Done right, your accounting process can give you priceless information to take your business to the next level. But there are plenty of ways to do it wrong, too. When you find yourself tripping over common accounting pitfalls, it can wreak havoc in your business.
Here are seven common accounting mistakes to avoid — and how you can actually avoid them.
Reinventing the Wheel Every Month
Accounting should get simpler every month. As you develop systems and processes, you create a workflow that makes it go more smoothly each time you do it.
If you’re starting from scratch each month and trying to figure out the steps you need to take, you’re wasting energy and opening yourself up to a lot of mistakes. You can avoid this by using standard tasks and checklists that help you follow an identical process month after month. If there are multiple people handling the accounting, this also helps keep everyone on the same page and clarify who is responsible for what.
Forgetting Adjusting Entries
At the end of the month, you may have accounts that need to be adjusted for the period. These could include accrued revenue, accrued expenses, and depreciation. Typically, these balances need to be adjusted using a journal entry to reflect the amounts that have been used up or the depreciation that’s occurred.
When you forget to make your adjusting entries, your books don’t reflect the right balances and you can be WAY off by the end of the year. That can be a nasty surprise when you suddenly have to make a year’s worth of adjustments at once. Or even worse, when you forget them completely and your taxes or financial statements are thrown off by incorrect revenue and expenses.
Getting Stuck in the Past
Accounting tends to show us what’s already happened in the business. Transactions get recorded as they occur and give us a good view of the past. But if you stay stuck in the past, you’ll never get the most from your accounting process.
It’s crucial to use accounting data to project future trends and make decisions that will impact the future of the business. This can take some analytical skills, intelligent accounting software, or a bit of both. As technology improves, it’s getting easier and easier to analyze accounting data in a way that can have a huge impact on future choices.
Unnecessary Data Entry
Entering transactions by hand is not only slow, but a much higher risk for human error. Missing a digit, transposing a number, or repeating a number are all easy to do after a long way of accounting work.
Fortunately, we’ve got tools to automate much of the manual accounting work and take away that element of human error. Accounting software and apps can pull data from the bank or from internal systems like a POS system or inventory tracking software. With automations in place, you’ll save tons of time every week and cut way down on errors.
Account reconciliations are a must. You need to regularly reconcile your accounts against external sources like bank statements, loan statements, etc. It’s the only way to know that your accounting records are complete and accurate.
Unfortunately, it’s far too easy to skip reconciliations in the busy rush of the end-of-month or end-of-year closing. But to keep your books in good shape, you need to reconcile regularly. The more crucial the account (large balance or high-risk for issues) the more often you need to reconcile. You may not have time to reconcile everything on a monthly basis but you should make sure to at least reconcile:
- AR and AP
- Prepaid expenses
- Payroll liabilities
- Accrued liabilities
- Loans and other forms of debt
Failure to Communicate
Accounting isn’t just about numbers, it’s about the ideas those numbers represent. The first communication failure that trips people up is failing to communicate accounting insights to the people who need them. Whether you’re doing your own accounting or working on it for the company, you need to share crucial information in a clear way so better decisions can be made.
If you’re working within a team, communication is even more important. Without it, accounting steps and processes will be duplicated and a lot of energy wasted. You need to clearly lay out everyone’s responsibilities and make sure you know if there’s a special order in which things need to happen.
Partying Like It’s 1999
There’s nothing magical or romantic about doing things in the hardest possible way. Accounting technology has come so far in the past few years. There’s no reason to be working like it’s 1999, or even 2009. Starting with your primary accounting software, you can pull together some amazing tech tools to help make your job easier. Many of these apps and tools will sync to your accounting software to automatically import data and verify the accuracy of it.
Technology also allows you to share accounting records across the team or company, working on them simultaneously or even remotely. This makes it much easier to get the job done in less time and with less stress.
Take some time to think through which of these mistakes you may be making and which ones are having the biggest impact. Then get to work solving the biggest problem first and you’ll see a world of difference in your accounting process.