5 Biggest Bookkeeping Mistakes Fixed | bigpicturecpa

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    Biggest Bookkeeping Mistakes And How To Fix Them

    by Andrew Jordan, Big Picture CPA

    1 Separate Interest and Principal on Loan Payments

    If you got a loan for remodeling your studio or buying that new equipment, you probably know that part of your monthly payment goes towards the principal of the loan and part goes to pay interest. You need to tell QuickBooks about this break down too. If you don’t split out your loan payments each month, you can easily end up with tens of thousands of dollars being moved to interest expense when you have your tax return prepared. It’s no fun to see your books go from owing $30,000 and having net income of $20,000 to owing $40,000 and a net income of $10,000 because you showed $10,000 in interest payments as going against the principal of your loan. If you have experienced this pain, here’s how to avoid it next year.

    Often banks will send a loan payment breakdown to you each month, or you can usually log in online and get the breakdown there. When you record a loan payment, make sure you have a line for principal and a line for interest expense. Don’t use a Transfer to record a loan payment because that won’t let you split the payment between principal and interest. Instead, use either a Check (if paid with a paper check) or Expense (if paid electronically, online, or with an ACH, etc.) type transaction.

    2 Not Capitalizing Things Correctly

     

    Let’s say you bought a new equipment for $3,000. Instead of having $3,000 in Office Supplies expense for that computer, you should create a new Fixed Asset. A fixed asset is an item purchased for long-term use that is not likely to be converted quickly into cash, such as land, buildings, and equipment. Capitalizing fixed assets is not only good bookkeeping, it is also required by the IRS. The good news is the IRS now allows you to no capitalize things is they are under $2500. “Capitalizing” simply means that you create a Fixed Asset that will be depreciated instead of expensing it right away. For example, In QuickBooks, you need to choose a Fixed Asset type account for these purchases instead of an expense account. Make sure to include a good description of what you bought, like in the example below.

     

    If what you bought wasn’t something physical like a computer or a desk, you might need to Amortize that asset instead of Depreciating it. Amortization is just like depreciation, except it’s for intangible items like a copyright, software, or loan fees you pay on a loan. (Loan fees usually have to be capitalized and amortized over the life of the loan but check with your tax preparer for your individual circumstances.) This is pretty much just an Accounting terminology thing, so don’t worry about it too much, but at least now you’ll know what your tax preparer means if they mention it.

    Attaching a copy of the invoice to the check, credit card charge, or ACH is a great thing to do in case you are ever audited, or you need to make a warranty claim or return your fixed asset. In QuickBooks Online, drag and drop the receipt into the Attachments section in the bottom left or in QuickBooks Desktop, click the paperclip icon that says “attach file” in the middle of the top bar.

    3 Not Reconciling Completely by Leaving Old Outstanding Items​

    Most people reconcile their bank accounts and credit cards in QuickBooks, and for good reason: It’s fast, easy, and important. Monthly reconciliations make sure not only that you didn’t forget to record any checks, deposits, ACHs, or credit card transactions but also that you don’t have duplicate transactions. People often stop when they get to a zero balance in their reconciliation, but they don’t do critical final step: making sure there are no old uncleared items.

    Checks should clear within 90 days of when they were written. If one hasn’t, you need to look into it further to make sure it’s not a duplicate. Details on how to do this are in our Growth Plan’s detailed Control Sheet, visit jordancpaservices.com/GrowthPlan to learn more.

    Deposits should show up on the bank statement for the month they are dated in QuickBooks with the rare exception of a deposit that is recorded in QuickBooks on the last day of a month but doesn’t clear the bank until the following month.

     

    Credit card charges should show up on the credit card statement within 3 days of when they are recorded in QuickBooks, so the only charges that might not show up on the same month’s statement are the ones at the end of the month.

    Checking for old uncleared items is critical because if you don’t, your cash balance, income, and expenses can all be way off. For example, let’s say that you accidentally recorded a deposit for $4,000 twice. (This can happen a variety of ways from entering it once, forgetting you did, and entering it again, or by accepting the deposit from the bank feed and then manually adding it afterwards. If you don’t ever deal with this uncleared deposit, your sales and cash could both be overstated by $4,000. I’ve seen companies with more than $100,000 in accumulated misstatements because they did not ever clear out their old uncleared transactions.

    4 Not Periodically Cleaning Up Accounts Receivable and Accounts Payable

    The Accounts Receivable and Accounts Payable Aging Reports in QuickBooks make it easy to track who owes you and what you owe your vendors. They also show you how old the balances are with each customer or vendor. One handy tip is that you can customize these aging reports to show the results in a different format. For example, if your bank requires you to subtract Accounts Receivable that are older than 180 days, you can change the “Days per aging period” from the default of 30 to 60 and now the report shows a column for “181 and over.”

     

    The three things to look for on these reports are:

    • Do these amounts actually look right?

    • Does anything have a negative balance?

    • Does anything have a balance of less than $1?

     

    When you look at your Accounts Receivable, you probably have a pretty good idea of who really owes you and about how much they owe you. Spend a few minutes with your Accounts Receivable Aging Report just looking at who it shows owes you and how much, and make sure it matches what your gut tells you. Anything that doesn’t look right is something you should spend a few minutes looking into. Maybe there’s an invoice that didn’t get created but should have been. Maybe a payment was accidentally recorded with a date of next year instead of this year. Maybe your employee is stealing from you and covering it up by adjusting client balances (if they have access to QuickBooks). More than one fraud has been uncovered by a business owner keeping their finger on the pulse of their business with things like this.

    The Accounts Receivable and Accounts Payable Aging Reports in QuickBooks make it easy to track who owes you and what you owe your vendors. They also show you how old the balances are with each customer or vendor. One handy tip is that you can customize these aging reports to show the results in a different format. For example, if your bank requires you to subtract Accounts Receivable that are older than 180 days, you can change the “Days per aging period” from the default of 30 to 60 and now the report shows a column for “181 and over.”

     

    The three things to look for on these reports are:

    • Do these amounts actually look right?

    • Does anything have a negative balance?

    • Does anything have a balance of less than $1?

     

    When you look at your Accounts Receivable, you probably have a pretty good idea of who really owes you and about how much they owe you. Spend a few minutes with your Accounts Receivable Aging Report just looking at who it shows owes you and how much, and make sure it matches what your gut tells you. Anything that doesn’t look right is something you should spend a few minutes looking into. Maybe there’s an invoice that didn’t get created but should have been. Maybe a payment was accidentally recorded with a date of next year instead of this year. Maybe your employee is stealing from you and covering it up by adjusting client balances (if they have access to QuickBooks). More than one fraud has been uncovered by a business owner keeping their finger on the pulse of their business with things like this.

    5 Not Using Undeposited Funds Correctly

    If you are like most businesses, you deposit more than one check at a time. The way QuickBooks handles this is with a special account called Undeposited Funds, which I think of as the drawer in your desk where you put checks until you deposit them. It might be that you make a deposit every day, but even then, throughout the day, when checks or cash comes in from customers, you put them in your drawer until you make that deposit. Some people make the mistake of receiving customer payments and telling QuickBooks that each customer payment went straight to the bank instead of going to Undeposited Funds. Then, when they go to reconcile their bank account, they have to waste a lot of time matching up the 15 customer checks in QuickBooks that make up a single deposit on their bank statement. Even worse, QuickBooks doesn’t know which checks make up a deposit if you don’t tell it this information, so you can end up Adding transactions from the Bank Feeds instead of Matching them with a deposit that’s already on your books. This essentially doubles these transactions, which requires more of your time to fix.