In analysing clients’ books for their year end accounting there are certain mistakes that I am finding that clients have made with their book-keeping that could easily be avoided:
One mistake that I have quite commonly found, not only in my small client’s books, but also previously, when working for much larger organisations, is duplication. This is particularly so for purchase invoices / receipts.
One of the reasons that this occurs is that there may be two copies of an invoice or receipt. An invoice may have been faxed or emailed initially but then a final invoice sent through the post (maybe with goods ordered), or an initial receipt may have been issued and then followed up with a valid tax invoice. Of course, sometimes the duplication problem occurs even when there is only one copy (as I have seen with a couple of my clients).
There are two effective ways to ensure that duplicate entries do not happen:
Another mistake that I have come across is to miss an entry completely. Of course this could work either for or against the client depending on whether it is a sales or purchase entry that was missed.
The primary way to avoid this error is to reconcile all your entries back to your bank account. In general, if you use an accounting program such as Xero or Banklink, then the automatic bank feeds should ensure that omissions do not happen. However, if you don’t use a program with automatic bank feeds then you will need to manually reconcile all your entries.
The easy omission to make that would not necessarily be picked up by bank reconciliations is that of cash receipts. I know from having a market stall for my jewellery that any sale paid for in cash could easily be overlooked and not included in your accounts.
There are two main ways to ensure that these sales are properly accounted for:
Cost of Sales
Another common error is to cost all purchases of goods for resale, or materials for making goods, directly to cost of sales. In fact, all these types of purchases should instead be costed to “stock” or “inventory”. The cost of purchasing goods for resale cannot be treated as a Cost of Sale until the goods have actually been sold. Likewise, the cost of materials, cannot be treated as a Cost of Sale until the materials have been used to make a product and that product has been sold. (I won’t go into further detail here as I have a previously post specifically about Cost of Sales).
One common misconception appears to be that meal or refreshment costs can be treated as taxable business costs as long as the meal or refreshments are taken whilst out and about on business matters. In fact, I know of one Franchise Organisation who actually told their franchisees that this was the case. IT IS NOT!
While as an employee, it may well have been possible to claim the cost of a meal or refreshment from an employer while out on company business, that employer would NOT have been able to claim this cost in their accounts as a taxable expense.
If you particularly want to you can treat these costs as business expenses, however, they cannot be treated as TAXABLE business expenses. In other words the costs would have to be added to your accounts after tax and not before.
If the meal is taken with a genuine client, then 50% of the cost can be treated as a taxable business expense but you still can’t claim the whole cost against tax.
Equipment/Tools etc. Costing $100 or More
Another common error is to write off items that should in fact have been capitalised. If a piece of equipment, or a tool etc. that you have purchased for your business costs $100 or more then it has to be capitalised and you can’t claim the whole cost in the year of purchase. It doesn’t matter what it is, whether it is a mobile phone, a piece of furniture, or a tool, if it cost $100 or more than it has to be treated as a capital purchase.
The thing to really watch out for here is when several items are purchased together, that may individually cost less than $100, but that in total cost $100 or more. If they are all purchased for the same type of thing, i.e. refurnishing an office, or building a computer etc. then it is the total, not the individual cost that is relevant.
If in doubt about any of the items mentioned above then please check them with your accountant!