Bookkeeping Strategies

Before getting into a discussion of common bookkeeping mistakes, it is worthwhile to address the importance of sound bookkeeping in general.

The importance of sound bookkeeping is frequently lost and ignored by management. It is apparent that the main reason management tends to ignore the bookkeeping function is because it is focused on the “big picture.” What management fails to recognize is that there is no “big picture” to look at without bookkeeping first doing its thing in the details.

Bookkeeping can help keep your business organized and able to yield a profit. Many small businesses fail due to poor financial management. By applying sound financial principles, you may be able to prevent this fate from befalling your business.

The following are some of the benefits that are generated by an accurate bookkeeping environment, as noted by QB Express:

1.   Improved financial analysis and management

Cash flow management is something that your business should start focusing on right away. Once your invoices are delayed, there will be zero follow-ups on customer payments. With accurate bookkeeping, you can systematize your follow-ups and invoicing, while making on-time payments to suppliers.

2.   Fulfil your tax obligations on time 

Bookkeeping can help you keep a track on all the information required to accomplish your tax obligations. When the time for tax comes, you will no longer need to rush everywhere to hunt for your bills or try to remember your expenses. An organized Balance Sheet, Profit & Loss and Cash Flow also makes filing your Tax Returns a lot easier. Your tax advisor can also finally give you some sound tax advice instead correcting incorrect entries in your financial statements.

3.   Enjoy easy reporting to your investors

With regular and accurate bookkeeping, you will no longer need to worry about reporting to your investors and sharing the financial status of your company. From graphs to charts and the lists of data, you can easily present everything to your investor right from your accounting books.

4.   Make informed business plans

With the Balance Sheet and Profit & Loss statements, you can check if your company is on the right track financially. Based on your financial status, you can make informed and effective business plans.

5.   Keep a proper record, as required by the Law 

With bookkeeping, you can keep a record of all your financial dealings and keep everything organized right from your big to small invoices.

Common Bookkeeping Mistakes

The foregoing section above focused on a discussion of the benefits that can flow out of a sound bookkeeping system. Such a system shouldn’t be taken for granted however. Frequently, bookkeeping mistakes can creep in and weaken the bookkeeping infrastructure as well as the systems in the organization that rely on the bookkeeping system.

The following is a list of common bookkeeping mistakes that bookkeepers and others should always be on the lookout for.

1.   Skipping an Accounting System

As Business2Community notes, your business may be so small that you decide to save money by not using software that is specifically designed for accounting.

However, even if you use spreadsheets and a well-organized file system to keep track of where your money goes, you are missing out. As Doug Boswell, an accounting expert, points out: “…before having your taxes done, the tax preparer needs to cobble together some sort of makeshift system that will allow your tax return to be prepared, but it almost surely won’t capture all your deductions.”

2.   Not Double Checking Everything

Another good point from Business2Community: adopt the habit of double-checking everything and be consistent about it. As their report notes, a mistyped number, a lost receipt, and other human errors can result in inconsistent figures. Prevent such problems from piling up by reconciling your records with your bank account statements every month. Keeping track of your businesses money will be easier if you try to use cash as little as possible. Credit and debit transactions will show up on your statements so you know where every penny goes.

3.   Jumbled Invoices

Some small businesses miss out on money because they have an inefficient system for filing invoices. Number your invoices and keep them in order so it is easier for you to find out which invoices have been paid and which still have outstanding balances.

4.   Not reconciling your accounts

As this analysis of sound bookkeeping observes, after the end of each month your bank, credit cards and even merchants like PayPal will release statements showing your beginning and ending balances as well as all of the transactions that occurred in that month. Take those statements and reconcile your accounts in your bookkeeping software. Not reconciling your accounts each month can lead to errors that copy over month after month.

5.   Not tracking Mileage

Remember: you can be reimbursed for the miles that you drive for your business. The IRS sets a mileage rate for businesses each year that covers your gas, maintenance to your car and general wear. Use an app like MileIQ that will track all of your drives and then you can categorize them as business or personal. At the end of every month they’ll send you a report showing how many business miles you drove and what that amounts to. You can take that amount and reimburse yourself from your business account while categorizing it as a business expense. Not doing this prohibits you from claiming this eligible deduction on your taxes.

In addition to the previously noted mistakes, the following links point to additional common bookkeeping mistakes.

• Believing you have to do your bookkeeping yourself

• Leaving bookkeeping to the last minute

• Not using bookkeeping software properly

• Using the wrong accounting method

• Not separating business and personal bank accounts and transactions

• Inadequate filing systems (for bank statements, invoices, receipts)

• Lack of documentation or systems regarding cash

In conclusion, it’s fair to say that the fewer bookkeeping mistakes there are in your organization the smoother your organization will operate. It is human nature to seek short cuts and avoid pain points, but this is a crucial area where you can’t afford that approach: you must take the long way and endure the strain of the process, otherwise much bigger pain points could arise down the road.

Most professionals have only a vague understanding of what Artificial Intelligence (AI) is or means. Absent an understanding of these capabilities, it is near impossible to have a working knowledge of the opportunities for applying AI to the accounting field.

What Is Artificial Intelligence?

According to BJ Copeland of the Encyclopedia Britannica, AI refers to the ability of a digital computer or computer-controlled robot to perform tasks commonly associated with intelligent beings. The term is frequently applied to the project of developing systems endowed with the intellectual processes characteristic of humans—the ability to:

• reason
• discover meaning
• generalize
• learn from past experience

Since the development of the digital computer in the 1940s, it has been demonstrated that computers can be programmed to carry out very complex tasks—as, for example, discovering proofs for mathematical theorems or playing chess—with great proficiency.

Still, despite continuing advances in computer processing speed and memory capacity, there are as yet no programs that can match human flexibility over wider domains or in tasks requiring much everyday knowledge. On the other hand, some programs have attained the performance levels of human experts and professionals in performing certain specific tasks, so that artificial intelligence in this limited sense is found in applications as diverse as medical diagnosis, computer search engines, and voice or handwriting recognition.

In addition, revolutionary, ambitious new projects, such as Elon Musk’s OpenAI project, are accelerating humanity’s course to achieving true Artificial Intelligence.

AI Suitable to Accounting?

In simple terms, technology won’t just collect information, it’ll learn from what it stores. As Xero notes, accounting software is getting smarter, automatically performing analysis which previously required human intervention. Consider tasks like bank reconciliation: systems can learn how to completely automate this job, freeing up your time.

The finance sector, given its heavy reliance on mass amounts of numbers and data, is a prime candidate for the automation offered by intelligent learning systems.

Accounting Applications of AI

Note the following examples of how AI can be implemented within your environment, as explored by Accounting Today’s report on the topic:

1. Clearing Payment Invoices

Today, accounts receivable or treasury clerks struggle to clear invoice payments when customers combine invoices in one payment, pay incorrect amounts or do not include invoice numbers with their payment. To clear the invoice, the employee either has to manually add up various invoices that might match the payment amount or contact the customer to clarify some information. In the case of a short payment, the employee either has to ask for approvals to accept the short payment or request the remaining amount from the customer. An intelligent system could help by immediately suggesting invoices that might match the paid amount and, based on established thresholds, automatically clear the short payments or automatically generate a delta invoice.

2. Expense Claim Auditing (AI enhanced automation)

Finance employees must ensure that receipts are genuine, match claimed amounts and are in line with company policy. What if AI and machine learning could support this process, audit 100 percent of all claims, and send only questionable claims to a manager for approval?

3. Determining bonus accruals

Deploying AI solutions, we could leave this calculation to a machine that uses all available system data and predictive analytics capabilities to come up with an unbiased accrual. Additionally, this would give accounting teams more time during the closing process for activities that require human intervention.

4. Automating Approval Workflows

Intelligent workflows could allow finance teams to distinguish and filter out the true exceptions from the standard low-risk exception that is usually approved anyway. This way, employees do not need to wait for approvals and feel empowered, while still limiting the risk for the organization.

Based on just these foregoing examples, it is clear that there is potentially a significant value-added from implementing AI, and it is an important trend in accounting to follow.

Most people starting a business start the business because they are good at providing the product or service they are selling. Bookkeeping is usually an afterthought but yet, a realized necessity to be able to provide the goods and services they wish to sell.

Here are the common considerations regarding bookkeeping that new business owners face.

Defining The Case for Bookkeeping

Essentially, bookkeeping is the official documentation of all financial transactions and inventory of assets.

Being thorough and complete is critical to the success of your venture. Your business can only be as efficient as your bookkeeping. Bookkeeping is how you identify successes and opportunities for growth when assessing the financial health of your business.

Your records need to be air-tight in order to create profit and loss reports and make accurate forecasts for revenue and expenses. This is beneficial for all your business’ stakeholders such as the IRS, creditors and the bank, and thus, keeps you in their good favor.

The better your bookkeeping, the better odds you have of not overpaying or underpaying taxes. In addition, being organized and rigorous helps you avoid unnecessary costs such as late fees and penalties.

Your books need to be a clear picture of what your business is making now and what you’re projecting. Your records also need to indicate how much money is owed to you by clients/customers. It should also reflect how much you owe to vendors and overhead. Good bookkeeping also accurately portrays the value of inventory. And your books should explicitly call out the financial performance of specific categories or business segments.

Bookkeeping Basics

Simply put, bookkeeping is a journal of every single financial transaction that accounts for every single penny coming and going through the business. Prior to the Digital Age, this was a physical book called a Ledger.

It’s best to hire an accountant to set up a process for your business to thrive in. An accountant will guide you on keeping up this process. Ultimately, your bookkeeping will inform your tax preparation and financial reporting.

If you’re a sole proprietor, your system need not be too complex and you may not even need to use automated bookkeeping (described next).

Automated Bookkeeping

You can be more efficient by automating bookkeeping. You can manage payroll and inventory, track and calculate expenses as well as transactions. You can generate reports, and create files to hand off to your accountant. Most bookkeeping software will show you visualizations of where your money is going. They will also help you stay on top of your cash-flow by data being easily accessible from a computer or smartphone.

Also, most bookkeeping software allows you to connect your books to your bank accounts so you can automate payments and track balances. And nowadays, software companies are automatically backing up all your data so you don’t have to fret about losing it.

Bookkeeping software can also automate invoicing and estimates. You can also track inventory and billable hours. And you can also accept payments online.

Automated software rapidly continues to become easier to use and includes more robust features.

Determining What Software Is Right For You

Most bookkeeping software companies differ in what they offer from each other (sometimes only slightly) and the individual software companies themselves usually offer tiered plans to more closely match the needs of your business.

To determine which one is right for you, you first want to talk to your accountant to see what they recommend. It’s best to select one your accountant is familiar with and has the software on their computer so they can open files you send them.

You’ll also want to take stock of your current bookkeeping needs as well as consider how your projections impact your ability to scale in regards to the right software for you. To determine your needs, make a list of all of your business’ functions and a list of all the reports you want to generate on a regular basis.

For example, do you need to track inventory, pay employees, track sales and profits specific to multiple locations? These are the type things you need to consider when deciding on what’s right for you. Most software vendors list out each feature and whether or not that feature comes with certain tiered plans. It may be helpful for you to refer to their list of features when creating your list of business needs.

Implementing an Automated System

Depending on the scale of the implementation, bringing in an automated system can have quite an impact on your business and staff. For example, if you’re the child of a Mom & Pop shop running the day-to-day business and Mom & Pop have always managed the books by hand, bringing in a new software system can be a steep learning curve. Training and lots of communication prior to the implementation is key.

A new automated bookkeeping system should be integrated slowly with a phased approach. Should your automated system require onsite hardware such as servers, routers and wireless backup drives, you’ll want to make sure you have adequate housing for it free of moisture and lots of places to safely plug in the equipment.

The IRS requires you to maintain consistent accounting throughout your fiscal year. You must use a method that clearly reflects your income.

When you file your first tax return, you’ll decide on an accounting method. No one method is mandatory but your method must accurately mirror your income and expenses and thus the upkeep of your records and books is crucial. Not only books, but you must maintain any documents that support the data in your books—receipts, invoices, manifests, etc.

Your accounting method must be the same every year. A change will need to be approved by the IRS. If the IRS deems your method to not clearly reflect your income, the IRS will refigure your income based on what they say constitutes an accurate portrayal of your income, which usually means, “audit.”

There are 4 accounting methods acceptable by the IRS and the first 2 are discussed below:

1. Cash
2. Accrual
3. Special Methods
4. Hybrid

Cash Method

The cash method is the most simple of the methods and the one that is used most by small businesses—businesses with under 5$ million in yearly sales or $1 million in inventory on hand to sell within the tax year. The Cash Method is essentially, your records documented with when and how much cash is received in revenue and when and how much you pay out in expenses.

Under the Cash Method, you combine your total gross income, which includes not only cash received for goods and services sold, but also for property and services you received in exchange for goods and services using the the received property and services Fair Market Value to determine it’s monetary contribution to your total gross income.

You must also include in your gross income, income that you received “constructively.” A Constructive Receipt is when income is made available to you without any restriction but you’ve yet to take possession of it. A simple example of this is a local client says they have a check ready for you and all you have to do is pick it up. You then, hold off on picking up the check until your next tax year begins and thus, reducing your taxable income for the prior year. The IRS considers this to be part of your gross income for the year in which the client made the check available to you. You’d have to prove that you were unable to pick up the check until the next tax year in order to claim that it was income that went towards the next tax year.

Expenses are usually deducted from taxable income when they are actually paid. However, expenses paid in advance only count towards the applicable tax year. For example, if you were to buy the license to use a photo for marketing purposes and the license was good for 2 years, the expense must be capitalized—spread out over the 2 years the license is valid.

Accrual Method

The Accrual Method is when you can assume that income will be received based on a transaction and that projected income is considered in the tax year that it was assumed (or earned). For example, you send an invoice for a delivered service that requires the payer to fulfill the invoice terms within 30 days and they pay on the 30th day and that day falls in the following tax year. This income counts towards the tax year the service was rendered regardless of whether or not the recipient has yet to pay it.

Another way of understanding the Accrual Method, the tax year the service is performed or the goods are delivered is the year the income is considered to fall under.

If you wound up receiving less from your customer than you’d estimated on this year’s return, you can take the difference out in the following year’s return. And if you agreed on a rate, you must accrue and claim that rate even if you ended up giving the client a reduced rate. Again, the difference in the rate would be deducted from the following year’s taxable income.

If you receive payment in advance, you may be able to defer that until the following year if that’s when you’re delivering the service. For example, in December, a wedding photographer that books a wedding scheduled for June the following year and takes a deposit to hold the date. The deposit can be counted towards the following tax year. However, if the photographer is so in demand she books out over a year in advance, i.e., if the service is not going to be rendered before the end of the following tax year, the wedding photographer will have to report the deposit for the year it was received.

Pros & Cons of Cash and Accrual Methods

Simply, the Cash Method of Accounting is good for showing you an accurate cash-flow but it can be misleading for the bigger picture as well as sales history. For example, by looking at the books a retailer would see January as the best month of the year and December quite dismal when actually, it’s the other way around as the business happened in December but paid for via credit card payments in January.

Conversely, the Accrual Method can show you just how much revenue is coming in “in real-time” but the actual cash in the bank is quite low because customers haven’t paid yet. If your business quickly reacts to sales trends, it’s best to have sales reporting based on the Accrual Method so you can react to the business as it happens.

Obviously, you’d want to have a handle on both methods to be a prudent manager of your business, but to the IRS, you need to pick a method that is a clear reflection of your income. So the Cash Method may be good for a business like a wedding photographer who, for the most part, has a predictable turnaround of cash. The Accrual Method may be best for businesses that have long pending times between delivered goods and services and payments received.