Here at Gavrilov & Co, bookkeeping blunders never surprise us. We have seen all kinds of errors when we take over the books for a business owner. It doesn’t matter how challenging the data seems to be.
The Gavrilov bookkeepers and accountants stay cool, calm and collected.
We thought you might like to know how we stay so calm when we face a challenge of the top bookkeeping blunders in the known universe.
Plus, we thought you’d like to know a little bit about the two most damaging mistakes you can make in your books, so you can avoid them.
Bookkeeping Blunders and Business Owners: No Reason for Disgrace
Now, many such business owners are very smart people with successful ideas, super products, and a good profit margin. However, they simply are not trained bookkeepers or accountants. New clients are often ashamed of their books. And they admit they have limited knowledge of bookkeeping. We do not judge.
Because of our years of accounting experience, bookkeeping mistakes do not shock us. Year after year we have seen smart business owners repeat the same bookkeeping blunders.
Likewise, because of our educational experience, our accountants and bookkeepers know of at least 39 such errors which are so common they are almost traditions. The bookkeeping crew at Gavrilov & Co encounters these 2 classic mistakes almost daily. These occur in New York City businesses just like yours.
Before you even read about them, we want you to know, we can readily help you correct such mistakes. Thus, you need not be worry or apology if you recognize these errors. Knowledge of the problem is the first step in finding the solution.
Bookkeeping Blunder Number 1: Mixing Business and Personal Accounts
The mixing of business and personal spending is our top-ranked, number one worst bookkeeping blunder. Granted, many people know this. However, they do not know why the mixing is so bad for your business.
First, before we get into the details, let’s look at a few yes/no questions.
The Gavrilov Personal Expense vs. Business Expense Questions:
1. Did you pay for that business luncheon with your personal credit card?
2. Do you utilize the same bank account for your business as well as personal needs?
3. Do you deposit checks made out to your business into your personal account?
4. Have you been writing business checks for your personal purchases?
5. Did you make withdrawals from your business checking account to pay for a personal expense without documenting it?
6. Do you take money out of the business account and put it in your personal account without documentation?
If you answered any of these questions “yes,” then you have first-hand experience with the top-ranked bookkeeping blunder of all time: Commingling personal and business funds.
Bookkeeping’s Big Question: What’s In Your Account?
Real-estate expert Brandon Hall puts it this way: “Think of “commingling funds” as accidentally using your personal account for business income and expenses or your business bank account for personal income and expenses.”
You see, it is only in the most extreme cases of commingling that the business owner maintains one bank account for both personal and business expenses. Many business owners have divided the two accounts, but they habitually use them interdependently.
Other than the fact that the commingling of business and personal accounts is bad business practice, there are quite a few reasons to avoid it.
1. What about those write-offs? Sooner or later you will miss an opportunity to write-off a tax deduction—or maybe several opportunities. Over the course of a busy year, it is very easy to lose track of finances when you mix the accounts.
2. Do not let them Pierce the Corporate Veil. “Piercing the corporate veil,” is a rather poetic name for a legal concept. In a nutshell, commingling your personal and business accounts can expose your personal assets as well as company assets to lawsuits or unpaid vendors.
In simple terms, anyone with a legal claim against you, like a lawsuit, an unpaid bill or a mortgage could hold you personally liable for your company’s debt. Therefore, your legal protection as a company would be destroyed.
Good Bookkeeping: Breaking You of Bad Business Practices
Holding the owner of a corporation personally liable for a corporation’s debt is known as “piercing the corporate veil.” To do this, your prosecutors would simply prove that your company is not a real business. They could claim that your company name was just another name for “you,” like an alias.
You play right into that legal trap if you do not keep business and personal accounts. and you must treat them as very separate entities. The financial specialists at Investopedia tell us “Turning a profit isn’t enough; you must also protect your business from claims and lawsuits. Debts and mortgage obligations to third parties and vendors, claims for damages caused by your employees, product or professional liability and consumer-protection issues are just some of the risks you must deal with.”
Avoid the Paper Chase or Lost Time and Lost Journals
We have known a business owner who kept absolutely meticulous journals in spite of his bad habit of mixing business and personal purchases.
He carried a fat little journal and worried himself into an ulcer by making constant tiny notations about his purchases. The idea of an audit did not scare him because his precious journal was protection. (By the way, it is true the IRS respects your personal journal notations.)
However, one year he lost his briefcase, i-pad and three journals in a taxi-cab. You guessed it; that was the year the IRS audited him. To make a long story short, he made the landmark decision to outsource his bookkeeping…And yes, he came through the audit with flying colors. However, he never recommends his old system.
You see, eventually he realized his most valuable resource, the one that cannot be bought or made was time. Much to his surprise, it was easier, faster and more profitable to separate business from personal expenses. Secure with his bookkeeping service, he no longer worries about all his little notes-or his ulcer. With his business under control, his ulcer has healed, he’s not only making more money, he’s enjoying it. He has more time.
A Little Gavrilov Formula: How To Prevent Mixing Your Business and Personal Accounts
We have seen a lot of business owners get into this kind of trouble in the electronics store. They are just starting out or they had insufficient cash in their business banking or credit card account. But they just have to get that computer now. So, they plunk down that personal credit card.
Here’s what they should do instead of this behavior:
1. Transfer the actual money from the personal account into the business account.
2. Buy the computer using a business check from the business account.
3. The bank documents the movement of the money. The computer belongs to the business. The tax is deductible. The business account has proper records.
It’s good to remember that in best business practices, how a purchase is paid is just as important as the purchase itself.
Mistake #2: Bookkeeping is not a DIY Skill
The second most popular bookkeeping blunder is very closely related to number one. As a business owner, doing your own bookkeeping is a major error.
It’s no secret that many business owners neglect the importance of good bookkeeping. You might think bookkeeping is easy. (Someone, back at the dawn of time must have instigated a rumor that bookkeeping is easy. And it might even be relatively easy until you get too busy.)
Likewise, some business owners despise the chores of bookkeeping and put them off until the last minute. This is not healthy behavior for you or your finances.
- You might not really know all the possible tax deductions associated with your business.
- Likewise, you might not really understand how to categorize all of your purchases and transactions.
- Remember, if entries are incorrect, then all the financial reports are incorrect. (Garbage in. Garbage out.)
A Bookkeeping Offer For You, the Business Owner
At Gavrilov & Company, we really respect business owners. They are the experts that excel at inspiring their employees, creating new products and services and motivating sales. To do all these activities, they must become experts at the delicate art of delegation.
So, why do so many business owners resist delegating their bookkeeping to properly qualified, trained and talented bookkeepers? Why do they insist on a DIY approach to this crucial element of their businesses?
After careful consideration, we know the reason. It’s naturally difficult for you to feel like you are yielding control of your finances. We realize that documenting your finances with a company like ours and committing to bookkeeper’s services is a little like telling us all your secrets. Finances are deeply personal. That is why Gavrilov & Co maintains maximum integrity and confidentiality.
We know the high level of trust you require. Thank you for reading our blog this week, and please consider this as your personal invitation to check out our bookkeeping page.
If you give us a call, we’ll prove worthy of your trust. In the near future, Gavrilov & Co will be sharing a few more of the worst bookkeeping Blunders in the Known Universe so you can avoid them.