As a small business owner, you understand that mistakes are inevitable. While you cannot avoid every error, it’s important to mitigate and prevent them from compounding or escalating. The key is to know how to detect and correct mistakes early on and implement systems to avoid recurring issues.
This is especially true when it comes to your accounting and the financial health of your company.
Business accounting requires a lot of data collection, input, management, and analysis. All of which lends itself to human error — especially when not performed by a certified public accountant or accounting company.
Even the smallest errors can affect the accuracy of your financial documents, thus rendering any subsequent interpretations useless. The best solution to preventing accounting errors is to hire a local accounting firm to manage your finances, as they are the most qualified and experienced.
However, some businesses prefer to keep their accounting solutions internal. If that describes your company, then it’s important to understand the most common accounting errors made by small businesses so that you can identify the mistakes and resolve them quickly if they occur.
Don’t Forget to Record the Small Transactions
Sometimes transactions slip through the cracks, resulting in inaccurate or missing information. Failing to record transactional data is often referred to as an “accounting error of omission.” These errors typically include things like forgetting to enter expenses, omitting sales transactions, or failing to adjust inventory quantities to reflect the current levels.
Errors of omission are some of the most difficult mistakes to catch. And, even worse, they become more difficult to detect the longer they go unnoticed. That’s why it’s important to establish clear standards and practices for the prompt submission of documents (e.g., invoices, receipts, etc.) and timely bookkeeping. You’ll be far less likely to miss smaller transactions if you implement systems that encourage and monitor timely inputting of that data.
Mitigate Data Entry Errors
It’s amazing how a single missed keystroke can throw your balance sheet completely out of whack. Data entry errors can occur in a variety of ways. There are transposition errors which occur when numbers are reversed inadvertently. For example, by entering 83 instead of 38. There are also simple typographical errors, such as when a 6 is accidentally entered into a database in place of a 9.
Regardless of the cause, it’s important to audit your work and practice due diligence every time someone adds or modifies data.
Prevent Data Misclassification
Another common accounting error s the incorrect classification of data, such as mislabeling assets and liabilities. As you’re probably aware, assets provide future economic benefit, while liabilities represent financial obligations (debts, long-term expenses, etc.).
Clearly, there’s a big difference between the two. It goes without saying, incorrectly classifying an asset or liability can dramatically affect your financial statements and paint an inaccurate picture of your business’s financial well-being.
Steps to Help Prevent Accounting Errors
While accounting errors can be difficult to prevent, there are steps you can take to minimize the likelihood that they’ll occur in the first place. Strong internal controls are essential to prevent mistakes that can cause long-term accounting problems. All it takes is some planning and preparation.
It may seem tedious and time-consuming right now, but it will pay off over the long haul. The fact of the matter is that it usually takes more time to clean up an accounting mess caused by a mistake than it does to get it right the first time.
Here are a few steps you can take to reduce the likelihood of accounting errors in your business:
- Ensure that your forms are consistent, so employees know what to expect when entering data into your accounting software.
- Hire knowledgeable employees who have an eye for detail.
- Make sure that you have enough staff to handle the workload. Being understaffed is an easy way to ensure your accounting department rushes through work and make mistakes.
How to Detect Potential Accounting Pitfalls
In a perfect world, your internal controls will prevent accounting errors from ever occurring. But in reality, errors like those outlined above can still take place. That’s why you need systems in place to detect errors.
Accounting systems and controls become even more important as your business grows. If you haven’t gotten serious about your accounting practices, now is the time.
Here are a few tips for detecting accounting pitfalls:
- Maintain digital copies of all financial documents so they can be easily accessed and reviewed if any accounting issues arise.
- Conduct monthly bank reconciliations to detect and correct accounting errors.
- Conduct fixed asset reconciliations on an annual basis so you can ensure that you’ve booked the amount of depreciation expense.
You will find that your business will run much more smoothly if you look for ways to prevent errors and have a routine of performing reviews and reconciliations.
A Few Final Thoughts
No matter the size of your company, it’s important that you take your accounting seriously. It is critical that you have an accurate picture of your company’s financial health. Without strenuous booking and accounting systems, you’re more likely to have a distorted picture of your company’s condition. Don’t let sloppy accounting practices undermine the financial security of your organization. Take control today and get an accurate record of where your business’s money is going.
If you need professional accounting help, please contact Rivero, Gordimer & Company — A Tampa Accounting Firm with decades of accounting experience!
