6 Common Bookkeeping Mistakes Made by Small Businesses

As a business owner, it's natural to manage every aspect of the business yourself. Thus, small businesses often consider hiring a bookkeeper as unnecessary expense and end up handling the accounts themselves, which could lead to expensive mistakes. Let's review these mistakes and learn how you can avoid them:

There’s no question that maintaining accurate financials is a fundamental part of doing good business, yet many small business owners do not take it seriously. Being aware of the most common bookkeeping mistakes can save you from disorganized financials, unnecessary stress, and potential penalties.

To help prevent situations like these, we have compiled a list of the six most common bookkeeping mistakes made by small businesses, and how you can avoid them.

Having One Bank Account for Business and Personal Expenses

The most common mistake made by many startup businesses is using personal bank account to pay for business expenses. If you don’t follow the CRA tax guidelines, you may end up getting in trouble when it comes to filing your annual taxes. This practice could lead to a CRA audit and your business could face serious consequences in terms of interest charges and penalties. It is essentially important to immediately draw the line between personal and business expenses and get a separate business bank account and credit card.

To make bookkeeping easier, keep your business transactions separate from your personal ones. If your business transactions are mixed up with your personal ones, you will end up spending hours sorting out disorganized business receipts and eventually lose control of your bookkeeping affairs. It takes much longer for an accountant to do books for an disorganized business which means that you'll end up paying a higher bill at the end of it.

Misplacement of Receipts

Often, business owners make the mistake of not saving the receipts and relying on the bank statements or credit cards. Failure to not having your business receipts can lead to a bigger problem over time in the event of a tax audit and if the CRA were to ever question an expense and you don’t have a copy of the receipt, they could deny it.

It is highly recommended to keep track of your receipts and keep them in the safe place and save a copy on your computer and the cloud.

Not Knowing Your Tax Obligations

If you run a small business in Canada, you need to be aware of the taxes which are applicable to your business. if you fail to comply with tax rules and guidelines, you will end up in serious trouble at the time of CRA’s assessment. When you file your corporate tax returns, the Canada Revenue Agency (CRA) may issue a review prior to the initial assessment of your submitted tax return. It means a CRA auditor may ask you for more information on some of the line items included in your tax return. Unable to provide such information will result in denial of such expenses or may start a formal investigation against your business on prior returns.

It is essential to provide all the necessary information to the CRA’s examiner during the entire assessment process. When you are not fully aware of your tax obligations, it would not be possible for you to provide relevant documents for the successful completion of your assessment with the CRA.

Not Having a Financial Insight

Financial planning such as budgeting and forecasting is a crucial part for stability and growth of a business. A full understanding of short- and long-term forecasting is essential for setting small-business objectives and for measuring growth. Each forecast requires data from yesterday, an eye on the present and a look toward tomorrow to envision and plan for sustainability and growth.

An accountant will review bookkeeper's work and prepare monthly financial statement. Accountant can also help you understand and plan for the various costs involved in starting, building and growing your business. It is recommended that you review these statements with your accountant on regular basis to get analytical support for your business activities. Accountant can provide valuable insight by preparing, reviewing and analyzing current financial statements and create a annual budget and monitor performance against the budget. This allows you to manage your cash flow and determine if your are on track with your business objectives and make continuous improvements where necessary.

Performing Bookkeeping Once a Year

If you do your bookkeeping at the year-end, there are chances that you make more mistakes and errors while recording transactions and reconciling accounts . The bank reconciliation is a process used to ensure that the company’s books are aligned with the bank statements. To have your books in order, you need to do your bookkeeping and bank reconciliation every month. Don't panic, it will become second nature once you've done this couple of times. If you are doing these verifications steps once a year, it could result in irregularities or errors in your books and you will get in big trouble if CRA decides to review your books.

Not Hiring an Accountant

To save money, some small business owners attempt to do their bookkeeping on their own. It is a non-cost effective way of conducting your business because it can hurt your business in case CRA decided to audit your books due to errors and mistakes.

Hiring a qualified CPA is crucial to the growth of your business. A CPA is an experienced and professional accountant who can provide strategic planning to support your business. They are experts in their field and well worth the investment. A CPA can provide assistance with planning the best financial strategies, review and analyze financial statements, build out budgets and forecasts, develop year-end tax panning strategies, and ensure that your taxes are filed with all possible deductions. For more information, read our article on 5 Reasons to Hire an Accountant : Small Business Guide.

Our accounting firm has many years of experience in assisting businesses with their accounting and tax needs. Our services include financial statement compilations, corporate taxes, personal taxes, bookkeeping, sales taxes and consulting. Get in touch and we’ll be happy to help!