Having an accurate bookkeeping system in place would make the process of recording transactions and getting the best of tax deductions easier. Accurate bookkeeping supports internal financial controls and provides an auditable record to ensure policy compliance.
For some small business owners, it’s not worth it to hire an accountant for this single task. So you either have to ensure you have accurate accounting records manually or use software that automatically ensures your business’s records’ accuracy.
In today’s article, we’re going to discuss the importance of accurate bookkeeping, the feasible solutions, and the next steps.
What Is the Importance of Accurate Bookkeeping?
Accurate bookkeeping records all financial transactions, It provides reliable data for financial reports, tax filings, and other accounting documents. This allows business owners to better understand the financial health and performance of the business.
Properly recording income and expenses is necessary for complying with tax laws and reporting accurate income levels to the IRS. Inaccurate bookkeeping can lead to tax errors and potential penalties.
Accurate books are also essential to analyze historical financial performance and trends. This information helps create realistic budgets and forecasts to guide business planning.
Keep in mind that lenders and investors often require current and past financial statements to assess risk and make funding decisions. Mistakes in bookkeeping undermine credibility with financial backers.
Reliable financial data empowers owners and managers to make prudent decisions about issues like pricing, inventory levels, purchasing, hiring, and more.
Proper record-keeping helps identify losses, waste, theft, and errors. It prevents and detects problems before they significantly hurt the bottom line.
Businesses depend on bookkeeping to ensure financial transactions are followed, documented, and reported correctly over time. This gives leaders full visibility into operations that support both compliance and strategy.
Examples of How Accurate Bookkeeping Can Find Errors and Loses
Regular analysis of books against source docs thus helps management actively seek out and remedy financial leakage and inaccuracies impairing the bottom line. Here are some examples of how accurate bookkeeping can help identify losses and errors:
- Comparing recorded sales to inventory levels and receipts can reveal losses from items being stolen, damaged or given away improperly.
- Reviewing expense accounts line by line against receipts and contracts may uncover overpayments, duplicate charges, personal expenses listed as business costs, etc.
- Checking accounts receivable periodically against actual payments received helps flag clients who aren’t fulfilling obligations on time.
- Checking outgoing payment records and supplier statements regularly can uncover mistakenly issued refunds/credits that are losing the business money.
- Verifying payroll records like timesheets and paychecks align with wage/salary allocation in the books may surface over/underpayments to staff.
- Checking itemized bills from major suppliers for inaccurate quantities, duplicate charges or discrepancies between paper/digital records can catch mistakes costing the company.
- Routine reconciliation of bank statements against deposit logs and receipts provides visibility into income that may have been collected but not properly recorded.
Consistent bookkeeping makes any alterations to records without cause more detectable, perhaps indicating theft or embezzlement by employees or others.
How do you Ensure Accuracy In Bookkeeping?
Use double-entry bookkeeping as both debits and credits for every transaction reduce errors and create a self-balancing system. You should also implement internal controls to segregate bookkeeping duties, require approvals, and conduct periodic audits to prevent and catch mistakes.
Reconcile accounts regularly to verify statements for accounts like bank, credit cards, and loans against books at least monthly. Record transactions completely and promptly – Omissions or delays increase the risk of permanently lost records or erroneous entries.
File source documents systematically to organize receipts, invoices, and other paperwork, so they can be easily referenced if questions arise. Having a clear chart of accounts as well as consistent classification of income/expense types with well-defined codes prevents confusion.
Use bookkeeping software to automate systems and minimize manual errors like typos or mathematical blunders when entering numbers.
It’s also better to perform regular bookkeeping checks and scan for anomalies, non-standard entries, and missing numbers that could signal an inaccuracy.
Hire professionals for audits and complex work – outside expertise helps ensure compliance and catches issues overlooked internally. Employees doing the books need education on principles, practices, and accounting procedures.
How Often Should Businesses Conduct Audits to Ensure Accuracy In Bookkeeping?
There’s no definitive rule on how often businesses should conduct audits to ensure bookkeeping accuracy, as it depends on various factors like the company’s size, complexity, industry risks, etc. However, here are some general guidelines:
- Startups and small businesses – An annual audit is typically recommended during the initial years of operation to catch any system or procedural issues.
- Mid-sized businesses – An audit every 1–2 years is reasonable. Monthly internal checks of key accounts are also advisable.
- Larger, more complex businesses – Quarterly internal audits and an annual external audit are common standards to closely monitor risks.
- Public/externally regulated companies – These require audits at a minimum annually by certified public accountants to comply with regulations.
Changes like new accounting software, and recent errors/fraud demand an audit to confirm processes work as intended. Sectors dealing with large cash transactions, inventory, and security needs may necessitate semi-annual audits.
Keep in mind that most tax experts recommend auditing books ahead of returns filing to catch errors that could lead to penalties.