Common Bookkeeping Mistakes Small Business Owners Make (and How to Fix Them)

When it comes to bookkeeping, most businesses have so many moving parts that even the most detail-oriented business owners are not immune to errors. Still, it’s important to try to minimize them wherever possible.

Bookkeeping errors can balloon into more than minor nuisances to be addressed at year-end. They can lead to cash flow issues, unexpected taxes, and a lack of clarity that results in strained decision-making.

If you do your own bookkeeping, then this post is for you! We’ll walk through some of the most common areas where things go wrong and how to get them right. 

1. Forgetting to track cash transactions

Here we’re talking specifically about in-person expenses paid with cash or small cash receipts (for example, a minor repair on the fly that a customer paid for in cash).

So much of bookkeeping is now digital and automated that we tend to rely on our monthly bank statements to capture business transactions. But what happens when you use a $50 bill to buy supplies at the local shop? How do you record a $5 tip received for your services? What about the $20 cash reimbursement made to your employee for gas?

Cash transactions tend to be small, so they seem insignificant and are easy to forget about. Plus, they require extra effort to record since they won’t show up on a bank statement, meaning there’s no automatic feed. 

But for both the accuracy of your books and compliance with tax law, they should be recorded. 

How you capture cash transactions depends on how frequently your business uses them. 

You could:

• Capture receipts from cash transactions and store them digitally or in one secure location.

• Log cash transactions weekly in your accounting software while details are still fresh. 

• Route cash through your business bank account whenever possible to keep personal and business transactions clearly separate.

Many businesses use a petty cash or undeposited cash account to help ease the flow of cash tracking. If you choose to use one, ensure that this account is examined and reconciled to your actual cash balance when you do your bookkeeping. Regular review will help keep the account accurate.  

2. Mixing personal and business expenses

This is quite common and often unintentional. Some business owners don’t yet have a separate bank account for their business. If they do, occasionally it’s more convenient to use a personal account for a business expense (or vice versa). 

This leaves you spending time picking out business expenses from your personal records each week or month—and this isn’t always easy. You may need to dig through receipts or invoices to classify transactions properly, so unless you’ve been meticulous in documenting all of your invoices, you may need to rely on your memory to discern business from personal expenses. 

The result? Potentially inaccurate records, possible missed deductions, and unclear paper trails (which can cause issues if your records are ever audited).  

To avoid this issue, one of the most impactful fixes is to consistently use a separate bank account for your small business. This will keep your bookkeeping efficient and your records accurate. 

If you do need to make a business expense personally, be sure to document it and reimburse yourself from the business—preferably as soon as you can so that it’s not missed.

Finally, you may wish to talk to your accountant to get clarity on which expenses are personal, which are deductible, and how to track them. Some expenses require discernment; for example, the monthly cost of a phone used both personally and for business often needs to be allocated between business and personal use. 

Using clear expense categories can help you filter business and personal expenses more easily. 

3. Falling behind on categorizing transactions

A subtle theme so far has been to capture transactions sooner rather than later, which is why weekly bookkeeping is often recommended over monthly or annual. 

It’s normal to fall behind occasionally, whether you’re navigating seasons of high demand or surprise detours. But problems arise when the books start falling behind:

• Your financial data becomes less relevant for real-time decision-making.

• Details of transactions that happened weeks ago may be forgotten.

• Your bookkeeping workload accumulates, increasing resistance to tackling it.

• Issues such as duplicate entries, cost creep, or cash flow constraints are spotted too late.

The key is to create a recurring weekly bookkeeping routine and to break tasks into smaller blocks of time. 

For more guidance on keeping up with your bookkeeping, these posts may help: 

• How Often Should You Do Bookkeeping For Your Small Business

• How to Organize Business Receipts (A Simple Weekly Routine)

4. Letting uncollected invoices pile up

We’ve talked a lot about expenses so far, but what about income?

A common mistake is letting uncollected invoices pile up, which can happen when:

• Invoices aren’t issued right away;

• Accounts receivable is not reviewed frequently;

• Income is recorded to the wrong account or without details; and

• Outstanding invoices aren’t addressed with the customer.

The issue is that if you prepare your books on an accrual basis, you’re essentially reporting income without the cash inflow to show for it, which can create some confusing operational cash constraints. 

On the other hand, if you prepare your books on a cash basis, you may miss seasonality or other trends because income is only recorded when cash is received, not when the sale was made.

Avoid the stress and uncertainty that uncollected invoices create by:

• Invoicing promptly. Try to automate your invoicing as much as possible to make it simpler to invoice immediately. 

• Including payment terms on your invoices.

• Following up on unpaid invoices. If possible, you might be able to automate your follow-ups (for example, via email) as a first step. 

If you use accounting software, it’s usually quick and simple to download the aged accounts receivable listing, which will help you identify long-outstanding invoices requiring a follow-up.

Ensuring you have a strong invoicing and collection process will help keep your books accurate and your cash flow stronger.

5. Data entry errors, typos, and manual tracking

It happens—and if it’s not caught, it can really skew your financial results, depending on the type and size of the error.

Honestly, these types of errors are probably encountered most when bookkeeping in Excel. There are simply more moving parts and more room for error than when using accounting software. Dedicated accounting software typically has rules built in to avoid many common errors, such as unbalanced journal entries.

Accounting software leaves room for error as well, of course—an accidental extra zero could go unnoticed, debits and credits could be swapped, or an income or expense item could be recorded to the wrong category. 

Either way, if left unchecked, these errors will erode the accuracy and usefulness of your books.

Using a dedicated accounting software such as QuickBooks can help to reduce these types of errors. Linking your bank account to your software to automate transaction entry can also help. 

Related reading:

• Do I Really Need Accounting Software? Excel vs Accounting Software for Small Businesses

• Using Excel for Small Business Bookkeeping: What Works (and What Doesn’t)

Another error-minimizing action is to reconcile your accounts (cash, credit—anything that can be tied to a statement) to ensure accuracy and quickly spot errors. If it doesn’t reconcile, there’s likely an error somewhere.

Finally, frequently reviewing your financial reports is key. In addition to bolstering your familiarity with your books and supporting business decision-making, this process will help you identify where there may be errors. 

With frequent reviews, you’ll feel more confident identifying when something seems off, and digging down to find the underlying issue or error.

6. Waiting too long to ask for help

When small business owners are used to doing everything themselves, it’s difficult to find the friction point when it’s time to get some help. Often, we end up waiting until things feel truly out of hand.

Help can come in the form of asking your accountant questions about how to properly report aspects of your business transactions. 

Help can also mean hiring a bookkeeper to take care of the books for you. 

So, how long is too long?

• When the books start feeling inaccurate and really difficult to reconcile

• When you start putting off bookkeeping altogether, it feels like too much 

• When you no longer feel like you can rely on your records for decision-making

This post can provide more clarity: When Is the Right Time to Hire a Bookkeeper?

Does the thought of asking for support bring a sense of relief? Then the time might be now. 

Whether you need help cleaning up your books or you just need someone to share this responsibility with, we would love to get in touch and see how we can support you. Book a free consultation with us here. We look forward to meeting you!