If your small business uses accounting software in-house to prepare your financial statements, then you're putting in all of that extra time and effort for a reason... Maybe you're not the right fit for an accounting service, or you don't see the need to outsource. But most likely, you're concerned that outsourcing will cost an arm and a leg.
When you use software instead of outsourcing, you're counting on it to save you some money. But what happens when it doesn't? Incorrect records can result in penalties and interest or make you miss reimbursable expenses. Plus, going through an audit can cost you big-time.
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. Keep reading to see some common red flags.
The Common Red Flags on Financial Statements
Negative Balances
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.
Shareholder Loans
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 you've taken more money out of your business than the profits would normally allow. If not handled correctly, the amounts of this type of loan can become taxable income to the shareholder.
Balance Sheet Income Doesn't Match P&L 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.
"Forced Total", "Suspense", & "Clearing Account" Titles
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 doing your bookkeeping, you 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 this free kit:
The Small Business Accounting Kit includes:
- A year-end payroll checklist
- Tax return calendar
- Tips on how to understand the basics of income statements, balance sheets, and cash flow statements
- Advice on when to contact your accountant
- Outline of business entity and LLC pros, cons, and requirements
- Checklist of daily, weekly, monthly, quarterly, and annual accounting tasks
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're committed to helping our clients achieve valuable insights into business performance. We take over your bookkeeping and provide you with monthly reports. 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 business taxes first!
