Starting your own business is fast-paced and demanding, so things like accounting can end up being rushed or taking a back seat. As a result, the most common accounting errors happen to those starting out in business, but the effects of making these mistakes can be hugely detrimental.
In this article, we'll explore some of the most common accounting errors for new businesses in the UK. We'll also explain how to tackle them and the benefits of outsourcing your accountancy requirements.
Let's jump in with one of, if not the, biggest mistakes new business owners make when it comes to accounting.
1. Going it alone
Accounting requires focus and expertise because errors can be a huge blow to your business. That's why one of the most common accounting errors for new businesses is not getting the help they need and instead, tackling it in-house without proper training.
By outsourcing your accountancy requirements, on the other hand, you can get professional assistance with year-end accounts, bookkeeping and payroll, self-assessment, VAT returns, and more. This helps you focus on running your business, safe in the knowledge that your accountancy needs are taken care of by specialists.
2. Overlooking tax
Taxation is frequently overlooked by new business owners who are more focused on their day-to-day operations. This is understandable, but problematic, as it can land you in trouble with HMRC and the law. It can also lead to a stressful period in the lead-up to tax deadlines that can take time away from running your business.
Because business tax is such a complex area, even if you have the time to handle it in-house, professional tax planning is highly advised. By helping you avoid common taxation pitfalls, hit relevant deadlines, and make the most of tax allowances, hiring the right expert can boost profitability and give you more time to focus on growth.
3. Forgetting to record smaller transactions
When new businesses take accounting into their own hands, they often prioritise large expenses but ignore the smaller ones.
Unfortunately, forgotten small purchases add up over time, and missing them can create a large amount of expenditure that isn't recorded. This throws a spanner in the works of your bookkeeping and can lead to all kinds of problems such as missing out on expenses and paying more in tax.
4. Rounding errors
If you round a figure incorrectly within your accounts, even by the smallest amount, it can wreak financial havoc for your new business. The best way to avoid this is with frequent reconciliation of your books and frequent reviews carried out by an expert.
Regular bookkeeping and reconciliation means spotting rounding errors early and making sure they don't snowball into larger issues. An effective accountant can also prevent them from happening in the first place.
5. Errors of omission
Another one of the most common accounting errors, particularly for new businesses, is known as an error of omission. This is when you simply forget to record a transaction, meaning it doesn't become part of the accounting records.
As with most of the problems in this article, this is usually due to human error, and it happens when you rush the job of accounting at the end of the month or before a tax deadline.
The best way to avoid this is once again by hiring an expert and outsourcing your accountancy requirements.
6. Not removing VAT
VAT-registered businesses often forget to deduct VAT from their purchases, which can become a complicated mistake.
Then there's the issue of forgetting to charge VAT for services or sales, which can lead to difficulties with HMRC because you aren't being transparent about your earnings and tax obligations. The consequences of this can be expensive because you'll be liable for the VAT you haven't charged, and you could be fined or be forced to pay interest on what you owe.
This is a huge mistake for new businesses and business owners who aren't as knowledgeable about VAT rules in the UK.
7. Data entry mistakes
Data entry is the backbone of efficient accountancy, yet data entry errors make up 27% of the most common accounting errors. Once again, this is often a result of human error, which is prevalent when you choose to handle data entry in-house rather than outsourcing.
Transposed numbers, typos, and misplaced decimal points are the most common forms of data entry slip ups, and they can lead to a plethora of issues for new businesses. Non-professionals are more prone to making these mistakes because instead of giving it the care it needs, they'll often rush it to get the job out of the way.
8. Errors of commission
Errors of commission occur when you enter the correct amount for a transaction, but it's done incorrectly.
An example of this would be paying one invoice that has the same amount as a different invoice. Because the numbers will match what's coming in and going out of your overall accounts, the mistake may be hidden, even though it was credited to the wrong supplier or transaction.
Duplicated entries and reversed entries, which are when debits and credits are mistakenly reversed, are more examples of errors of commission. These are other extremely common accounting blunders because they're so easily missed until it's too late.
Professional accountants are trained in handling this kind of data and can reduce the human error associated with errors of commission to zero.
9. Mixing personal and business expenses
Lots of entrepreneurs who are new to business mix their personal and business expenses, which is an example of an error of principle. This is when a transaction uses an incorrect accounting rule that goes against the Generally Accepted Accounting Principles (GAAP).
Generally, those who are new to the world of business are less familiar with these principles of accounting, which is why this mistake is so common with new businesses. They might have also received incorrect guidance from somebody, rather than speaking to a qualified, professional accountant.
10. Duplication errors
Duplication errors happen when an item is entered more than once. If more than one person in your business has access to the accounts, for example, they may list an expense that's already been entered by somebody else.
This leads to complications for your accounts and can inflate your revenue or expenses, which affects the impression of financial health your business has. These kinds of errors will also likely lead to miscalculations on financial reports, which can affect valuations, cash flow analysis, and planning.
11. Transposition errors
Transposing figures incorrectly happens when the numbers of a transaction are mixed up and confused.
An example of a transposition error is paying £123 for an expense item but logging it as £213 by mistake. This can lead to all kinds of issues, particularly when it comes to claiming tax relief, as your numbers won't match your receipts for the transposed items.
Conclusion
Starting a new business is often complex and stressful. While keeping everything running smoothly and profitably is crucial, overlooking business accounting and its importance will more than likely cause serious issues.
That's why it's always highly advised to speak to a professional accountant who can handle these requirements for you. Taking away the stress and helping you focus on your business operations; every good business has a good accountant behind it.
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