Put plainly, there are certain accounting practices you don’t want to screw up. If you don’t get your finances in order, you could find yourself in trouble down the road. Bad accounting practices can lead to tax audits, penalties, and unnecessary losses of your hard-earned money.
And bad accounting practices often start at the very beginning stages of business.
So now that you’ve come up with a memorable business name, you’ve done your market research, and you’ve got a flawless business plan, you need to get your accounting practices in place.
Raquel Smith, a small business accountant for Golden Life Consulting, offers these four tips to keep you from starting on the wrong accounting foot.
1. Don’t mix business and personal bank accounts
It might seem easy to collect your income in your personal account, but it’s not a good practice, Smith says. By co-mingling your personal and business accounts, you won’t get a clear financial picture.
Aside from financial clarity, if your personal and business accounts are joined, you could have a hard time untangling your financial history if the IRS steps in.
“In the event of an audit by the IRS, the business may be liable to pay additional taxes because the business expenses are not easily distinguishable from the personal expenses,” Smith says.
“As soon as you decide to open a business, open a bank account to be used solely for business purposes. Keep the business transactions strictly to the business account and vice versa.”
2. Don’t neglect accounting software
Having separate bank accounts is just the first step to track your financials. You’ll want to buy accounting software like QuickBooks or Xero that can give you a real-time look at what’s coming in and what’s going out.
Make accounting part of your routine. Many small business owners start out as their own accountant, but to do so effectively you can’t neglect the accounting software. It’s only as good as the information you put in it.
If you skimp on this duty, you won’t know where your money is going. For startups, that’s a big problem. By tracking your income and expenses, you won’t waste money.
3. Don’t pocket cash
In Smith’s experience, small business owners have a tendency to pocket cash from clients. Yes, it’s your money, but if it’s not on record it undervalues your company. There could come a time when you need investors or a loan. When that time comes, if your business has a low profit margin, you might not qualify for additional funds.
In addition to undervaluing your business, the IRS says pocketing cash is a big no-no. If the cash isn’t reported and you’re not paying taxes on it, Uncle Sam could slap you with a penalty if an audit occurs.
Every cent of income your business brings in should be deposited into your business bank account, Smith says.
4. Don’t forget to reconcile your bank account
Every month, sit down and make sure your bank account is reconciled, meaning your bank account matches the amount listed in your accounting software. You can’t get sloppy here, Smith says. If you don’t reconcile regularly, you could end up overdrawing your account, which usually results in bank fees.
You’ll experience a learning curve, but once you have a routine in place, you’ll be able to work through the necessary accounting measures with ease, Smith says. Of course, you can always hire an accountant on a part-time or full-time basis to help as well.