How To Avoid Costly Accounting Mistakes and Errors in Your Business
You must already be aware that it is not easy to run a business, especially if you are a small business. That is why so many small business owners struggle. Businesses struggle because they do not know the mistakes to avoid and how to avoid them.
One of the biggest mistakes most business owners make is accounting errors. Many business owners simply do not understand the importance of having their books properly organized and completely up to date.
This blog will help you avoid these costly mistakes and errors.
The most prevalent accounting errors and how they occur
Error of commission
This is improperly handling an item by placing it in the incorrect location. The amount you entered is accurate, and you even deposited it into the correct general account, but you used the wrong sub-account. For instance, you receive payment on an invoice but record the receipt against the invoice of a different customer. Accounting-wise, your total payments are correct, but what is displayed for a single consumer is incorrect.
Error of transposition
This blunder involves documenting the wrong quantity of an item by inverting the numbers. This can lead to an overestimation or underestimation of an item’s quantity, which is the outcome of transposing a number. For instance, instead of putting a cost of $946, you enter $496. This results in $450. This error can be costly if it involves a deductible amount that is not claimed due to the entry error.
Data entry mistakes
Errors in data entry occur when items are entered incorrectly in your accounting system. Data entry mistakes that are frequent include:
- Putting items in the incorrect account.
- Reversing the numerals.
- Omitting, including, or subtracting a digit or decimal point.
- Duplicate or omitted entries.
- Treating expenses as revenue or the opposite.
Error of repetition
This happens when you enter the same revenue or cost item multiple times. Such an issue may occur, for instance, when multiple users have access to the accounting system and duplicate entries are made.
Error of principle
This error involves the recording of a transaction that is inconsistent with generally accepted accounting principles (GAAP). This typically occurs when an entry is made in the incorrect account. The right amount has been typed in the incorrect field. An error of principle is a grave procedural blunder since it can have significant repercussions. The most prevalent example of a principle error is recording a proprietor’s personal spending as a corporate expense.
Preventing accounting errors
Here are some tips on how to avoid these accounting errors.
1. Adopt the best accounting procedures and guidelines
Do not allow employees to procrastinate. Set deadlines for data entry and reconciliation so that errors can be discovered and addressed efficiently.
Comprehend accounting standards in order to implement them into your accounting system. U.S.-based private enterprises utilize GAAP for accounting. This regulates the timing and format of income and expense reporting. Your accounting system must adhere to these requirements.
2. Staff training on data entry accuracy
Ensure that staff who enter expenses into your accounting system are familiar with your accounts and their descriptions. Take the time to describe your method in detail. Use this option if the program in question offers employee training.
Establish documentation policies so that entries can be made correctly and precisely. Record reimbursements to employees, for instance, only after they have completed expense reports, so that you know the figures are accurate.
In addition, ensure that someone with knowledge of accounting entries is available to answer issues as they arise.
3. Implement internal controls
Implement procedures that can aid in the detection and correction of accounting mistakes. Monthly bank reconciliations, for instance, will allow you to identify an issue and eliminate it from your books. The same holds true for credit card bills. Review them each month to ensure that your accounting system accurately reflects the charges.
4. Do not overwork your employees.
Employees who are overburdened with work are more likely to commit simple data entry errors than if they were given sufficient time to complete this task. Nonetheless, it is crucial that your accounting remains up-to-date and that you do not fall behind. Consider measures to simplify and improve data entry and prevent errors, such as importing expenditure report data into your accounting system using expense report software.
5. Employ the most recent accounting software
Utilize the most recent version of your accounting software. Improving software and cloud-based versions to streamline the overall accounting process is a continuous process. Cloud-based solutions are automatically updated, whereas desktop software must be purchased every few years to remain current.
Conclusion
Many small business owners have the misconception that all mistakes made in accounting are minor, and something that can be easily covered up to avoid any negative repercussions. However, mistakes in accounting can be costly and detrimental to your business’ success. This is why it’s important to watch out for common accounting mistakes and errors, and to make sure you’re avoiding them.