Top 10 Bookkeeping Mistakes and How to Avoid Them with Kim Wolfe

1. Not Making Sure The Data Makes Sense!

I started a career in bookkeeping as a stay-at-home Mom when I was asked to be a part-time bookkeeper at the local flight school. The school had a long-time bookkeeper who would come into the office several times a week. One of the first things I noticed was that QuickBooks vendor balances didn't match the balance of the bills received in the mail. This problem was systemic over many vendors and went back months and even several years in some cases! Either the prior bookkeeper never noticed, or didn't know how to fix, or worse, and most likely, didn't care enough to fix! It's very important to slow down enough and care enough to review your data to make sure it makes sense! A quick review of the balance sheet, the income statement, the accounts receivable, and the accounts payable report will do the trick! The best part of this story is that it was this exact scenario that inspired me to start my bookkeeping business. Even though I had no prior training, I needed an opportunity to work at home with my small children and I knew if I cared enough, I could be better than my competition and there was an obvious need for small businesses.

2. Ignoring Un-cleared Items in the Bank Reconciliation

It's not ok to ignore transactions that are left un-cleared in your bank reconciliation. These uncleared items are likely errors and are sure to be affecting the profit and loss report. The only items that should be left uncleared are issued checks that haven't cleared the bank yet. Debits and deposits should not be outstanding for more than a day or two. You'll need to determine why these transactions are still outstanding and fix them. One of the first things to check is to see if the transaction is in QuickBooks twice.

3. Expensing Loan Payments

All too often we see loan payments on the income statement as an expense. A loan payment belongs on the balance sheet, to reduce the liability. I like to enter 100% of the payment towards the loan balance. In other words, I don't split the loan payment between liability and interest. I enter the interest in the reconciliation window or create a journal entry so that the interest accrues on the loan register and I'm able to match the source data.

4. Not Reconciling Loans

Loans must be reconciled, just as you would a checking account. This will make sure the interest expense and any fees have been correctly accounted for. It will also make sure the loan payment wasn't expensed!

5. Expensing Assets

Check with the CPA, but typically, purchases of tangible items over $2,500 should not be expensed but put on the balance sheet as a fixed asset. Even items purchased for a lesser dollar amount could be put on the balance sheet and then 100% depreciated. You'll want to develop a procedure for reviewing transactions to catch items over a specific dollar amount that have been expensed instead of put on the balance sheet (capitalized).

6. Not Closing the Books

It's important not to have a moving target! Once the books are delivered to the CPA for preparation of the tax return, it's important to close the books. I like to make sure I prompt for a warning and also enter a password when changing data from a prior year. The password is not for security purposes, but to make sure you don't accidentally pound through the warning.

7. Expensing Sales Tax

Sometimes we see a sales tax expense on the income statement. Sales tax is collected from the customer, as a liability owed back to the state. So, the sales tax payment should either reduce a liability. or, if the liability was not accrued, it should reduce income. For the most accurate financials, the liability should be accrued in the proper accounting period.

8. Not Entering Credit Card Data Correctly

We've seen some creative ways to enter credit card data. One of the most common errors we see is a single entry for the credit card statement - the payments are split between different expense categories. This is a bad idea for 3 reasons. It doesn't work for partial payments, your transactions are not dated on the correct date, and you can't transaction data by vendor. It's important that each individual credit card charge is entered separately as a charge on the credit card.

9. Growing Undeposited Funds

Without the proper workflow, you may end up with growing undeposited funds. This also usually means income has been double-counted. This causes your income statement to be wildly off. It's important to tie your deposits to payments that were received on invoices. If you're creating invoices, your deposits should not post directly in income accounts. Instead, tie to the undeposited funds or directly from payments. As a side note, we always recommend always posting payments to undeposited funds and not directly to the bank account.

10. Not Reconciling Payroll

A common mistake we see is payroll posting to a generic payroll expense account. For outsourced payroll, there are typically 3 payroll debits for each payroll run. One for the net payroll of the direct deposits, one for the taxes, and one for the processing fees. There are several reasons you want to make sure your payroll expenses reconcile with your payroll tax reports, such as the 941's and the 940. We create a spreadsheet where we input data from the tax forms and the same data from QuickBooks, and we look for differences. There are all kinds of things that can skew your numbers in a generic payroll expense account, such as employee advances, employee reimbursements, garnishments, health insurance deductions, and so on. Instead of "Payroll Expense", we like to see Payroll Wages (separated by staff and officer) and tax expenses (employer only) separated by Social Security, Medicare, FUTA, and SUTA.