10 Common Accounting Mistakes and How to Avoid Them

Accurate accounting is essential for the success of any business. Without it, you may not have the critical information needed to guide your business toward profitable growth. Filing annual tax returns can also become a daunting task filled with errors, and your business could face increased risks of fraud. To ensure your accounting remains precise, it’s important to understand the common mistakes that can occur and how to avoid them. 

In this article, we’ll explore the 10 common accounting mistakes and offer simple steps you can take to prevent them from affecting your business.

• Inadequate Checks and Balances

In small businesses, it’s common for one person to manage all financial tasks. While hiring extra staff just for oversight might seem unnecessary, the lack of checks and balances can lead to serious issues.

If someone other than you, the owner handles all financial matters, your business is at risk for fraud. Even if your employees feel like family, no one should manage business funds without proper oversight.

How to Avoid It: Establish checks and balances wherever possible. Ensure the person managing bookkeeping is not the same person making deposits. Avoid giving employees signing authority on bank accounts, and review bank statements along with canceled checks monthly.

• Improper Record-Keeping

While filing may not be enjoyable, it’s still essential, even in the digital age. Digital tools have minimized paper clutter, but managing digital records is just as important as managing paper ones.

During a tax audit, you may need to provide receipts to validate business expenses. Beyond taxes, accurate records are critical if you sell your business, as buyers will likely require an external audit or formal valuation. Proper documentation helps verify your financials and can prevent employee fraud by ensuring all expenses are properly accounted for.

How to Avoid It: Use a receipt capture, filing, and backup system with tools like Receipt Bank or Hubdoc, and ensure consistent use of these systems.

• Skipping Bank Reconciliations

While bank feeds synced with accounting software make data entry easier and provide real-time balance updates, they don’t eliminate the need for monthly bank and credit card reconciliations.

Reconciling your accounts at the end of each month ensures that your books match your bank or credit card statements. This process helps catch errors and can prevent fraud by validating your financial data against external records.

How to Avoid It: Make monthly reconciliations a habit. Set a reminder in your calendar to complete them within a few days of receiving your statements. With bank feeds, this process should only take a few minutes.

• Not Reconciling Loan Accounts

Loan accounts, like bank and credit card accounts, also need regular reconciliation whenever you receive a loan statement.

Reconciling your loan accounts ensures the liabilities section of your balance sheet is accurate and that loan payments are properly split between principal and interest. Without this, your liabilities and interest expenses may be understated if the entire payment is incorrectly applied to the principal.

How to Avoid It: Schedule regular loan account reconciliations, just as you do for bank accounts. At a minimum, reconcile these accounts before filing your tax returns each year.

• Changing a Closed Period

Making changes to a closed accounting period can disrupt your financial statements, leading to poor business decisions based on inaccurate data. If changes are made after filing a tax return, you may even need to file a revised return. While these mistakes are avoidable, fixing them can be costly.

Once an accounting period is closed, meaning all data is entered, reconciled, and verified, any changes require redoing the closing process. It’s easy to accidentally post transactions to a closed period, often by inputting the wrong date, but this mistake can cause significant issues.

How to Avoid It: Use the closing password feature in your accounting software to lock periods once closed. Many business owners overlook this simple safeguard. A closing password like the period’s end date prevents accidental changes and gives a warning if a transaction is mistakenly posted in a closed period.

• Undeposited Funds on the Books

This error, often seen in businesses using bank feeds for data entry, occurs when a payment is recorded in the bookkeeping software, but the deposit hasn’t been posted.

Undeposited funds can result in overstated revenue, leading to overpayment of taxes and false assumptions about business growth.

How to Avoid It: Ensure deposits are accurately entered into your accounting system. Regularly check your balance sheet for undeposited funds. The balance should be $0, and if not, investigate. If old transactions remain in the account, it signals an accounting error that needs to be addressed.

• Over-Relying on Automation

While automation has streamlined bookkeeping, it’s not perfect. Common issues include incorrect payee names, transactions posted to the wrong accounts, and owner’s draws mistakenly recorded as transfers to asset accounts.

Accounting software with AI capabilities makes assumptions based on past transactions and other businesses’ data, but it’s not foolproof. Errors like incorrect payee names can cause major issues, such as inaccurate 1099 reporting, which could lead to vendors being taxed on income they didn’t receive.

How to Avoid It: Establish a workflow to prevent these errors. Ensure your bookkeeper doesn’t automatically accept transactions from the bank feed without verifying them. Entering transactions first and then matching them with the bank feed is a best practice to minimize errors.

• Balance Sheet Items on the Profit and Loss Statement

This error often occurs when a bookkeeper without accounting expertise is managing the books. It involves recording asset purchases, liability payments, and owner’s draws as expenses, or loans as income.

The profit and loss statement should reflect revenues and expenses for a specific period, while the balance sheet summarizes assets, liabilities, and equity at a point in time. Mixing these can distort your financial picture and lead to incorrect decision-making.

How to Avoid It: Ensure your bookkeeper has basic accounting knowledge or consults with your accountant to establish proper practices. Have your accountant review your financial statements quarterly. If balance sheet items are temporarily included on the profit and loss statement for clarity, correct them before filing taxes or applying for financing.

• Overstating Revenue

This error often occurs in businesses that invoice customers for later payment and use bank feeds for data entry. Without proper workflows, your profit and loss statement might mistakenly show nearly double your actual revenue.

Overstating revenue can lead to paying more in taxes than necessary, and you may falsely believe your business is thriving when revenue is actually down.

How to Avoid It: Set up clear workflows to ensure incoming payments are posted correctly against open invoices, not directly to revenue. A monthly review of your accounts receivable will help ensure this process is followed.

• Not Using Your Accounting Software Properly

Modern accounting software offers powerful features and can generate detailed reports to support business decisions. However, these benefits only come if the software is used correctly.

Why It’s Important: While accountants may rely on journal entries, relying solely on them or using them to fix mistakes can produce accurate financial statements but distort the subsidiary reports you need for day-to-day business management.

How to Avoid It: Ensure your bookkeeper is proficient with the software and uses it as intended. Most modern accounting systems are form-based, and journal entries should be used only as a last resort.

Inaccurate accounting can lead to serious issues, from overpaying taxes to making misguided business decisions. By identifying and fixing errors early, you can keep your financials on track and ensure your business runs smoothly. At Reconcilix, we specialize in maintaining accurate financial records and can help bring your books in order. With our expert bookkeeping services, we ensure your records are up-to-date, error-free, and compliant, giving you peace of mind and allowing you to focus on growing your business. Let Reconcilix be your partner in keeping your financials in perfect balance.