Here at MinistryCPA we receive a wide variety of questions and come across many unique situations. We recently received a request to cover different topics by briefly describing the top 10 problems or questions raised in each category. We have since developed a list of topics that will be covered in a series of top 10 posts on our blog. We hope that these discussions will be helpful to you.
In this post we will be looking at the top 10 bookkeeping mistakes seen by MinistryCPA.
1. Errors in initial software setup
When establishing and setting up accounting software such as QuickBooks, it is important that it is done so carefully and properly. Many of the problems MinistryCPA helps to correct are caused by an error in the initial software setup. It is important to consider what software features are needed for the organization (payroll, inventory, etc.), what accounting method best suits the organization's operations (cash, accrual, modified cash), and that a strong chart of accounts is established. Careful consideration of these items and the proper setup of accounting software will help minimize future bookkeeping headaches.
2. Errors associated with chart of accounts
It is important to have a clear chart of accounts in order to understand where a transaction should be recorded. Organizations often make use of sub accounts and it is important that transactions are posted to the correct sub account. Softwares, such as QuickBooks, allow users to make use of classes, which help separate multiple departments' revenues and expenses. For example, a church may use two classes to distinguish the transactions related to its church and Christian school functions. While using classes can help accomplish bookkeeping objectives it is important that they are used correctly with every transaction being assigned to its correct class.
3. Delaying bank and credit card statement reconciliations
It can be a temptation to put off reconciling credit card and bank statements. Examining source documents and reconciling transactions to an organization's general ledger help to assure that receipts and disbursements are authorized and recorded. Accounting softwares typically provide help in this area through their bank feeds and reconciliation tools. The bank feed feature allows the business to import its bank transactions directly into the program and reconcile the bank and credit card statements with the accounting entries.
4. Incomplete transaction records
Sometimes it may be useful for an organization to use another program to keep track of payroll or other business operations. In those situations the business needs to make sure that it is also recording those transactions in its normal accounting software. For example, if an organization uses QuickBooks for its accounting, but uses another system to record payroll then those transactions will not be in the QuickBooks records. The organization needs to make sure that all transactions are being recorded in the accounting software.
5. Lack of document retention policy
Keeping source documents for tax purposes is required. We advise business clients to keep documents for 7 years, since that is the statute of limitations for most legal actions. The statute of limitations for individual taxes is generally 4 years. Be sure that your organization knows how long it needs to keep source documents, but also make sure that documents are being properly disposed of once they are no longer needed. The best way to establish a record keeping policy is to write out what needs to be kept, and how long it should be kept. Tracking the year that documents should be discarded is also a good practice.
6. Incorrect transaction classification
Classifying a transaction as an activity of one account instead of the correct one can skew financial statement analysis by the organization, and give an incorrect picture of what has happened during a year. For example, if a transaction is recorded as an expense when it was actually a withdrawal by the owner incorrectly portrays what has happened in the organization. An expense reduces the income that was earned during a year, whereas a withdrawal reduces the owner's stake in the business. These are two very different outcomes and an incorrect classification
7. Incorrect use of "designated funds" account
In nonprofit organizations, designated funds received with donor stipulations should be recorded separate from general fund activities because they are to be used for a specific purpose. Instead of being combined with unrestricted funds, designated receipts must recorded in a separate equity account. This helps track the designated fund balance and prevents it from being closed at year end with general fund revenues and expenses since it continues to exist until all of the donors' designations are honored.
8. Failure to make year-end adjusting and closing entries
Year end adjusting entries are made to comply with the matching principle. The matching principle requires revenues and expenses to be recorded in the period that they occur even if no money has changed hands. Adjusting entries fulfill the matching principle and give a clear representation of what has occurred. Closing entries are important because they help to prepare the books to record the operations of the upcoming year. The closing entries move temporary account balances into the equity accounts to show how the operations of the year have affected owner's equity. While all softwares automatically close revenue and expense accounts to an equity account, other common closing entries include closing retained earnings, owner's contributions, and owner's withdrawals.
9. Creating over complicated financial statements
Financial statements take a significant amount of financial information and condense it into a handful of easy to read documents. These reports give others a clear idea of the financial position of the organization without going through every ledger and transaction. One mistake we see is providing too much information to others. Many people do not have a strong background in finance. Providing too much information overwhelms people and confuses them. Financial statements should condense information into easy to understand categories and accounts. For example, the financial statements could avoid listing every aspect of payroll like FICA, health care, retirement, etc. Instead a better practice may simply report overall payroll expense. This format keeps the financial reports simple and easy to understand. Comparative financial statements enable reference to both current and past year results. Budget-to-actual reports permit analysis of actual versus planned or projected revenues and expenses.
10. Failing to file government documents
Meeting filing deadlines is important to preventing potential government penalties. Understanding what forms an organization needs to file and when they are due is important to the operation of the business. Some common forms include 1099, W-2, 940 and 941. Forms 1099 can specifically add to the stress of filing deadlines since information from non-employees may not have been collected at the time of disbursement. Forms W-9 should be collected from non-employees throughout the year as their work for the business crosses the $600 threshold. Having this information on hand will make filing deadlines easier to meet.
While this list represents the top 10 bookkeeping mistakes we observe, we recognize that there are certainly more to consider. Please leave your thoughts and suggestions in the comments below, including added topics that you would like us to cover. Contact us if we can help you address any of the bookkeeping mistakes discussed above.