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We’ve all read articles about common accounting mistakes, in fact there are so many out there you might expect everyone to be wise to these errors. But for one reason or another people still make them and therefore, at the risk of clogging up the Internet with even more dos and don’ts, here are the 5 accounting mistakes I would like to see banished to Room 101.
Why Do People Make These Accounting Mistakes?
Before sharing my top five, let’s consider why business owners make these accounting blunders. I would surmise that many are a result of a hang up from previous accounting systems, before the business started to grow. Generally these are made in an attempt to reduce costs, but if they result in an incorrect tax return they could cost you instead.
Accounting Mistake #1 – Mixing personal and business expenses
My first no-no is common with many self-employed individuals. You start working in a freelance capacity with minimal expenses and business overheads. Invoices to clients pretty much equate to a salary after you’ve paid tax and NI contributions. Because there is no legal reason for a self-employed sole trader to open a separate bank account, money can be paid into a personal account: the one that household expenses are paid from.
This works perfectly well when the freelancer does not have many work-related outgoings. But problems occur when work changes. For example, perhaps a new project involves some additional outlay, or the client requires you to buy in materials or stock and invoice them for this. Whether it’s a one-off or a gradual change in accounting the self-employed individual finds themselves managing more business expenses through their personal bank account.
This increased volume is what creates problems and potential error as you are forced to reconcile both your business and personal expenses. It also makes it more difficult for you to hand over your accounts to a bookkeeper or accountant, as you are the only one who knows what is business and what is pleasure.
Accounting Mistake #2 – Doing it all yourself
Filing an annual tax return is not difficult if your accounts are fairly straightforward. If you’re earning a modest amount with few expenses and variables, DIYing is a viable thing to do. However, as your business grows and your offering changes your accounts may not be quite as straightforward, and here you could benefit from some outside help.
Remember that although it will cost you to get an accountant to do this job for you, it can save you money too; and of course time. Instead delegate this job to someone who can help reduce your tax and free up your time to concentrate on other areas of your business.
Accounting Mistake #3 – Don’t hire family or friends
Keeping business in the family is great if your family (or friends) have the right skills, qualifications and attributes to do the job required. But just getting your spouse to do the books because it’s a cheap solution can cause personal and professional problems.
Even if your friend or family member is qualified to do your accounts, be wary of favours and “mates rates”. Even with the best of intentions your friend may struggle to prioritise your accounts over their higher paying clients, and therefore you might not be getting such a great service.
Accounting Mistake #4 – Not keeping receipts
Here’s another reason you shouldn’t mix your business and personal accounts: receipts. If you’re guilty of having receipts stuffed in your wallet, handbag or pocket and no idea whether they are business expenses or your weekly supermarket shop, it’s time to get organised! Losing receipts costs you money. Without them you cannot claim for expenses you have incurred through your business. The solution is simple. Separate your finances so you have a dedicated business account (for the self-employed this can still be a personal bank account) and use your “business account” exclusively for that. Keep an envelope in your car / bag to put all business receipts in and weekly, or monthly, go through and file them.
If you don’t want to store paper copies a digital scan/photo of both sides of the receipt is allowable, and if you are using Xero, or any other Cloud accounting system, you can attribute the receipt to the relevant expense online.
Accounting Mistake #5 – Not keeping an eye on the VAT threshold
Finally, another accounting mistake that is common with start-ups and the self-employed – not registering for VAT. Currently the VAT registration threshold stands at £81,000, this is based on your VAT taxable turnover – the total value of everything you sell or supply that isn’t VAT exempt. What people often forget is this is a rolling 12-month threshold, not based on your tax year. Therefore, you could find that an invoice dated for December pushes you over the threshold in the period December 2013 to December 2014. Checking your rolling turnover regularly is essential, especially if you are close to the threshold.
I think the overriding lesson to be learnt from all these accounting mistakes is to be professional about your accounts from the start. However, all is not lost if you have started off on the wrong foot. An accountant can help you consolidate your accounts and put in place systems to enable you to manage your accounts efficiently.
If you would like to speak to a member of the Black & White team about your accounts, tax returns or VAT, please get in touch. Call us on 0800 140 4644 or email [email protected].
