If your small business uses accounting software to prepare your financial statements in-house, then you're putting in all of that extra time and effort for a reason!
Maybe you think your business is not the right fit for an accounting service, or maybe you trust yourself to handle your books and don't see the need to outsource. You could even want nothing more than to just balance a checkbook or file your taxes. But most likely, you're concerned that having somebody else do the work will cost you an arm and a leg.
When you use accounting software instead of outsourcing, you're counting on it saving you some money. What happens when it doesn't? Record inaccuracies can result in penalties and interest down the line or make you miss out on reimbursable expenses. Not to mention, going through an audit will take up a lot of the time that you could have put toward making profits. If you don't have a background in accounting, you may not even realize you're getting lost.
How can you tell if your bookkeeping is getting mixed up? Start by taking a look at your financial statements. Here are some common red flags.
You might find that using your system in-house is time-consuming, and it can also be confusing. Do you know what to be keeping an eye out for? Check out the advice a monthly accountant can offer to find out how we use financial statements to gain insight on your money moves.
The Common Red Flags on Financial Statements
A negative balance is by far the most common red flag that pops up in small business financial statements. If this shows up on your Balance Sheet or Income Statement, it's very likely an error. For example, a negative loan balance would mean that you somehow overpaid a loan. Our experts at CSI see this mistake frequently if your statements are prepared by a non-professional.
Also called an officer loan, a shareholder loan is a loan between a business and one of the owners. There must be a loan agreement with a specified interest rate and repayment terms, just as a loan with a bank would have.
The most common type of shareholder loan is when someone loans personal money to their business. As long as these are treated like loans between two unrelated parties, they are perfectly fine.
A less common type of shareholder loan is when a business loans money to a shareholder. The IRS will look deeper into your business if you have this kind of loan because it usually means that you have taken more money out of your business than the profits would normally allow. If not handled correctly, the amounts of this type of shareholder loan can become taxable income to the shareholder.
Balance Sheet Income Doesn't Match Profit & Loss Statement Income
These key financial statements document assets and liabilities and how equity balances them. They show how far "above water" you are, or your ability to pay off your debt. A Balance Sheet and a Profit & Loss Statement tie together, so the numbers indicating income should be exactly the same.
Titles Such as "Forced Total", "Suspense", and "Clearing Account"
While these titles aren't uncommon, they are intended to be temporary accounts. They are used during the month to adjust balances in your financial statements, however, they should zero at the end of every month.
Large Miscellaneous Expense Account
If you have a miscellaneous expense account that contains a large amount of money, you're more likely to throw up red flags. Where did this number come from, and why couldn't it be categorized elsewhere in your financial statements?
Financial Statement Basics
Let's take a step back. Surely if you've been working on your own bookkeeping, you might know a thing or two about your financial statements. However, if you'd like to brush up on the basics or make sure you have the essentials for tax season, we've put together some resources for you in the form of a downloadable kit:
The Small Business Accounting Kit includes:
Tax return calendar
Tips on how to read and use your income statement, balance sheet, and cash flow statement
Advice on when to contact your accountant
How Can CSI Accounting & Payroll Help?
If you're ready to fix some of these red flags listed in this article, it's going to take the effort of a trusted accountant performing back work on your books. Don't trust just anyone with your business! CSI Accounting & Payroll can guide your finances on a monthly basis and help you avoid common in-house accounting errors that are often missed by small business owners.
Our team members are Certified QuickBooks Pro Advisors and Xero Pro Advisors. We are committed to helping our clients efficiently and effectively use these tools to achieve valuable insights into business performance. We take over your financial bookkeeping and provide you with monthly reports. By hosting your QuickBooks file, we won’t have to email files back and forth. We also regularly review your accounting information for accuracy, and we balance your books and bank accounts!
Did we convince you yet? Click the button below for a free consultation to see if we're a good fit for each other.
Not ready to make that leap? Be sure you're confident in your knowledge of small business taxes first!
This article was composed by a member of our staff who interviewed our experts to get the facts straight. Any uncited information found here came straight from a knowledgeable accountant or payroll specialist.