While when running a business, most business owners tend to know their product/service very well, they tend to make the mistake of focusing mainly on producing and selling their product/service and see accounting as merely the trivial recording the transactions. They may just do the bookkeeping themselves, use a spouse or relative or maybe even employ a bookkeeper with no formal training to do it for them. However as time rolls on and the business grows, the business owner will rely heavily on the financial statements, as a guide to how well the business is doing and eagerly await a copy of the financial statements each month. Seldom do business owners realize that bookkeeping is the foundation of all financial reports and therefore is imperative that it is done right. While a transaction may be duly recorded in the accounting system and therefore show up on the financial statements, there are in fact many ways to record a transaction and so just because a transaction is in the system, it doesn’t mean that it is accurately recorded. This could lead to a whole host of misinformation and if left unmonitored, could have a domino affect on other parts of the business.
Consequences of inaccurate Bookkeeping:
- Financial Statements inform business owners of how well their business is doing, aiding decisions on what direction to take the business in, whether to continue or close down the business etc. It is also used to develop budgets and forecasts to help steer the business to growth. However, if the bookkeeping is done incorrectly, for instance, transactions are coded to the wrong account or worse yet, to a balance sheet account instead of a Profit & Loss account, the Financial Statements could tell a completely different story from the truth and thereby affect the decisions made by other parts of the business which rely on data from the Financial Statements, budgets, forecasts etc. Large expenditures like employee bonuses could be paid when not warranted etc. plunging the company profit even further and possibly into a loss.
- Financial Statements are also used to determine the taxable business income when filing taxes, if a transaction is misclassified and reported in the wrong section of the financial statements, or indeed not reported to the CPA preparing the taxes at the end of the year, it could result in a lower expenses balance and hence increase the business tax liability (as tax is based on income minus expenses). I recall reviewing the accounts of a new client and found that the employee bookkeeper who was not a formally trained accounting professional, had coded a number of fixed assets in the fixed assets account, but did not inform the CPA to update the fixed assets register, so these fixed assets were not being depreciated. As depreciation is an expense, it would have reduced the business income and hence the business tax liability at the end of the year.
- Another instance of poor bookkeeping is in the area of Loan interest. While the recording of loan repayments should be recorded in the balance sheet, the interest paid on the loan should be recorded as an expense in the a profit & loss account and hence reduce the net profit. An untrained bookkeeper is not likely to understand the intricate differences between the two and could very easily record the interest in the balance sheet and the error would not be picked up until years later when the loan the loan account starts to show a positive balance (as opposed to a negative or zero balance) in the balance sheet. This may later show that decisions had been made from inaccurate financial statements data as well as higher taxes being due as a result.
These are just a few examples of what could result from inaccurate bookkeeping and cumulatively over a number of years could prove very costly to the business. It is far safer and usually even cheaper to have an outsourced professional do the bookkeeping for you.
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