Top 7 Small Business Bookkeeping Mistakes to Avoid

As a small business owner, you already have a lot to juggle, never mind the fear of making costly bookkeeping mistakes! But if you’re handling your finances on top of running your business, managing team members, customer outreach, marketing—the list goes on—things can slip through the cracks. 

There are several common missteps we continue to see business owners make from one year to the next. But we hate to see hardworking entrepreneurs wasting time, money, and energy due to avoidable mistakes or things they simply didn’t know.

So, to ease your mind as you review your accounting processes, check out these errors and how to avoid them.

1. Mixing Business & Personal Finances

We see this bookkeeping mistake among many small business owners. There are many reasons not to mix your business and personal finances, but one comes to mind: the additional money and time it could cost you! 

It takes a LOT longer for a bookkeeper to untangle your transactions, meaning it will cost you more to organize your books. Or if you manage your own books, it will take you significantly more time to review transactions, review your purchases to confirm they’re business-related, and keep them organized. 

Opening separate business accounts when you first form your business prevents these inefficiencies and makes it much easier to manage your balances. This way, you can ensure you have enough funds to cover both planned and unexpected expenses. 

Being disciplined and controlling where your money is coming and going mitigates the chaos of constantly wondering, What was this for? So, one of the first things we recommend every entrepreneur do is establish separate bank and credit card accounts to avoid costly mix-ups.

2. Not Planning for Tax Liabilities

A good rule of thumb is to set up separate accounts for each type of business tax. This allows you to leave aside that money untouched until it’s time to pay your taxes. Business owners need to remember three essential taxes: federal, sales, and payroll taxes.

Federal & State Taxes

Ideally, you should have a separate account where you save a percentage to cover any federal and state income tax due for business income. 

Sales Tax

Remember, the sales tax you collect NEVER actually belongs to your business. Instead, your business is holding those funds to pass along to the state. When you collect sales tax, move it into a separate account as soon as possible so that when you file your sales tax returns, you have the funds available and don’t negatively impact your cash flow. 

Letting yourself think you can spend that money is a dangerous bookkeeping mistake we’ve seen many business owners commit. Don’t let yourself get caught in this habit!

Payroll Taxes

Some payroll taxes are paid monthly, quarterly, or annually—not each payroll cycle. If your payroll specialist tells you the bank requirement for payroll, but the wage checks written are for less, you must set aside the difference for future planned payments. 

For example, if the payroll specialist says the bank requirement for payroll is $4,000, but the checks that clear total $3,000 and no payments are processed in the next several weeks, it does NOT mean the $1,000 difference is available! This portion of payroll taxes will be due later. If the same thing happens seven payrolls in a row, you’ll need $7,000 available for a future tax payment.

Find out which frequent tax mistakes you can avoid this season.

3. Overlooking Merchant Transaction Fees or Interest Expenses

When it comes to small business bookkeeping, ongoing expenses are easy to neglect. But doing so can cause significant errors in your books and cost you more—after all, interest and transaction fees are deductible expenses!

Reconcile your business or auto loans at least annually to capture the interest paid and ensure the balance in your financial books is accurate. 

Beware that some payment processors, such as Amazon, Stripe, and Shopify, take their merchant transaction fees before depositing the funds into your account. You’ll need to pull reports from the processor to account for those expenses and update your finances accordingly.

4. Failing to Upload & Classify ALL Monthly Transactions

Ensure ALL bank transactions for the month are uploaded and classified in your accounting program.

These transactions include your deposits, cash receipts, and cash disbursements. This allows you to reconcile your bank statement and gives you clear insight into how much cash you have available. Additionally, your reflected monthly profit and loss (P&L) activity will align with the cash activity of your business.

Bottom line: These reports are ONLY as useful as the information available is complete. 

5. Forgetting to Check Your Default Bank Account

Are you double-checking the default bank account selected when you enter a “new deposit” or “receive payment”? This is one of the many accounting mistakes we see people make as they go through the motions and forget attention to detail—and it can result in unnecessary expenses.

When you enter a new deposit, payment, or expense in an accounting software like QuickBooks, the program might automatically fill in the last bank account used. This means the amount could be deposited into or expensed from the wrong account. If you enter a planned expense and accidentally pull from the wrong checking account, it could cause an overdraft.

Always verify the selected bank account to reflect planned transactions where expected.

6. Accepting Transfers in QuickBooks

Another frequent error small business owners make is accepting transfers in QuickBooks. If you enter a transaction as a “transfer,” it is much harder to track down those transactions in the future and make adjustments. 

We recommend entering all transfers between accounts as Checks or Expenses with the bank as the vendor, which allows you to see a list of all the transactions in the vendor transaction lists.

7. Trusting Automatic Categorizations

And on the topic of not unquestioningly trusting your accounting software, last but not least—don’t just automatically accept matches or other transactions in QuickBooks without double-checking the categorization!

This bookkeeping mistake can do a number on your records. Even if a single transaction to a particular vendor is categorized the same, QuickBooks may try to auto-categorize the transaction to a different category. Always review your entries and be very careful with the auto-accept rules. 

Stress Less About Bookkeeping Mistakes

Solid accounting primarily comes down to attention to detail and thorough processes. However, you’re just a human doing your best to build your business while managing every aspect of it. Bookkeeping mistakes will likely happen—especially if numbers and finances aren’t your “thing.”

If you’re ready to hand off your accounting responsibilities and enjoy total peace of mind, contact JLS Accounting today! Our team of accountants and tax professionals will find the best solution for your business’s needs. Plus, you can sleep soundly at night knowing your finances are handled properly, from accurate books and reporting to taxes being filed on time.