As a business owner, it’s not always easy to set up your bookkeeping system for yourself.
You can definitely try. But do you know how many people have asked me what cash versus accrual means? Or what is a Chart of Accounts?
Or that they should have an accounting period set up for their business?
Do you know those answers for yourself? It’s okay if you don’t.
But these can also mess up your bookkeeping and even your business finances when they aren’t done correctly.
If these are things you can figure out for yourself, then by all means do them. But you may just want to hire an accountant, a bookkeeper or some form of accounting manager to help you in your business to at least make sure they are set up correctly.
Want help with getting this stuff set up for your business? Check out my bookkeeping set up service and let’s chat.
Most Common Bookkeeping Setup Mistakes
Not Understanding Cash vs Accrual Accounting
Most people do not understand cash versus accrual accounting, so if you don’t, you are not alone.
But this is one of the first questions you have to answer when you are setting up a new bookkeeping program for your business.
Cash basis accounting means you recognize a transaction when cash is exchanged. When a customer pays you, you recognize the sale. When you pay an expense, you recognize the expense. But also when a customer pays you on a payment plan, you only recognize the amount that you have received as cash.
Accrual basis accounting means you recognize a transaction in full when it happens. So that customer that is on a payment plan, you recognize the full amount of the sale, what she paid plus what she owes. When you have a large purchase you make and you pay on a payment plan, you recognize the full amount on the day the purchase is made, both what you paid and what you still owe. Accounts payable and accounts receivable are regularly used in accrual basis accounting.
The majority of online businesses use cash basis accounting.
Forgetting about Bank Reconciliations
One of the most important parts of bookkeeping, and one of the steps that is usually forgotten is the bank reconciliation.
This just verifies that all of the transactions in the bookkeeping program are in the bank account and all of the transactions that went through the bank account show up in the bookkeeping program.
This is another reason why it’s so important to have separate bank accounts for your business and personal money. A bank reconciliation for your personal money is going to be tiresome and tedious because you will have so many transactions that are not business transactions, but they have to be gone through to do the reconciliations.
Not configuring the system to allow for invoice payments
Just because you have PayPal and Stripe and maybe another form setup to collect payments in your business, doesn’t mean you shouldn’t configure your bookkeeping program to collect payments as well.
What happens when you send those one time invoices? Your bookkeeping program makes it easy to send those one time invoices.
Your bookkeeping program also makes it easy to set up recurring invoices as well and to set up a system to automatically send out the invoices again when they haven’t yet been paid.
It’s a quick and easy setup to configure your bookkeeping program to collect payments for you, so it’s definitely worth configuring, whether you plan to use it or not.
Not having multiple PayPal Accounts setup
This part doesn’t affect all businesses, but with more and more businesses working in the online sphere, they can collect money from multiple different currencies.
The most popular method of collecting multiple currencies is through a PayPal account.
When you hook up your PayPal account to your bookkeeping program though, it will bring all of your money into your bookkeeping program in the multiple different currencies.
So you have to set up multiple different PayPal accounts in your bookkeeping program.
This way, you are accounting for the different currencies. Then at the end of each month, you can easily convert the different currencies into your main operating currency for your business.
Yes, this process can be a pain. But that’s the main drawback of being able to conduct business all around the world.
If you only accept one form of currency in your business, then this is not something you need to do.
Not setting financial period dates
Are you operating your business on a calendar year basis (i.e. January 1 through December 31)? Or are you operating on another schedule (i.e. something like April 1 to March 31)?
These dates should be put into your bookkeeping program, otherwise they can mess up your reports.
Most businesses do operate on the calendar year basis, but there are some that don’t.
When you do not put this information into your bookkeeping program, then you will have some of your reports messed up. Plus if your bookkeeping program automatically closes prior financial periods, this will definitely mess up your system.
Not closing the prior financial periods
Part of the accounting and bookkeeping cycle is to close out each financial period at the end of the year.
If you don’t do this (some bookkeeping programs will do this automatically), then none of your revenue or expense numbers will be correct.
Another part of closing out the prior financial periods though, is also setting up the correct financial period in your business. Almost all business operate on a calendar year, meaning you file your tax returns on January 1 to December 31 basis. You should set this basis in your bookkeeping program as well, this way all of your reports will run correctly.
There are little setup issues that many business owners don’t even know about, but they will affect all parts of your bookkeeping if you don’t catch them (or have someone else catch them).
Not setting up the Chart of Accounts properly
It’s very easy to not set up the Chart of Accounts properly when you have no idea what it even is or what should be on it.
The chart of accounts is simply the list of account names that you will use for your business. Things like Personal Development, Virtual Assistant, Legal and Professional Assistance, Office Supplies, Payroll, Taxes, Website Expenses, etc.
You can always add and edit this list, but most of the time, the list will just be set up as the general list that automatically populates from the system when you set up a new account in the bookkeeping program.
And when that happens, you usually end up with way more accounts than you know what to do with.
But since those accounts are in your program, you inadvertently use them because you don’t know what they are, but you think something may just fall into one of those categories. Therefore, the cleanup work by a bookkeeper will result in many more questions than needed.
Not following up automatically on unpaid invoices
When you send invoices through your bookkeeping program, you can usually set rules and parameters to have the invoices automatically be sent out to the customer when they remain unpaid.
Most business owners do not configure this to happen.
They end up finding out a week or two later that an invoice hasn’t been paid. Then they have to send an email to their client asking for payment.
When you could have just configured your bookkeeping program to automatically send the email out asking for the invoice to be paid.
This is one system that all businesses should have in place.
Not choosing the right bookkeeping program for your business
This happens way more often than you think.
Many business owners don’t want to spend money on a bookkeeping program, so they opt for the lowest cost one.
But what they don’t know is that that program doesn’t have everything they need unless they pay for all kinds of extra upgrades.
The cost of a bookkeeping program is a must for your business. It will help you make sure things are done correctly and that come tax time, your tax return will be filed correctly as well.
I recently had a potential client come to me asking me to help her with her bookkeeping. During our initial call, she told me she had no program set up yet and asked for my recommendations.
I gave her my recommendation of Quickbooks, as it tends to work best for the online business owners I work with the most.
She opted to go with Freshbooks and went for the cheapest plan, which didn’t have all of the things she needed for her business finances. When I tried to explain to her what else she needed, she told me she had no idea what I was saying (nor was she open to understanding it), and she didn’t think it was worth the money to pay for the version of the program she needed.
I understand that you may think a bookkeeping program is expensive, but it is a must for your business, in order to have your business finances done correctly.
Plus when your bookkeeping is done correctly, it is a tool for you to continue to grow your business.
It’s also not easy to switch between different bookkeeping programs and can be quite costly. So make sure you find the right program for your business and have things set up properly from the beginning.
Have you made any of these bookkeeping set up mistakes in your business?
These are mistakes that can be fixed, but if you don’t know these mistakes have been made, then they will continue to mess up your business bookkeeping.
If your bookkeeping is something that stresses you out and you really are afraid of doing things wrong, then you really should at least talk to a professional to help you get on the right page.
There are professionals that will help you make sure you are doing your bookkeeping correctly without judging you. You did the best you could with the knowledge you had. Don’t beat yourself up for it, just get it corrected now.