Accounting and bookkeeping services are crucial to every business. Just like the roots of a plant go deep to maintain its strength, the accounting activities set up a strong foundation for the growth plans of a firm. Without it, the business operations will go haywire. Any erroneous action can set the company back by millions. The integrity of your business gets threatened when you do not maintain precision in drafting your accounts. Even the highly qualified professionals, when they ignore some principles, can lead the company to the path of bankruptcy.
Weaknesses in accounting and bookkeeping services can ruin the image of the company among the stakeholders. The credibility reduces, and it has a severe impact on the company’s relations with other parties. If you do not treat these errors on time, they can snowball into a huge mess that can cause the downfall of your firm. If you are wondering what these errors might be, here is a list of pitfalls that you should altogether avoid and protect your firm:
1. Errors in Data Entry:
While entering the data into the books or software, it might be possible that you note the figures wrong. You may confuse the zeroes and enter a lower or higher amount, which can mess up the firm’s financial scenario.
Since the foundation is inaccurate, further processing and reporting results do not show an accurate financial picture. It may mislead the stakeholders and miscalculate tax liability. When the government realizes the mistakes in your accounting and bookkeeping services, they will impose hefty penalties.
Therefore, you can avoid such a situation by verifying the financial information. You should adopt a consistent method for accounting and data entry. Also, you should develop a habit of balancing the debits and credits periodically and correcting any errors before they become a nightmare. Also, you should store your supporting documents correctly to verify the precision of the work.
2. Omitting a Transaction:
Sometimes when the workload is sky high, the accounting and bookkeeping services provider may succumb to it. The pressure may lead them to miss recording an entry completely. The size of the amount doesn’t matter because every transaction holds significance in accounting. You might lose the chance to claim tax deductions or other benefits because of an omitted entry.
It isn’t accessible to verify the impact of this entry because there is no entry on either side of the double-entry bookkeeping system. The firms may not even realize the missing entry until it pops up later. Such a scenario also signifies the importance of maintaining and updating the documents regularly. It will smoothen the process of reconciliation.
3. Throwing Away The Receipts:
The major mistake that a business can commit is throwing away the official receipts. These receipts verify whether the transactions recorded are consistent or not during an audit. No matter how minor a transaction is, if it is a business expense you have registered in the books of accounts, you should always maintain the proof of transaction. The more tokens you have to back up your claims, the more will it benefit you.
The experts advise you to keep the receipts with you for at least three years or as long as the government can audit you. You can also use automated accounting outsourcing services to store and secure your data digitally.
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4. No Distinction Between Personal and Business Deals:
The one mistake that small business owners usually make is mixing up personal and business transactions. When you forget the distinction between the two, your reports deliver inaccurate financial results for the firm. The financial statements do not reflect the exact financial picture and allow personal assets to be used for business. You must realize how messy and troublesome can such an act become in the long run.
Therefore, it will be better to record such transactions separately. You can either open a different business bank account or classify the personal expenses in your financial records separately. Doing this at a later stage can become increasingly cumbersome and expensive accounting and bookkeeping services.
5. Net Profit Equals Cash Flow:
If you also think that your net profit is the equivalent of how much cash you have in your bank account, you are highly mistaken. ‘Net profit’ and ‘Cash flow’ are two different terms in the accrual accounting method. While cash flow signifies the cash position, inflows, and outflows, net profit comprises non-cash or outstanding items.
The accrual method follows the accounting principle of recognizing losses but does not account for profits. It states that a company must create reserves for any uncertain situation like bad debts. Also, depreciation, provisions or outstanding expenses affect the net profit, which may not involve any cash flow. Therefore, it becomes significant for a business to treat these terms distinctly to reduce any chance of losses.
6. No Reconciliation:
You are making a blunder if you think reconciling accounts with bank statements is a waste of time. Regular monitoring and balancing the sum of both accounts ensure financial stability. When you do not intervene for a long duration, you may miss some entries that should or should not be in there. It may set your operations back significantly.
The accounting outsourcing services should ensure the delivery of accurate and precise reports.
7. No Budgeting or Controlling:
Creating budgets is as essential as water to a thirsty man. It allows the firms to grow and adopt flexibility. If you do not set budgets aside for a particular purpose, you can not keep a tab on your expenses. Budgeting acts as an internal control tool that specifies the limits for a specific area. With proper controlling techniques established by Whiz Consulting accounting and bookkeeping services providers, you can measure your progress.
The list of accounting errors that adversely impact a business is pretty long. However, it all comes down to monitoring, verifying, updating, and maintaining the records properly to ensure that you are not one of the victims of this nightmare.