An accounting system provides a clear view of the overall financial health of a company. Setting up an accounting process is important because it provides organization for a business, provides an understanding of a business’s cash flow needs, and can help identify and implement tax reduction strategies before year end.
QuickBooks is a well-known accounting software used by businesses to easily track expenses, revenue and performs other bookkeeping tasks. Despite the many tools QuickBooks offers to businesses to ensure their success, there are some common mistakes a business can make while using the software that can result in costly accounting errors and incorrect financial statements.
Here are a few of the most common errors made by QuickBooks users and how to avoid them:
Mistake 1 – Accounts are not reconciled on a regular basis
Performing account reconciliations on a regular basis helps businesses better understand their cash flow and true cash position. Reconciling all of your accounts (checking and savings, credit cards, loans, tax accounts, etc.) ensures that the Balance Sheet is accurate and will allow a business to identify and correct mistakes or unusual transactions on a timely basis.
Mistake 2 – Chart of Accounts:
The chart of accounts is a list of company general ledger accounts and their balances which are used to categorize transactions when they are recorded. Financial reports (i.e., Balance Sheet/Income Statement) are created from the Chart of Accounts and will not show correct balances if transactions are improperly categorized.
Tips on Creating Chart of Accounts:
- Don’t create too many accounts and subaccounts – keep it simple
- Customize default accounts – ensure the accounts reflect your unique business
- Use standard numbering for your accounts (1000 range for assets, 2000 range for payables, etc.)
Mistake 3 – Generating Incorrect Reports – Accrual vs. Cash:
There are two primary types of accounting methods a business uses to record financial information – Accrual or Cash-Basis. Cash-Basis accounting records revenues and expenses when cash is received and paid out. The Accrual Method of accounting recognizes revenue and expenses when they are incurred.
QuickBooks allows users to generate reports using either method, which is why it’s important to ensure you are generating your financial reports reflecting the correct method of accounting. If you incorrectly run a report using the wrong method, then you risk either overstating or understating financial information. It’s especially important to ensure you are generating the correct reports when reporting information to the IRS. You may be managing your business on accrual basis numbers, but you might have elected cash basis for tax reporting.
Mistake 4 – Incorrectly Recording Loan Payments
When a business obtains a loan, the full amount should be recorded on the balance sheet as a liability. Then, each month when a payment is made, the principal paid should reduce the loan balance on the balance sheet, and any interest paid should be recorded on the income statement as interest expense.
Mistake 5 – Bill Payment — Using Checks instead of Bill Payments
The ‘Accounts Payable’ account helps a business track outstanding bills, which is why it’s important to enter each bill correctly in QuickBooks. A common mistake users make when paying bills is entering the bill and then paying the bill using the ‘Write Checks’ feature, which will result in recording the expense twice, and the accounts payable will be overstated.
Correct Method: The first step when receiving a bill from a vendor is to enter the bill in the ‘Enter Bills’ window. Then after the bill is entered, you will go to the ‘Pay Bills’ window and indicate the bill you wish to pay.
Mistake 6 – Receiving Customer Payments
When you record an invoice in QuickBooks, you are also recording revenue. Therefore, when you receive payment on the invoice, the payment must be received and applied to the outstanding invoice. A common mistake is made when the user receives a payment from a customer and enters it as a bank deposit, which results in revenue being recorded twice and the accounts receivable being overstated.
Correct Method: When a payment is received from a customer, use the ‘Receive Payment’ window and apply the payment to the appropriate customer invoice. QuickBooks will automatically put the payment in the ‘Undeposited Funds’ account. Then the payment can then be recorded as a deposit using the ‘Make Deposits’ window under the ‘Banking’ menu.
Mistake 7 – Not Making a Backup of QuickBooks File
Data loss can often happen when working with computer systems, whether it’s from deleting the wrong folder, power outage, or a computer virus. This is why creating a current backup of your QuickBooks data is important. In addition to keeping a local backup of the file, it’s also advised to keep an offsite cloud-based version.
QuickBooks is a great resource to use in recording your transactions and providing reports to help manage your business – as long as you are set up correctly, reporting your transactions consistently, and reconciling your Balance Sheet accounts. If you have any questions on getting the most out of your QuickBooks software or would like help with an issue identified above, please reach out to your client manager.