Bookkeeping Red Flags | John Briggs – Incite Tax
What are some bookkeeping red flags to watch out for?
The first red flag is you want to run a profit and loss statement by month. When you’re looking at the statement, it’ll show January, February, March, April, however many months you’re looking at in separate columns. You wanna notice trends, mainly inconsistent trends. If you see this you’re likely not categorizing your expenses consistently the same way.
As an example, let’s say I purchase supplies on Amazon.com, so it’s office supplies. Well, let’s then say I buy computer equipment on Amazon. What happens if I book that to office supplies, when it really should be equipment? What my books will show is maybe one month where office supplies are a lot higher.
Maybe there’s a month where office supplies don’t exist at all. Inconsistent trends is a flag to look out for because it means you can’t make informed business decisions based on the numbers, because they’re just not in the right spot.
The second red flag is on your balance sheet
where your business loans are listed. If you have the same loan balance from last year to this year, that’s a red flag. It means you’re not capturing your interest expense properly. This means you’re paying more in taxes. It also means you can’t see the trend of when that loan will actually be paid off. So loan balances. Example in 2022, my loan balance is $10,000, and in 2023 it also says $10,000, which would be a red flag.
The third red flag
is If I see a lot of credit cards on a small business owner’s books. That’s a red flag because chances are many of those credit cards are really just for personal use and you want to keep all personal transactions off of your books. I should not have a personal credit card that I’m tracking on my books. I don’t need to be tracking my grocery store purchases for my food at my house on my books. I don’t need to track my mortgage statement for my primary residence on my books. If you want to keep track of your personal information, that’s awesome, but do that in a separate file. Don’t co-mingle your business transactions with your personal transactions. In general, if I see an account that is a negative number on either my profit and loss statement or my balance, that typically is a flag.
The fourth red flag
is a negative number in an account. For example, if I say I have an expense item on my profit and loss statement, that’s a negative number. What that actually means is that I have some income that I wrapped up in there which again then means I can’t use my finances to make informed business decisions because they’re not accurate.
The final red flag
which is a really good foundational way to avoid a lot of these other red flags I’ve already talked about is reconciliation. That’s a fancy accounting term that really just means matching. You’re going to match what happened in real life on your bank statement and what happened on your credit card statement to what is put into the accounting software. It’s literally just a matching process.
We do hundreds and hundreds of books a year and if they’re not matching you will have transactions in there that have been double counted and transactions that are missing. If you’re using a download transaction feature, sometimes that feature doesn’t get all the data. So again, your books are now not accurate.
You aren’t able to use the financials the way you should to make informed decisions about the way your business is trending. Maybe you’re missing revenue, maybe you’re missing expense. , all of those things don’t bode well if you’re trying to look at the financials to make a decision to see where you are at in hitting your goals! You want to be profitable!
Doing the reconciliation process and matching what happened in real life to what’s in the software are the most critical steps of bookkeeping. Those are the top 5 red flags to watch out for when preparing your books for taxes.
Remember the #IRSSUCKS.
Remember, profit is a choice. Have the courage and wisdom to choose it.
John Briggs | Tax Genius
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