Accurate financials start at the bottom with complete, correct accounting practices. When business have proper procedures in accounting, they will avoid the worst of mistakes.
How serious is an accounting error? What if you released your quarterly earnings summary to investors and accidentally omitted a major expense?
Groupon, a popular coupon and rebate provider, once did exactly that.
They forgot to include the entire sum of customer rebates–the cost of their entire core service offering–on their earnings statement. It was a big blunder and a multi-million dollar difference that subsequently hurt the company’s stock price.
More often, it’s smaller mistakes in accounting that go unnoticed and skew the company’s financial data, making it more difficult to make the right strategic decisions.
Below are common accounting mistakes that you should avoid.
The days of compiling folders of paper receipts might be long gone–but the need to document expenses is not.
Your foundational accounting systems should include a well-documented paper trail. It’s okay to use technology like a receipt-capturing app and accounting software that automatically categorizes transactions as long as it is all set up correctly from the get-go.
In accounting, there is typically a period close process where all transactions for a set period of time (month, quarter, year) are reviewed and finalized. Once a period is closed, no changes should be made to that data.
Posting a transaction to a closed period can wreak havoc on company financial records and initiate the need for amended tax returns or public announcements regarding adjustments, so it’s not something that should be done without cause.
To avoid this mistake, create and enforce a clear closing process and change process. Add a layer of security like a password to closed periods that require two more levels of authentication before a change can be made.
Another mistake that seems to be a product of modern accounting is skipping reconciliation activities. It’s easy to make this mistake when you see a live feed with real-time updates from your bank and credit card accounts right in your accounting software. But that would be a mistake.
Big data has big benefits. More than 80% of businesses that have adopted real-time data have also seen an increase in revenue. So, while novel fintech in accounting is enabling greater efficiency, it’s also adding complexity.
Each month, when you receive your account statements, take time to reconcile that statement with your records. You should be able to create a regular schedule for this task to keep everything on track.
Nobody wants to pay more taxes than they really owe, yet many businesses inadvertently do so as the result of their accounts receivable (AR) workflows.
It’s a simple mistake–especially if you haven’t fully formed your revenue recognition process or you’ve left gaps in your system of checks and balances that leave errors uncorrected.
Here are a few ways that companies tend to fall into this trap:
A business spends money in many different ways. Some expenses are directly related to the cost of goods that the company provides. Other expenses might be related to sales and marketing; some are administrative, and some are related to facilities and equipment.
Sometimes, the line is a little unclear. Like a new computer workstation–is that an asset that needs to be on a depreciation schedule, or does it fall under the label of office supplies? Not having a clear answer to this question often leads to inconsistent categorization, which in turn leads to ambiguous reporting.
Modern accounting software with correct configuration and consistent documentation can prevent most classification errors.
Most business owners and accountants would agree–modern technology like Quickbooks Online has changed finance for the better.
But that sentiment only rings true if all systems are properly configured, and all integrations are set up and utilized.
These errors might include:
Integration and configuration errors can bottleneck the transfer of data from one system to another, leaving you with incomplete and unusable financial records.
However, it’s easy to fix this error. Work with an experienced provider to set up and validate automation and accounting software integrations.
Human error is the most common accounting error. A wrong digit or a misplaced decimal can
range anywhere from barely noticeable to a big problem.
Adding automation is one way to eliminate the bloat of data entry errors in your accounting systems.
An adequate system of checks and balances, like a double-entry process where each transaction is entered as a debit and a credit or where two or more employees validate entries, can be helpful in reducing data entry errors in your accounting systems.
Just because it’s in the cloud doesn’t mean it’s foolproof. Your financial data should be stored in more than one location in case you become the victim of a ransomware attack or a systems failure that compromises your primary records.
Storing your financial data in the cloud is a good first step. However, you should also keep this data on an external hard drive or network attached storage (NAS) device. Additionally, you might keep secondary backups offsite in case a natural disaster or fire destroys your primary facilities.
You’re never too small to get your accounting and financials in order. In fact, many firms - small or large - can benefit from establishing adequate controls early on.
Empaxis can help you navigate the process of configuring technology, adding easy automation, and implementing systems and processes to facilitate better accounting from the ground up. Learn more about our finance and accounting solutions today.
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