A Bookkeeping Cleanup Can Put You on the Right Path

The bookkeeping function mostly operates behind the scenes. Transactions are entered and reconciled, reports of what has transpired are printed, and business decisions are made based on those reports. What happens if those reports aren’t accurate? You could be making decisions that end up damaging your business.

I have worked on several cleanup projects over the last few months. I print out the financial statements before I do any work and then again when I am done. The final financial statements often look much different from when I started. That is due to transactions being miscategorized, duplicated, entered into the wrong account, or, in same cases, never took place at all but there they were in the accounting software.

All of the examples I mentioned will impact your financial statements. These are the reports that you use to make business decisions. Let’s go through some of these scenarios to illustrate how they could cause you to make decisions that could hurt your business.

When transactions are miscategorized, it means they were not assigned to the proper category. For revenue or expense transactions, you would pull the Income Statement, or Profit and Loss Statement. If a transaction was not assigned the correct category then your revenue allocation might not show what you were expecting. This could be a problem if you break down your revenue into different types of revenue. Recording a revenue item under the wrong category would skew your performance for that category and, on paper at least, give the impression that you missed your goal. On the flip side, it could make you think you did better in a category than you actually did.

An expense item that was recorded under the wrong category would cause you to believe that you spent more than what you expected for a particular period. That might cause you to cut back on an expense category that you don’t really need to. Cutting back could cause you to not benefit from what you were paying for and could result in a decrease in revenues.

Duplicate transactions will cause your reports to overstate amounts, whether it’s a revenue or expense. It could also be an asset, liability, or equity transaction. These can give you a false sense that things are going well or cause a chill to run down your spine. Consistently reconciling your accounts each month will minimize the impact of duplicate transactions.

Assigning transactions to the wrong bank or credit card account will present incorrect amounts when you run your Balance Sheet. You could get a better sense of what you have available if you check your bank account but what’s even better is to have information entered correctly the first time so you won’t have to double check so frequently. It’s still a good idea to double check but if your books are being presented accurately then you will have the confidence that you can rely on the numbers. Monthly reconciliations will alert you to discrepancies.

The final scenario is a transaction that actually never took place. Yes, I have seen them. In the case of an expense, having a transaction in your accounting software that never took place will, once again, cause amounts to be overstated. If it was an invoice that should never have been generated then your income will be overstated. When looking at your accounts receivable and forecasting cash flow, you are going to factor in that invoice and the money you should be receiving. Finding out that it was bogus means you now have to find a replacement for that revenue and that’s not something you want to do at the 11th hour before the end of an accounting period. Connecting your bank, credit card, and loan accounts to your accounting software will import transactions so that transactions are not missed.

Having proper systems in place to ensure that your books are accurate will allow you to rely on your financial statements to make the best decisions for your business. Make sure that you periodically review those systems to see if they need to be updated due to changes in your business.

If you aren’t confident in the reliability of your financial statements then seek out a qualified bookkeeper who can go through your books, do reconciliations, research transactions, allocate them properly, and provide you with accurate financial reports. Read some of what a cleanup involves here. When you have reliable information at your fingertips then you can make decisions that will put your business on the path to success.