Accounting is an essential function that needs to be performed by everyone, no matter the type of industry you are working in or the business you are heading. Not properly performing the accounting duties can lead to the bankruptcy of winding up of the company and similarly conducting the accounting processes in a wrong manner can also result in grave consequences for the business.
This blog will talk about the significant accounting mistakes made by a company which can push it towards bankruptcy.
Accounting Mistakes to Avoid
Some of the mistakes that a business should avoid are given below:
1. Mixing of Personal Finance with Business Finance
Many people in the industry do not keep a separate bank account for the company and only utilize a single bank account for both personal or business use. This is a very wrong practice as this can lead to much confusion during the calculation of the total profit made by a business during a fixed period or while filing for taxes. Creating a separate bank account is one of the first jobs that a company should do.
2. Not Updating the Accounting Books
Recording of all the transactions should be made into a habit. This is a widespread mistake which can be avoided with due diligence. If a transaction is not recorded, there would be a mismatch in the books of accounts which will ultimately lead the management of the company to make wrong decisions. Updating the books of accounts will further help in the auditing process too.
3. Use of an Improper or Obsolete Method of Accounting
There are two kinds of accounting methods which are mostly utilized namely cash accounting and accrual accounting. There are also certain accounting methods which are relevant to specific businesses. Using the correct accounting method will allow a businessperson to calculate the profitability of the company correctly and will also help in making decisions regarding the future of the company.
4. Improper Classification of Transactions
One of the most original books of accounts is the ledger account. It is an essential financial books as it forms the base of all the financial book of accounts of a company. If a particular transaction is recorded in the wrong way, the complete financial statements of the company would be affected as the operating cash flow of the company would be disrupted.
5. Calculation Mistakes
These are the most common mistakes made in the account books of a company and are usually made in a hurry or when the accountant is not focused enough while recording the transaction. Though this is a silly mistake, it has the potential to lead the accountant in the wrong direction. It is not expected from a professional accountant to make such mistakes.
6. Maintaining the Accounting Books on the Own
Many people think that if the accounting of the company is done on their own instead of hiring a professional, then many funds would be saved which could be used in a better manner. Instead, it can result in a more significant financial loss than expected. A professional accountant will remain updated regarding the accounting norms and will also perform the accounting of the company ina quickly and accurately. He would also have varied experience of the different financial situations and will know how to handle them.
7. Ignoring the Budget
Many people don’t understand the need for a budget for a company and tend to ignore it. Even if they have prepared a budget, they have a tendency of not sticking to the budget which is a very wrong habit. A budget is made in accordance with what would be the expenses of a company and the revenue generated. Failure to work according to the decided budget will cause the different departments to overshoot the expected spending which would result in the losses for the company.
8. Not Utilizing Accounting Software
With the advancements in technology, the number of accounting software in the market has increased. The accounting software has become easy to use and with a simplified interface. There are different software specialising in various industries. A businessperson should take advantage of thisaccounting software to simplify their accounting. They can also help in the report generation and auditing of a company which would be a great help for the company.
Not following the proper accounting procedures will result in an early downfall of the company. Special care should be taken by an accountant that he should not makes such mistakes which have been mentioned earlier in the article. One of the best ways to follow proper accounting methods is to hire a professional accountant which commands a good reputation among the peers of the company and provides the required accounting services.
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