Common Accounting Mistakes

Introduction

Accounting is not just for tax reporting purposes, but it can help to identify areas in which costs can be cut or resources can be added to increase the profit and efficiency of the company.

Some accounting mistakes can lead to incorrect financial status presentation and hence wrong business decisions being made.

Let's find out the common mistakes in accounting.

1. Assuming Profit equals Cash Flow

This common misconception by many people will distort the company’s real financial position.

When a company buys machines to increase production, the profit of the company will not be reduced by the same amount of payment for the purchase of machines. Instead, the cost of the machines will be recorded as Property, Plant and Equipment under Balance Sheet.

2. Data Entry Error

Accounting work is all about details. While having an accounting software is essential to efficiency for complex and high transactions, nonetheless, human being can make mistakes whether we are using accounting software or manual way.

For example, wrong double entries being keyed, wrong amount being recorded or deposit paid not deducted from invoice.

It is important to have segregation of duty with other personnel to do the review work to minimize this type of errors.

3. Mix up between personal and business accounts

Many people will feel maintaining 2 bank accounts to separate personal and business accounts as very tedious work. Actually, it is not. In fact, it will smoothen the whole accounting process and increase efficiency.

It is important to have the mindset that business accounts should be strictly for business purpose. If the personal expenses are mixed up with business expenses, the accounts will be scrutinized by the auditors and tax officers even tighter.

Likewise, it is a good practice to do proper filing by separating business and personal bills.

4. Consistency in Classification between Direct and Indirect cost

Cost structure refers to different type of expenses a business incurred, which comprises of direct and indirect costs.

Direct costs are expenses that can be attributed to a specific product, while indirect costs are expenses required to maintain and run a company.

If the classification of the direct and indirect costs is not being identified properly or consistently, it will lead to unusual fluctuation in the gross profit margin. This will further affect decision making made by the company.

5. Not Reconciling Books with Bank/Loan Statements

This process, called reconciliation, helps verify that your financial records match your bank/loan statements. Failing to do this can lead to inaccuracies.

6. Not Accounting for Petty Cash

Small, petty cash transactions can add up over time and lead to noticeable discrepancies if not properly recorded.

7. Inaccurate Depreciation Calculations

Incorrect calculation of asset depreciation can lead to an overstatement or understatement of asset values.

8. Using the Cash-Based Accounting Method

Businesses usually use either cash-based or accrual accounting. Using the wrong method for your business type can lead to discrepancies.

9. Not Back-up Accounting Data

Imagine the consequence if the financial data is lost, stolen or hacked, and you don’t have any back up.

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