Top 5 book-keeping mistakes to avoid!

Kirsty Young Business Tips, Tax

Our book-keepers and accountants regularly see common mistakes made by business clients who do their own bookkeeping.

If you’re making the same mistakes in your business bookkeeping, these will cost your business money in either additional tax or penalties. More importantly, you won’t get the ‘right’ numbers on which to base important business decisions.

  • If you can’t see the correct amount of profit you are making, how do you know if you could hire that next (or first) person to join your team?
  • If you are entering costs incorrectly, your tax bill will be wrong.

 

The top 5 common mistakes to avoid!

This blog mainly deals with common mistakes from an accounting software point of view (Xero, QuickBooks etc). However, many of the points apply even if you are keeping a basic spreadsheet instead.

1 The obvious one – incorrect entries

The most common error is simply entering the wrong dates, amounts and/or category of a given cost. A simple error can become double-trouble if you’re using accounting software where your bank is connected, and sends a ‘feed’ to the app.

These apps are clever and try to match amounts paid on your bank statement with receipts you have entered into the system. It says, ‘Hey is this amount on your bank statement paying off this receipt?’.

If the values don’t match, the app won’t be able to match up the receipt you’ve entered. In most cases, this leads to the app adding the bank statement line as a cost again. This effectively is double entering that cost, once as an incorrect receipt, and once when seen on the bank statement/feed.

If you are VAT registered this is even worse, as you potentially have a double VAT claim, or at best an incorrect one!

2 Not checking your ‘accounts payable’ / ‘accounts receivable’ reports

One of the best ways to check you have these important accounts right is to bring up a ‘Accounts Payable’ report. This shows who you owe what to on any given day.

Check your Accounts Payable report … and think, “Is this correct at that date?”. If you have items that are negative figures, or you think “I don’t owe that!’”, it’s likely you have a bookkeeping problem.

Another common indicator of a mistake is where this report has negative figures on it, aka incorrect balances. What’s more, this is just one side of the problem. It’s also likely your Profit and Loss report is also wrong, and that’s the one that shows how much money you are making – or not!

Points to look out for are:

    • Personal payments. When you paid a receipt personally, so it didn’t come out of your business bank account. You just need to mark it as paid in your software.
    • Duplicate entries. If you have a balance due to one of your suppliers you know isn’t right, try checking the individual invoice/receipt listing to see if there is a duplicate amount there.
    • A negative figure. This makes it looks like you’ve overpaid. It’s often a dating issue with either the receipt or a payment, but it could be a multiple of other issues.

Now do the same with your accounts receivable report. This shows which customers owe you money. You are looking for the same errors (invoices you know are paid, negative numbers, etc).

3 Entering net wages direct to ‘wages’

You will usually have a few elements of pay to account for such as:

    • Gross wages (what it actually cost you)
    • Net wages (what went to the employees’ bank)
    • Tax/National Insurance (that you pay to HM Revenue & Customs having deducted it from their bank payment)
    • Employers National Insurance costs

You may also have pension costs to deal with.

Wages paid to you or your team that are run through a payroll scheme often require multiple entries. Often we see just the net wages being put to ‘Wages’. This is incorrect as the true cost is usually much higher than the amount that goes into the employee’s bank account.

When HMRC are paid, that transaction is often put to all sorts of categories! Often the best way deal with this is to use a ‘Journal’ and what is known as a ‘control account’ for wages paid, PAYE and pensions. However, that’s a subject way too long to explain in this short blog!

4 Entering ‘assets’ as an expense item

Items are often treated as business ‘assets’ if they:

    • Will last more than a year
    • Are usually higher value (say over £200)

These items should get put into an asset category, not an expense.

For example, your new MacBook should go to ‘Computer Equipment’ (Asset) or ‘Plant and Machinery’ (!) (Asset) etc, rather than some other expense line. This will help make sure your accounts are correct.

5 Entering drawings or dividends as a ‘wages’ expense

When you are paying yourself, some owners will put their pay to ‘wages’.

Unless they are wages paid through a payroll scheme, these costs are not technically ‘wages’. They won’t be coming off your profits, as they ARE the profits! So, they shouldn’t be shown as a company expense.

    • Generally, these payments should go to accounts such as an ‘equity’ account called Dividends Paid (Ltd company) or Owners Drawing (sole trader).
    • If you’re a limited company, you might also point them at the ‘Directors Loan Account’ and deal with them later.

You can see more information on paying yourself as a limited company in our blog on director’s pay basics, and in this one on dividends.

 

A final ‘Bonus Mistake’

There’s one final critical common mistake to avoid – make sure your bank balance is correct inside the software! There are many ways to do this, but one would be to bring up a ‘Balance Sheet’ report, go the bank balance and check the figure shown there matches your bank statement on that date.

If not, you have some work to do!

 

Want to avoid making these top 5 mistakes?

Ask your accountant or book a consultation with us. We offer a paid 1-hour, 1-2-1 consultation so you can ask simple questions of an accountant. If you don’t have an accountant or bookkeeper yet, we’d love a chat about how we can help.