As a small business owner, mistakes happen – that’s life. We’re here to help you understand why they happen and how you can avoid the common ones, at least when it comes to bookkeeping.
Mistake 1: You haven’t connected your bank account to your accounting software
Bank reconciliations are completed when you match your bank account balance to your accounting records. It seems simple enough, right? If you have a lot of transactions and you need to do this manually, it can be quite tedious. There’s room for error, and it’s a painstaking and time-consuming task.
As a small business owner, you’ve got enough on your plate. When you connect your bank account to your accounting software, you eliminate a lot of the manual entry and can track your sales and expenses more efficiently. This will also help you spot fraud and bank errors, and stay on top of your accounts receivable.
We recommend setting up your bank account in Xero and connecting bank feeds to bring in all bank transactions in real time. With auto-match and bank rules, you can quickly reconcile your transactions.
Mistake 2: You use the same credit card for personal and business expenses
It’s convenient to use any bank card that is available to you when making a purchase. And while it seems harmless, this is a common mistake made by business owners that makes their lives more difficult in the long run. It becomes hard to differentiate what was made as a business purchase and what was a personal expense.
Make sure you keep your business and personal bank transactions separate. An easy way to go about this is by setting up a separate business card. Keep business credit and debit cards for business expenses; personal expenses should come out of your personal account.
If you always keep your business and personal expenses separate, your bank statements are an exact record of your business. This also helps you to avoid forgetting to track your expenses and missing out on valuable tax savings!
Mistake 3: Not understanding the difference between capital purchases and expenses
While there are many tax grey areas when it comes to expenses, one common mistake made by small business owners is trying to write off a large capital asset as an expense.
What’s the difference?
- A current expense is a day-to-day operating cost of the business.
- A capital purchase is one that gives a lasting benefit or advantage for longer than a year.
For example, larger renovation projects that improve the useful life of a rental property, or increase the value of the property, must be capitalized as they provide a lasting benefit. Whereas an item like purchased printer paper, which will likely be used within 12 months, should be accounted for as an expense.
Capitalized items are depreciated over a number of years, usually the estimated useful life of that asset. Expense items are recognized as they occur.
Mistake 4: You don’t track your sales invoices in accounting software
There are a multitude of ways to track sales invoices, but not all of them are created equal. While tracking your invoices on Microsoft Excel might be better than tracking them on paper, there are still more efficient ways to track your sales invoices. For example, Xero, a cloud-based bookkeeping application, makes it easy to track your invoices and seamlessly integrate them with your bookkeeping. You can also set up auto reminders and accept online payments.
Mistake 5: You don’t keep proper records (audits, eeek!)
Although we don’t need to see every receipt you keep, you need to keep every business expense receipt for seven years. A physical copy is OK, but we recommend making a digital counterpart too.
If you’re audited, the CRA will request two things:
- Proof of purchase (receipt)
- Proof of payment (bank or credit card statement)
So, make sure you have both. Oftentimes, they’ll ask for your bank statement and request a sample of receipts from your list of expenses.
We will need to see receipts for anything that will be considered a capital purchase: equipment, vehicles, computers, etc. Please also share any transactions that are unusual, significant, or paid by cash or personally.
Remember those bank statements?
Your bank and credit card statements are the records of your business activities. You’ll want them on hand if you ever hear from the CRA. Here’s how to make sure you have the records you need:
- Save PDF statements for all bank accounts and credit cards. If you use Hubdoc, this can be done automatically.
- Regularly save your Interac e-Transfer history. (Usually, you can only search back six months, so make sure you do this.)
- If you’re claiming home office expense, you’ll need a record of a few things from your personal accounts: mortgage statements, rent, utilities, insurance, property tax, cell phone and internet.
Mistake 6: You haven’t hired a competent bookkeeper
It may seem easy to do the bookkeeping by yourself. How hard could it be to enter a couple of receipts?
This is a common misconception about bookkeeping in general. A competent bookkeeper does more than just enter receipts. They help business owners like yourself manage their daily operations through bank reconciliations, managing payables and receivables, payroll, and monthly and quarterly reporting.
At True North Accounting, we have seen small business owners make these common bookkeeping mistakes countless times. With our support, guidance and experience, we can make sure you don’t make the same errors. We’ll handle your bookkeeping so you can focus on what matters to you – growing your business. Set up a meeting with one of our knowledgeable CPAs to determine if bookkeeping support would be beneficial for you.
Want to learn more? Find other Bookkeeping topics that may be helpful to you and your small business.