As bookkeepers and accountants, we frequently encounter common errors made by businesses who handle their own bookkeeping.
If you’re making the same mistakes in your business bookkeeping, these will cost your business money in either additional tax or penalties. More importantly, you won’t get the ‘right’ numbers on which to base important business decisions.
- If you can’t see the correct amount of profit you are making, how do you know if you could hire that next (or first) person to join your team?
- If you are entering costs incorrectly, your tax bill will also be wrong.
1 The obvious one – incorrect entries
The most common error is simply entering the wrong dates, amounts and/or category of a given cost. A simple error can become double-trouble if you’re using accounting software where your bank is connected, and sends a ‘feed’ to the app.
These apps are clever and try to match amounts paid on your bank statement with receipts you have entered into the system. It says, ‘Hey is this amount on your bank statement paying off this receipt?’.
If the values don’t match, the app won’t be able to match up the receipt you’ve entered. In most cases, this leads to the app adding the bank statement line as a cost again. This effectively is double entering that cost, once as an incorrect receipt, and once when seen on the bank statement/feed.
If you are VAT registered this is even worse, as you potentially have a double VAT claim, or at best an incorrect one!
2 Not checking your ‘accounts payable’ / ‘accounts receivable’ reports
One of the best ways to check you have these important accounts right is to bring up a ‘Accounts Payable’ report. This shows who you owe what to on any given day.
Check your Accounts Payable report … and think, “Is this correct at that date?”. If you have items that are negative figures, or you think “I don’t owe that!’”, it’s likely you have a bookkeeping problem.
Another common indicator of a mistake is where this report has negative figures on it, or have incorrect balances. What’s more, this is just one side of the problem. It’s also likely your Profit and Loss report is also wrong, and that’s the one that shows how much money you are making – or not!
Points to look out for are:
- Personal payments. When you paid a receipt personally, so it didn’t come out of your business bank account. You just need to mark it as paid in your software.
- Duplicate entries. If you have a balance due to one of your suppliers you know isn’t right, try checking the individual invoice/receipt listing to see if there is a duplicate amount there.
- A negative figure. This makes it looks like you’ve overpaid. It’s often a dating issue with either the receipt or a payment, but it could be a multiple of other issues.
Now do the same with your accounts receivable report. This shows which customers owe you money. You are looking for the same errors (invoices you know are paid, negative numbers, etc).
3 Entering net wages direct to ‘wages’
You will usually have a few elements of pay to account for such as:
- Gross wages (what it actually cost you)
- Net wages (what went to the employees’ bank)
- Tax/National Insurance (that you pay to HMRC having deducted it from their bank payment)
- Employers National Insurance costs
You may also have pension costs to deal with.
Wages paid to you or your team that are run through a payroll scheme often require multiple entries. Often, we see just the net wages being put to ‘Wages’. This is incorrect as the true cost is usually much higher than the amount that goes into the employee’s bank account.
When HMRC are paid, that transaction is often put to all sorts of categories! Often the best way to deal with this is to use a ‘Journal’ and what is known as a ‘control account’ for wages paid, PAYE and pensions.
4 Entering ‘assets’ as an expense item
Items are often treated as business ‘assets’ if they:
- Will last more than a year
- Are usually higher value (say over £500)
These items should get put into an asset category, not an expense.
For example, your new MacBook should go to ‘Computer Equipment’ (Asset) or ‘Plant and Machinery’ (!) (Asset) etc, rather than some other expense line. This will help make sure your accounts are correct.
5 Entering drawings or dividends as a ‘wages’ expense
When you are paying yourself, some owners will put their pay to ‘wages’.
Unless they are wages paid through a payroll scheme, these costs are not technically ‘wages. They won’t be coming off your profits, as they ARE the profits! So, they shouldn’t be shown as a company expense.
- Generally, these payments should go to accounts such as an ‘equity’ account called Dividends Paid (Ltd company) or Owners Drawing (sole trader).
- If you’re a limited company, you might also point them at the ‘Directors Loan Account’ and deal with them later.
A final ‘Bonus Mistake’
There’s one final critical common mistake to avoid – make sure your bank balance is correct inside the software! There are many ways to do this, but one would be to bring up a ‘Balance Sheet’ report, go to the bank balance and check if the figure shown there matches your bank statement on that date.
If not, you have some work to do!
Want to avoid making these top 5 mistakes?
Ask your accountant or book a consultation with us. We offer a1-2-1 consultation so you can ask simple questions of an accountant. If you don’t have an accountant or bookkeeper yet, we’d love a chat about how we can help.
FAQs
1. What are the consequences of making common bookkeeping errors in my business?
Making bookkeeping mistakes can lead to additional tax burdens or penalties, inaccurate financial data for decision-making, and potential financial losses.
2. How can incorrect entries impact my bookkeeping records, especially when using accounting software?
Incorrect entries, such as wrong dates or amounts, can lead to double entries and mismatches between bank feeds and receipts, potentially resulting in inaccurate financial reporting.
3. Why is it important to check ‘accounts payable’ and ‘accounts receivable’ reports in bookkeeping?
Reviewing these reports helps ensure accuracy in what your business owes and is owed, identifying errors like negative balances or incorrect figures that can impact financial statements.
4. Why should net wages not be directly entered as ‘wages’ in bookkeeping records?
Net wages should not be solely recorded under ‘wages’ as they exclude other components like gross wages, taxes, and National Insurance, which should be accounted for separately to reflect the true cost.
5. How should business assets be categorized in bookkeeping to ensure accuracy?
Items considered as long-term assets should be categorized as such and not as expenses, distinguishing between assets like equipment or machinery and regular expenses for proper financial reporting.
6. Why should drawings or dividends not be recorded as ‘wages’ expenses in bookkeeping?
Payments to owners should not be categorized as wages unless part of a formal payroll scheme. Instead, they should be allocated to equity accounts like Dividends Paid or Owners Drawing to accurately represent profits.
7. What is the importance of maintaining a correct bank balance in bookkeeping records?
Ensuring that the bank balance in your bookkeeping software matches your actual bank statement is crucial for accurate financial reporting and preventing discrepancies that could affect your financial decisions.