As a business gets rolling, a myriad of factors can combine to create accounting issues. Although perfect accounting is as mythical as the unicorn, it’s important for business owners to adopt a strategy of keen bookkeeping oversight. The alternative is certain to result in mistakes, which can jeopardize the progress of your business.
In fact, losing track of your financial data is bound to result in inaccuracies that can cripple an operation. Sound basic procedures go a long way to promoting business success.
Matching customer payments to invoiced work is clearly a crucial objective for every enterprise. The proliferation of accounting software to aid in this process has been both a blessing and a curse. The blessing is that less time is spent finding invoices and comparing payment amounts. No more verbal quotes and hand-written invoices; accounting software permits simplified tracking of unpaid invoices and eliminates disputes. Moreover, summary financial statements of income and costs are compiled with no additional steps.
Its curse is that it results in a false sense of comfort that the computer accurately records what’s transpired. In fact, accounting applications only record what a human enters. You must scrutinize reports regularly to ensure that transactions are posted to the correct accounts.
For example, entering a received payment and not applying it to an invoice—or to the correct invoice—results in erroneous statements of income and costs. Prevent this by monitoring accounts receivable aging reports to be sure payments are posted to the correct invoices. An accounting program should produce “cash basis” financial statements, which by definition will not indicate any balance for accounts receivable—unless an error has been made.
Another bookkeeping goal is paying bills received from vendors. Accounting software facilitates the entry of a bill and subsequent payment. But correctly applying payments to existing bills in the system may be problematic: for example, matters are distorted when someone pays a bill by company credit card and then pays the credit card bill. Failure to follow the exact steps in these events will render inaccurate reporting of income and expenses. This solution rests with examining accounts payable reports; a “cash basis” balance sheet should not contain any amount for the accounts payable account.
It also makes sense not to enter loan payments as bills to pay. The indebtedness is already in the bookkeeping system and is reflected as a liability on the balance sheet. Loan payments, therefore, need not impact the accounts payable process. Simply record a check and apply respective amounts to the separate accounts for the liability and interest expense.
You can reliably compile business income and expenses by setting high standards of accuracy for accounts receivable and accounts payable. Tax professionals will know if accounting software mistakes have been made in these areas, and won’t permit income tax reporting of spurious data.
However, it’s difficult for your accountant to locate errors that occurred over long periods. In order to eliminate problems later, it’s important to quickly find bookkeeping mistakes and immediately correct them.