What Are The Most Common Bookkeeping Mistakes Small Businesses Make?

Small business owners wear many hats, and bookkeeping mistakes can have serious consequences for a business, including incorrect financial reports, trouble with the IRS, and even legal issues.

In this article, we’ll explore common bookkeeping mistakes and provide tips on how to avoid them.

Incorrectly Categorizing Expenses

Certainly, it can have serious consequences for a business, it can lead to inaccurate financial records which can then cause issues during tax season. Additionally, inaccurate financial records can make it difficult to access the financial health of a business. In the long run, it can negatively impact a company’s planning and decision making. It may also lead to inefficient use of resources, which could ultimately affect a business’s profitability.

Therefore, it’s critical to ensure all expenses are appropriately categorized to avoid any adverse impact on the business’s financial health and success. If not solved properly, it can become a never-ending cycle that ends up hurting your business.

Misclassifying Expenses as Personal Instead of Business

This is a bookkeeping mistake that speaks about the importance of having a professional bookkeeper by your side. It is crucial to keep track of all expenses and ensure they are correctly categorized as business or personal expenses. This provides you with a well-maintained and structured chart of accounts.

When mixed up, you may end up paying more taxes than you should. For example, if you purchase something for business needs and classify it as a personal income, when you file your taxes that item won’t go towards your bottom line.

Keep in mind that separating business expenses from personal expenses afterward can be difficult, confusing, and often erroneous.

Failing to Keep Proper Receipts and Documentation

Without proper documentation you can have problems when you complete your tax return. The other possibility is that you won’t be able to claim back any expenses.

Keeping track of all receipts, no matter how small or insignificant they seem, is essential to avoid any potential issues with the IRS. In the event of an audit, having proper documentation and proof of business expenses is critical to demonstrate the legitimacy of claimed write-offs. Therefore it is essential to maintain accurate and complete records of all your business transactions. It will ensure that you can claim back all eligible expenses and avoid any penalties or fines.

Mixing Personal and Business Finances

Mixing those bookkeeping “ingredients” firstly will lead to messy bookkeeping, and later will lead to serious issues. Confusion will be guaranteed when it comes to tax time, and you can lose track of essential expenses as a result of this bookkeeping mistake.

However, there is a solution.

Create a System for Categorizing Expenses

In order to avoid incorrectly categorizing expenses, create a functional system. Here are some steps to follow which will avoid this common bookkeeping mistake:

  • Create a chart of accounts to categorize expenses into various categories. It can be as simple or as detailed as you need it to be, you get to decide.
  • Set up expense categories that will be used to classify expenses. Examples could include office supplies, travel expenses, rent, utilities, etc. Organizing everything in the beginning will guarantee peace of mind in the long term.
  • Assign account numbers to each expense category in the chart of accounts. This will make it easier to track expenses and ensure that they are correctly categorized.

Keep All Receipts and Documentation Organized

Help yourself by properly storing, categorizing, labeling and even reviewing regularly. You will make everything more accessible. This can help save time and reduce the risk of errors when it comes to tracking expenses and managing finances.

When tax season arrives, if everything is organized correctly in advance, you will have a smooth process. What matters is to find a proper solution, designed for your needs. As a small business owner, keeping all receipts and documentation organized is critical. Well-kept documentation will not only be necessary for tax purposes, but will also help you better understand your business’s financial health.

Establish Clear Guidelines for Separating Personal and Business Finances

Because boundaries are important, right? Here is an interesting point of view. You want to take your client to lunch. And that’s totally fine. The bill is ready to be paid but at that moment you decide to pay with your personal credit card, because why not?

We assume you don’t consider this as important, because in the end, it’s all your money. If this is a rare occasion that’s okay, but in the long run, by repeating this common bookkeeping mistake you’ll serve yourself (bookkeeping) chaos.

To steer clear of this trap, develop a practice of refraining from using your personal funds to cover your business expenditures and vice versa.

Failing to Track All Income and Expenses

This can be the result of disorganized financial management. Disorganization can lead to inaccurate financial reporting, missed tax deductions, and even financial losses.

This is one of the bookkeeping mistakes that can put small business owners at risk of running into cash flow problems, overspending, or failing to make informed decisions about their business.

Missing Important Transactions

Poor recording practices, low organizational skills, inadequate accounting solutions, or human error lie at the core of this mistake. If a business fails to record transactions from any category, it can lead to inaccurate financial statements and cash flow problems.

As a result, there will probably be missed opportunities, lost revenue, and poor decision making. This common bookkeeping mistake can lead to making it difficult to identify tax deductions and can result in penalties and possible legal issues if tax returns are inaccurate.

Failing to Regularly Reconcile Bank Statements

This is one of the most crucial (and common) bookkeeping mistakes. Reconciling must be carried out monthly to gauge your business’s financial health

If not performed properly and consistently, you won’t be able to determine the exact amount of money available to you at any given point. You will not be able to detect any discrepancies made by the bank.

Not Updating Financial Records in a Timely Manner

Without a proper update to financial records, a number of financial issues for small business owners will appear. Failure to update financial records can result, logically, in inaccurate financial statements, but also difficulty tracking cash flow and missed tax deductions.

Not updating financial records ultimately and directly will affect the growth and success of your business. Inaccurate financial statements can make it difficult for business owners to make informed decisions and plan the growth of the business. It can also make it challenging to secure funding or attract investors. They rely on accurate financial information to assess the viability of the business. Without a regular update, you will face difficulties in tracking cash flow. This lack of visibility can lead to overspending, missed payments, and even insolvency.

Here’s the solution.

Keep a Record of All Income and Expenses

Be your own hero! Stay well organized and avoid bookkeeping mistakes. Using proper tools or outsourcing your bookkeeping department to an experienced team of professionals can save you time, money, and stress in the long run. By streamlining your process you can gain insights into your business’s financial health, make informed decisions, and be prepared for tax season. Additionally, outsourcing your bookkeeping to professionals can help ensure that your financial records are accurate, up-to-date, and compliant with tax laws.

Reconcile Bank Statements on a Regular Basis, for Several Reasons

Reconciling will ensure that all transactions recorded in your accounting system match the ones in your bank statement. This will provide you valuable insights into possible errors.

Secondly, reconciling  bank statements can help you identify any bank fees or charges that may have been charged. Avoid unnecessary costs by resolving this kind of bookkeeping mistake.

Thirdly, by reconciling bank statements you will track cash flow and manage your finances more effectively.

Update Financial Records in Real Time or on a Set Schedule

In order to have relevant insights about your financial health make sure that you rely on the most up-to-date information available.

Real-time financial records allow you to monitor processes and ensure that your business is running smoothly. On the other hand, updating financial records on a set schedule ensures that you don’t fall behind.

Not Staying Up-to-Date with Tax Laws and Regulation

Not being aware of tax laws and regulations can cause you to pay more and may lead to penalties. Tax laws can be complex to understand. There are often many deductions and credits that individuals and businesses may be eligible for, but are unaware of.

Individuals and small businesses must prioritize staying informed on tax laws, regulations, and guidelines in order to ensure growth for their businesses. Whether through self-education or working with a professional, it’s your responsibility to ensure that your business complies with all the relevant tax laws.

Failing to set Money Aside for Taxes

When you don’t plan (or even consider setting aside money) you may not have enough funds to pay your tax obligations on time. In other words, you may face cash flow issues. This can result in penalties and interest. Additionally, failure to pay taxes can damage your credit score and hurt your business in the long run.

Moreover, if you do not set aside money for taxes, you may be forced to dip into your personal or business savings. This can make it difficult to cover essential expenses and invest in future growth opportunities for your business.

Filing Taxes Late or Inaccurately

This common bookkeeping mistake will increase the chances of an audit by the IRS. Yes, it will be time-consuming and yes, it will be stressful for small business owners, but inaccurate tax returns can lead to overpaying or underpaying taxes, which can have an impact on your business’s cash flow and profitability.

Last but not least, keep in mind that with this kind of bookkeeping mistake you can ruin your business reputation. Late or inaccurate filings may give the impression to lenders or investors that your business is not relevant for any further collaboration

Here’s the solution.

Set aside a Portion of Income for Taxes

As a small business owner, here’s some ideas for how to set aside money for taxes to avoid cash flow problems:

  • Determine the amount you need to set aside – Use a tax calculator or consult with a tax professional to determine the appropriate percentage of your income to set aside
  • Open a separate savings account – Keep track of your tax savings and make it easier to transfer the money when it’s time to pay taxes
  • Set up automated transfers – This could be done weekly, bi-weekly, or monthly
  • Review and adjust regularly to ensure that you are setting aside the right amount of money

Work With a Professional Bookkeeper

Let’s be honest, and say it out loud, bookkeeping is a full-time job. Having a professional bookkeeper by your side can be beneficial for you and your business. A professional can help you understand your tax obligations, identify any potential roadblocks, and ensure that you are filing your taxes accurately and on time.

It will save you time by avoiding a lot of bookkeeping mistakes, and in the long run, you will be set free from the stress of ensuring you have a healthy finance structure. You will feel confident in your business knowing that the financials are taken care of by a professional.


Bookkeeping mistakes can have serious consequences for small businesses, but with a little attention to detail, they can easily be avoided.

By creating a system for categorizing expenses, tracking all income and expenses, and staying up-to-date with tax laws and regulations, small business owners can ensure their finances are in order and their business is protected.


What are the benefits of working with a professional bookkeeper?

Small business bookkeeping mistakes are a natural part of business growth. By being aware of the roadblocks you may find, you open yourself to grow your business by solving them ahead of time.

As a small business owner, you must be up-to-date on common bookkeeping mistakes and always look for ways to solve them before they become a huge problem. One of the possibilities is that you can explore the benefits of having a professional bookkeeper by your side.

A professional bookkeeper will be:

  • A Cost-effective Solution
  • Time Saving
  • Ensure Accuracy
  • Provide Financial Insights
  • Ensure Compliance
  • Provide Peace of Mind

How can I ensure that my personal and business finances are separate?

The most essential practice you can do for your small business is to keep separate personal and business finances. Follow these steps and set healthy boundaries:

  • Open separate bank accounts – Create a separate bank account for your business and use it only for business transactions. Avoid using the business account for personal transactions and vice versa.
  • Use separate credit cards – By having separate cards you will also make it easier to track business expenses for tax purposes.
  • Keep detailed records – With a proper system which accurately records all business transactions, you will easily keep track of business finances, while at the same time keeping them separate from personal finances.
  • Create a budget and stick to it – This will help you avoid using personal funds for business expenses.
  • Hire a professional bookkeeper – Professional support will make things far easier. You will have peace of mind for your finances and make informed business decisions based on relevant data.

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