12 Common Bookkeeping Errors to Avoid
12 Common Bookkeeping Errors to Avoid Small business owners aren’t always trained in bookkeeping and accounts. However, they often find it necessary to complete their own bookkeeping due to financial constraints. In this situation the ideal thing would be to get a qualified bookkeeping to help set up a bookkeeping system. The business owner can then carry on using the system with very little help. In the long run this saves the business owner both time and money. Whether a business owner sets up his/her own bookkeeping system or hires a bookkeeper to help the following are some common bookkeeping errors to avoid: 1. Not saving receipts for small expenses. This is one of the biggest mistakes that we find many small business owners making. Such receipts provide backup documentation for the many deductions you may claim and can prove valuable when completing bookkeeping records and during a tax inspection. 2. Forgetting to track reimbursable expenses. Many small business owners often pay for expenses with their own money or personal credit card and fail to submit the expenses to the company for reimbursement. These expenses then go unrecorded resulting in profits and taxes being overstated. Whilst having higher profits may be a goal, paying more taxes than you need to certainly isn’t.
3. Misusing cash. Many small businesses are nonchalant about using cash and often use cash without keeping accurate records. A system should be set up whereby a specific amount of cash is set aside for use. Each time money is taken out for any purpose, a petty cash slip is filled out detailing what the cash was spent on. When the fund is almost exhausted, the slips will total the amount used and a cheque can be written to cash to set up the full amount again. All Cash received should be banked to prevent misuse. 4. Not reconciling the books with the bank statement each month. One of the fundamental aspects of bookkeeping is reconciling the books and bank statements every month. Some businesses fail to check their bank statements each month and many do not carry out reconciliation procedures or fail to do it correctly. This results in errors not being picked up and dealt with in a timely manner. This is a good reason for hiring an experienced bookkeeper who has the knowledge to handle reconciliations. 5. Not deducting sales tax. A common mistake in small retail businesses that are VAT registered is not deducting the VAT from the total sales figure. The result is total sales and thus profits and taxes are overstated. Paying more taxes than necessary is not something any small business wants to do. 6. Not deducting purchase tax. Another mistake is not deducting VAT on purchases. The result is overstatement of expenses and understatement of profits and taxes due on profits. Penalties and interests
could be incurred for failing to pay the correct amount of tax. 7. Incorrect calculations for VAT. Not all items are subject to VAT. Some small business owners when doing calculations mistakenly account for VAT on nonvatable items. Some common ones we have seen are postage stamps, train travel, milk bought for tea. Even where items would normally carry VAT, VAT cannot be accounted for in the absence of a VAT invoice or where the supplier is not VAT registered. 8. Mis-categorization or over-categorization of expenses. Categories for expenses are fairly standard. However, there are instances when expenses are entered into the wrong categories or too many categories are created. Use of general bookkeeping guidelines for standard categories is advised. As few new categories as possible, should be created. Following generally accepted accounting practices is best. This is where a qualified bookkeeper would be helpful. 9. Not properly classifying workers. With the number of independent contractors and consultants on the rise, determining who are employees and who not, is increasingly difficult. This results in small businesses classifying people who should be employees as nonemployees. The penalties suffered for mis-classifying could be quite costly both in terms of misfiling when it comes to payroll tax returns and persons classified as non-employees later claiming to be employees.
10.Failing to register for VAT on time. Many small businesses who fail to keep proper books of account and even some who do, fail to recognise when they have reached the threshold for registering for UK VAT. The registration threshold is currently £81,000. When a business’s turnover in the preceding 12 months reaches this figure they must register for VAT. Please note the registration threshold changes from time to time. 11.Not keeping or organising bookkeeping records. HMRC requires that records used to determine a business’s (or individual’s) liability to tax be kept for a minimum of 6 years. Penalties of up to £3,000 can be incurred for failure to keep records. Keeping records that are organised in an orderly fashion makes sense as this helps you to provide your accountant as well as HMRC, if they need to ask you anything, with the information they need. This in turn allows you to save time and money. Where all files are kept on a computer system, backup documents and files should be available, especially since computers could be prone to technical problems. 12.Not hiring a professional bookkeeper soon enough. Many small business owners aren’t experienced in finance and make mistakes that could be costly. Having a competent bookkeeper coming in to handle the books can be extremely beneficial in that they have the skills to do the job quickly and efficiently and will provide a second pair of eyes to find errors and make suggestions.
For help or support with your Bookkeeping, VAT, Payroll, Accounts and Self-Assessment Tax Returns please contact Daphne@cbksltd.co.uk or alternatively we can be reached on either of the following numbers: Tel: 0208 419 8339 Mobile: 07900 956 326