The Top Three Bookkeeping Mistakes I See My Clients Making
If you do your own bookkeeping (and if you’re reading this, it’s probably safe to assume you are!), from time to time, you’ve probably wondered if you’re doing things “right”.
(And maybe “from time to time” is really “all the time”!)
(And really, why wouldn’t you wonder? It’s not like we’re taught bookkeeping in school!)
So, without going through an entire college semester of bookkeeping (because that’s SO not what you signed up for!), here are the top three mistakes you might be making, and more importantly, how to fix them!!
#1: Improperly Categorizing Transactions
This can be as simple as not knowing what expense category to put something in (“Does my Squarespace subscription go under advertising or software?!”) or something a bit bigger, like understanding what counts as an expense and what should be counted as something else entirely.
(Hint: you paying yourself almost certainly isn’t an expense! Also, it’s okay if you didn’t know that!)
Solution #1: Google it!
Simply type your question into Google: “How do I categorize a client gift for bookkeeping”. (Pro Tip: I find it helpful to search for “How do I categorize a client gift in Quickbooks” even if I’m not actually using Quickbooks!) Because I can guarantee you that you’re not the only person who has ever had that question!
Disclaimer: As usual, don’t trust everything you read on the internet. I’d put more stock in an answer you find on a reputable website than a random post in a forum from 2012.
Solution #2: Ask a professional.
Gather up all your questions, and book time with a CPA or reputable bookkeeper. You can cover a lot of ground in 30 minutes (or however long the session is!) and you’ll know you’re getting good info.
And because we all like specifics, here are some of the transactions that I most commonly see improperly categorized:
Owner’s Draw (ie you paying yourself!) categorized as an expense. It should be categorized as an Owner’s Draw. (Unless you’re an S Corp and you’re paying yourself an actual wage, with payroll and stuff. But you would know if that’s the case.)
Estimated tax payments categorized as an expense. Unfortunately, paying your individual taxes isn’t a business expense, even if the taxes are on income generated by the business. These payments should be categorized as Owner’s Draws.
Claiming photoshoot clothing as an advertising expense.
Okay, the photoshoot clothing one isn’t EXACTLY along the same lines as putting something in the incorrect category, but it’s a misunderstanding that I see a lot.
FOR THE RECORD: Clothing that you purchase for a photoshoot is NOT a deductible business expense. It’s just not. (I know, it’s very disappointing. Because I have bought some SERIOUSLY amazing clothes for photoshoots and damn I wish I could claim them as deductible expenses.)
(Also: a deductible business expense is different from a non-deductible business expense. But that’s a blog post for a different time!)
#2: Unhelpful / Vague Categories
This actually piggybacks on the mistake above. If your bookkeeping categories aren’t clear and concise, it’s hard to know exactly what to put where. For example:
Office supplies vs office expenses - what’s the difference?!?!
Dues & subscriptions - is this where you should put software subscriptions, or do those go somewhere else?
Professional Services vs Contract Labor - when I hire a social media marketer, which one does it get categorized as?
To be sure: there are absolutely grey areas when it comes to categorizing expenses. Yes, there are WRONG ways to do it, but there ARE multiple RIGHT ways to do it. (For example: your ConvertKit subscription could easily go under advertising, but it could also go under software.)
My advice is a three-step process:
Create a cheat sheet of categories that MAKES SENSE to you, your brain, and your industry. Because after-all, a life coach might not need a category called “Design Assets & Fonts”, but a graphic designer might! And while I (to echo my example above), may prefer to think of ConvertKit as a software expense, you may prefer to put it under advertising.
Using that cheat sheet, clean up your bookkeeping. (This is a bit too complicated to do a full rundown for in an already relatively long blog post, so if you need help with this, you can book a “pick-my-brain” session and we can tackle it together!)
Create any new categories that you need.
Recategorize transactions that you know you’ve put in the wrong category
Archive categories that you don’t use (you can do this in all the major bookkeeping software systems like Xero, Quickbooks, and Wave).
PRINT OUT THE CHEAT SHEET and use it whenever you do your bookkeeping.
Because what you don’t want is to sometimes put a type of transaction in one category and sometimes in another. (Like putting the aforementioned social media manager payments under contract labor and sometimes under professional services!) Having the cheat sheet right next to you will be invaluable when you’re trying to remember where to put that type of transaction.
Bottom line: Be consistent with your categories. Pick something and stick with it!!
#3: Not Reconciling Bank Accounts
The last common mistake I see people making is forgetting to (or simply not knowing they’re supposed to!) reconcile their bank accounts in their bookkeeping software. Which, believe me, is easy to do, because it’s not as “in your face” as categorizing transactions.
Reconciling means you’re making sure what your bookkeeping software has for transactions is the same as what your bank/credit card company has for transactions. This isn’t so much about categorizing transactions as it is about making sure there aren’t any duplicates, no transactions were accidentally deleted, or things like that.
(I teach you how to reconcile bank accounts in the Be Your Own Bookkeeper courses!)
Because the last thing you want to happen is for income to be duplicated or for expenses to be missed. Not only does it give you an erroneous picture of how your business is doing, it also means you’re paying more taxes than you need to! (If the opposite happens, where you under-report your income and over-report your expenses and you get audited, well, let’s just say that’s bad!)
So make sure you use the built-in reconciliation processes in your bookkeeping software! (I really like the way Quickbooks Online and Wave do their’s. Xero, not so much. But you do what you can with what you have.) Better to find any mistakes now, than when you’re trying to make a tax deadline!
Hopefully that was helpful!! For a quick recap, here are the resources I listed in the blog post:
