a project. Once a project begins, so does a continuous process of ordering goods, paying vendors, invoicing and collecting payments from clients — all of which must be properly recorded to avoid accounting errors. Unlike Quickbooks, Design Manager will simultaneously do the accounting work with data the user enters for project management purposes. The Design Manager system not only helps keep projects on schedule, but it also keeps the books up to date.
Additionally, interior designers have a unique billing structure that involves applying a complicated system of markups, discounts, and fee calculations which Design Manager can save and automatically apply where specified. This feature alone can save time and greatly minimize the potential for costly human errors. Of course, to the extent manual data entry is required, implement a buddy system where one person enters the data, and a second person checks the entries. With DM Cloud, users can securely log in to the system from any place with an internet connection, making it easy to make and review the necessary entries anytime, any place. It also functions as a real-time backup system for data.
With the help of your bookkeeper, make a daily, weekly, monthly, quarterly, and annual checklist of bookkeeping duties. Daily responsibilities should include compiling expenses, filing receipts and double-checking data entry for the day. Weekly to monthly responsibilities should include bank reconciliation and a review of financial statements, which can be generated with a few mouse clicks using Design Manager’s robust reporting tools.
To learn more about Design Manager and how it can keep your business’s books in order, sign up for a free trial today.