Webster defines Red Flag as “a warning signal or sign; a problem to be dealt with.” Negative accounts are a big red flag in your bookkeeping.
Despite popular belief, bookkeeping isn’t necessarily only for doing your tax return, although that’s an added benefit. Bookkeeping is for recording and organizing all of your financial transactions made for your business operations. With good records you are able to see trends in your business which will help you make better decisions.
Most business owners got into business because they enjoyed what they were doing like painting, sales, or running a gym, not because they had a great talent for accounting and loved keeping the books.
If you’re one of those small business owners that does your own bookkeeping, there are a few red flags to watch out for that indicate something is wrong with your books.
Some red flags are more obvious than others. Some are easily fixed and some, not so much. If you run into trouble with these, you should probably get a trained accountant (not just someone trained in QuickBooks) to take a look at your books.
Don’t get me wrong, QuickBooks is what most of our clients use because it’s the easiest to work with. But just because it’s user friendly doesn’t mean it’s always used correctly.
As part of your set up process, whether you’re using QuickBooks or another accounting software, you should make certain that your chart of accounts is set up and categorized correctly.
This will give you a quick look at your accounts which are usually organized with your assets, liabilities, equity, income, and expenses.
The only possible account that might ever go into the negative is your owners draw account because it’s an equity account that you take money out of. Of course, if this account is negative, that’s still not a great sign because it also means that your bank account is overdrawn. But for this blog’s purpose, the important thing is your bookkeeping is in order.
If you have a negative showing up on your assets, liabilities, or any other balance sheet, this is usually a sign that something was recorded incorrectly or needs to be moved to another category.
One of the most common errors we find is the Payroll Account. Payroll, whether it’s for employees or independent contractors, is often set up wrong. Some small business owners book those expenses to a category called “payroll liabilities.” If this account shows a negative balance, it’s most likely your payroll was set up wrong. If left unfixed, you will end up overpaying in taxes because it’s not properly calculating your expense for paying your team.
Credit Card Balances
Unless you’re pre-paying your credit cards (and I don’t know anyone who does) this account should never show a negative. The number one reason this account may show a negative number is if your bookkeeper is only inputting payments, and not expenses.
If any other debt balances show negative, then you’re most likely missing interest expenses.
Profit & Loss Report
If any of your Expenses items are negative on your Profit & Loss report then chances are you have income that has been put into that category and it needs to be fixed. It’s a relatively easy fix if you’re using QuickBooks.
It’s a good idea to look at your Profit & Loss statement for the last 12 months. Any time you see a drastic change in that income you’ll want to take a good look at that month.
One reason could just be that your accounting is incorrect. You either missed some or doubled some transactions. Bad accounting is an easy fix.
The second reason could be that your accounting is actually correct, but something happened with your business that caused a negative or upward swing.
If it’s an upward swing, great! Figure out what caused the upward swing and you may want to think about doing it again.
Obviously, a downward swing isn’t so great. You’ll want to figure out what caused that downward swing. Did you lose a lot of clients that month? Whatever it is, you can figure out a game plan to avoid it in the future.
Look at your financials with confidence now that you’ll know if you come across a red flag in your bookkeeping.
If you’re still having trouble reconciling your books, we offer bookkeeping clean up services, as well as monthly bookkeeping and consulting.
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