Times are changing. And changing fast. Businesses have become very competitive and are not everyone’s cup of tea. Those who venture into it have many areas to cover. In such a scenario, it would be most advisable to minimize the silly errors and focus on the main business. Bookkeeping, generally considered to be quite a boring and dull task can cause a major headache if not given its due attention. So, what are the most common yet important points to bear in mind while maintaining books of accounts? Here are seven important things to take care of.
1. Hire A Professional Accountant
Unless you can give adequate time and concentration to bookkeeping, it is advisable to have a competent accountant to maintain your books. Often small businesses try to cut costs by managing books themselves. More often than not, it ends up being penny wise, pound foolish. One needs to be alert and sharp while making bookkeeping entries. If the mind is already tired with other aspects of business, one is likely to make silly errors while entering numeric figures. Such errors could change the profit or loss figures which in turn would affect business decisions for the future.
2. Reconciliation Of Bank Balances
We all keep a book referred to as “bank book” wherein we make entries of cheques issued and deposited; and calculate the balance available. It is important to reconcile bank book balance with the statement on the bank’s website. It is not uncommon to issue a cheque hurriedly to settle some pending payment and postpone making the entry in bank book and then forget doing it.
If not that, at times, there are some charges deducted by the bank over certain transactions and we might not be aware of it until we check our bank account on the bank’s website. This way, our bank book would reflect a higher balance which in effect could result in issuing of cheques beyond our actual bank balance. That would result in bounced cheques, which adversely affect the image of company. Hence, we must always cross tally bank book balance with account balance on the bank’s website before issuing any cheque.
3. Separate Bank Accounts For Personal And Business Concerns
In sole proprietorship firms, we often keep one bank account in the name of the proprietor rather than a separate bank account for the firm and make personal and business payments from the same account. This requires proper categorization of expenses into personal and business.
Let us look into an example to drive home the point. A business owner decides to meet his/her client over lunch at a restaurant. This could be the same restaurant which the owner could frequently be visiting with his family. If the owner makes the payment with the only credit card he possesses, there is a possibility that at the end of the month, the owner might not put the office lunch in office expenses thinking that it could have been a family affair. With separate bank accounts and credit cards, one can pay with the business card for business expenses and not worry about categorizing the costs later.
4. Proper Provision For Back Up
Today, almost everything is computerized. All records are digitalized. All the calculations and reports are correctly made by the computer, and hence human error is minimized. However, the computer is also a machine that can go wrong, fall prey to viruses and significant data can be lost. Hence there should always be a backup of all bookkeeping records. Many options like external drives, cloud-based solutions are available to maintain a proper backup.
5. In-Depth Knowledge Of Tax Benefits And Categorization Of Incomes And Expenses
It is important to have in-depth knowledge of income tax. When we maintain our own records and file tax returns without employing a professional, we might miss out on the different tax deductions to benefit from or make an error in placing income and expenses in their right category. This way, we can end up paying more tax, and in case of errors in maintaining records, we could be at the receiving end of tax audits by IRS. In trying to save some money, we could be caught in paying hefty penalties.
6. Proper Record Of Employees’ Rights And Benefits In Bookkeeping
There are different rules and regulations to be followed by a business concern when it comes to their employees; according to their salaries, no. of employees and other criteria. It is imperative to know the rights and benefits to be accorded to employees. There are small businesses that are not aware of their responsibilities concerning provident fund, pension, gratuity, and other allowances to be accorded to employees. If an audit is conducted by the IRS and bookkeeping records reveal lack of fulfillment of these criteria, then one might have to pay huge fines against it.
7. Avoid Giving Cash From Your Pocket To Employees For Business Expenses
At times, while doing daily business, there are urgent supplies like stationery, etc. to be bought or expenses to be paid up. At such moments, avoid paying from your pocket however urgent be it. Let the employee take the required cash from the accountant who keeps a record of every detail. We might handover the cash at that moment thinking that we will get it reimbursed but forget it later. We would end up paying for business expenses from our pocket and concerned employees could manipulate by taking reimbursement of the expenses from the accountant.
Bookkeeping, however, boring and unimportant it might seem, is an essential aspect of every business. After all, it reflects an actual picture of our business, the areas which are yielding profits, losses, expenses that one needs to cut down on, areas that one needs to spend more on and important data which is required to take the right decisions. Hence, we must give bookkeeping its due importance and not be lethargic and irresponsible towards it in any way.