Accounting serves as foundation for operating any business, as it involves recording, analysing and reporting of financial transactions. Mistakes in accounting can have serious consequences on the financial health and reliability of the business.
Having dedicated more than three decades across the globe to serving the accounting industry, we, BCL Group, have gained direct insights into how critical it is to avoid mistakes that can spell trouble to businesses. Drawing from our extensive experience, in this blog, we have listed a few common accounting mistakes. By addressing these issues and adopting sound accounting practices, businesses can mitigate risks and foster growth.
Poor planning:
Planning enables the company to set roadmap on the accounting practices. Following a proper workflow of obtaining data and providing output to the management on weekly/monthly/quarterly basis will help the business to achieve its target and have a detailed view of the financial position on the given date. Management can make decisions based on the financial reports achieved by proper planning. Poor planning or ignoring the accounting aspect will provide poor visibility on the profits or losses to the management.
Further, accounting helps to adhere to VAT compliances. For an instance, registration with VAT is mandatory once the taxable supplies cross the threshold of AED 375,000. Proper accounting will help the business to identify the date when it crosses the threshold and comply with the provisions of the company.
Weak internal controls:
Weak internal controls could lead to frauds and leakage of profits. As there is no transparency and tracking of the profitability, accounts receivable, payables, petty cash etc, there could be instances of mismanagement of cash or double payment of the same expense bills etc leading the business to losses.
Adhering to tax regulations:
Accounting involves adherence to many regulations. Certain common mistakes relating to the laws and regulations are- late filing of VAT returns, inadequate maintenance of documentation for VAT input tax recovery, improper invoicing etc. If these provisions of laws are not met, it could attract fines, penalties and legal consequences.
Wrong classification:
Classification of the transaction plays a major role in the accuracy of the financial statements. Any wrong classification will result in overstatement or understatement of revenue and expenses which could affect the fairness and accuracy of the financial position of the company.
For an instance, if infusion of capital is accounted as revenue and the total revenue in the books is not matching with the supplies disclosed in VAT returns, then the business might have to spend longer time in justifying the reasons for mismatch to tax authorities.
Not reconciling the accounts:
Reconciliations help in identifying any irregularities in accounting. It could flag an account and aids in maintenance of proper books. For example, the accounts receivable has pending invoices from past years. However, as per the customer agreement, the credit period allowed is only one month. In this situation, reconciliation highlights the need to delve deep into the ledger accounts and analyse the reason for these variances.
Accounting personal expenses/incomes:
Owners of many small business pay for the expenses directly from their personal cards or bank accounts. If these are not accounted in the books, then the profitability shall be affected.
If the invoices are raised in the books of the company and receipt from such customer is received to the personal bank account of the owner, then this has to be accounted for. If not, the accounts receivable will be outstanding indefinitely.
If expenses paid directly by the owner is not accounted in the books of the company, the books will depict huge profit margins when in reality, expenses would have been borne by the owner.
Not maintaining supporting documents for the expenses and incomes:
Maintenance of the expense bills (paid through bank or cash), asset invoices, loan agreement, customer agreement, POs etc will help in justifying the accounting treatment. While the laws are becoming stringent, it is important for businesses to maintain these documents which are the proofs for these transactions. Whenever, the regulatory authorities raise queries, the company can provide justification based on these records and documents.
All these mistakes can be avoided by hiring an experienced and reliable accountant. Worried about how to find the best accountants? Refer to our article on this subject here.
At BCL Globiz, we understand the implication of the mistakes while accounting and we aim at bringing accurate financials, tax workings, advisory to the table of the business. Our workforce has been trained, and we implement an executor and reviewer model of accounting, which helps in the reduction of human errors. Our accounting packages are available at affordable and reasonable costs.
Contact our experts at punith@bclglobiz.com today for further information.
