Most small business owners dread the idea of keeping books. Daily accounting is a cumbersome, tedious task for everyone but the true number cruncher. But without an accurate set of books, all businesses will fail. An accurate set of books helps the owner get a clear idea of the financial status of his business. The owner who maintains an accurate, financial picture of the company can thwart potential disasters by shifting the company's general direction. Businesses can be broken or saved by the accuracy of their books. This article will discuss a fantastic tool for simplifying the accounting process: the business bank account.
Regardless of the type of business you are starting, you need a business checking account before you do anything else. Your local bank can help you with your business checking account needs. However, you might have to file for a DBA before you get an account. If your bank requires a DBA to be filed prior to opening your new account, they can usually steer you in the right direction for obtaining one. If the thought of additional monthly fees for a second account bother you, don't worry because more than likely the bank will have a "fee free" account option for your new business. If your bank does not have free small business checking, just shop around. Visit all the banks near your home or office. Eventually, you'll find a bank that has zero fees or none at all. Your new business checking account should come with a credit card that is directly attached to it.
There are a few rules that you must keep in mind when you have your business bank account. The first rule is easy: don't pay business bills with your cash! Why? Because it's too easy to forget about cash payments and they may never make it into your ledger. Your bank account should be used for all payments and all deposits. Always write a check or use your credit card for every bill no matter how small or insignificant it may seem. Why? When you use a check or credit card, you are guaranteed a record of your transaction.
Another guideline: deposit all income into your bank account. This includes all checks made out to you and any cash you might have received. The reasoning behind this rule is the same as above: guarantees a record of your income. When it finally comes time to balance the books, it will be much easier to accomplish when your account has an accurate record of expenses and income.
The last guideline to remember is to never pay personal bills through a business account. At the time of this writing, it is legal for a sole proprietor to mix funds in their bank account. However, it is not a good idea. Bookkeeping can get very confusing when you pay personal and business expenses from the same account. When a business has multiple owners, mixing funds can cause unnecessary tax and legal complications. Want the simple solution? Don't mix expenses!
If you follow the above listed guidelines, your business accounting will be much easier. Every business owner (new or seasoned) should try to follow the above listed bank account suggestions.
In only a few short weeks, these accountants know they'll see silly bookkeeping errors in many of their small business clients' books--errors that have meant the business owners have paid too little or too much in taxes. Errors that mean the business owner hasn't really been able to effectively manage the finances of the business.
Fortunately, these common bookkeeping blunders are easy enough to fix--if you know what they are and if you know the simple steps you can take to avoid making them.
Bookkeeping Blunder #1: Pretending No Accounting System is Needed
The first--and perhaps most serious blunder--is especially common with new business owners. Sometimes, sadly, the new business owner pretends he or she can get away without a real accounting system.
In place of a real bookkeeping system--something like Microsoft Small Business Accounting or Intuit's QuickBooks--the business owner simply collects receipts in a box or keeps a check register by hand. Or maybe the business creates the illusion of an accounting system by using something like Microsoft Excel to, at least, add up some of the numbers.
Unfortunately, the "no accounting system" doesn't work. Before you have your tax return prepared, someone (perhaps your tax preparer) will need to cobble together some sort of makeshift system. And that's too bad, really. Such a system allows your federal and state business and individual tax returns to be prepared. But such a system almost surely won't capture all your tax deductions. And the information that this crude "system" provides will be too late to help you better run your business.
Bookkeeping Blunder #2: Slow Entry of Accounting Data
Another common blunder? Taking too long to enter the accounting data into your system. Which is surprising, in a way...
You would think that people who've gone to the modest effort and expense of having a real accounting system set up would keep the system up to date. But often they don't.
The problem with pokey data entry is that any useful insights that come from your accounting system, come too late.
Whoever is doing your accounting should keep up to date on the data entry. Within a day or two of a transaction occurring, the bookkeeping records should be updated for the activity.
An important yet simple point: Of course people make errors in using their accounting systems. But the nature of double-entry bookkeeping means that it's usually relatively easy to catch errors. How? You need to reconcile your bank accounts at the end of each month when the bank statement arrives.
Furthermore, if you hold other valuable assets like inventory or investments, periodically you should compare what the accounting system says to an actual physical count or statements from an external source.
Regularly performing reality checks on key accounts (especially cash) cleans up all sort of easy-to-miss errors.
One common bookkeeping blunder makes for awkward conversations between accountants and their small business clients. But you deserve to know what the blunder is...
Unfortunately, accountants regularly encounter business clients with finances that are too complex for their bookkeepers. And that's a huge problem. If the business gets too complicated for the in-house bookkeeper (often the owner's spouse), the accounting system slowly becomes more and more unreliable. And this accounting unreliability usually means the business will shortly get into big trouble. (How can someone successfully manage a business if they don't know when they're making or losing money or how much cash they have in the bank?)
By the way, you'll easily be able to determine if the accountant or bookkeeper is overwhelmed. She will be falling further and further behind on the data entry. She will be producing reports that make less and less sense. And, often items, the profit and loss statement or the balance sheet will include a suspicious catch-all account named something like , "Ask the Accountant," "Suspense," or "Intercompany Transactions" that keeps increasing in size.
Only two true solutions exist for the "too much complexity" problem. You can simplify the business (probably the best idea). Or you can find a more experienced (and probably more costly) bookkeeper or accountant.
Bookkeeping Blunder #5: Co-mingling Personal and Business Assets and Liabilities
One final bookkeeping blunder should be mentioned given the approaching tax season.
Many small businesses don't clearly separate their business finances from their personal finances. For example, the businesses may use a single checking account for both personal and business banking. The business may regularly borrow personally to pay for business expenditures--and vice versa. And the business owner may too frequently mislabel personal expenses as business deductions.
Sadly, rampant co-mingling of finances makes financial records and books pretty much useless for tax preparation and for use in managing the business's finances.
Both Steven Trammel & Stephen Nelson are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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