For any business, accounting is a crucial part of running a business. From small to medium-size businesses, accounting is an aspect that must be handled with care. Even the slightest mistake can pose a huge risk to a business, could cost time, money, or lead to an audit.
Even though you can't manage everything in business finance, such as customers' buying trends or the economy, you can reduce the chances of any accounting errors. This article will discuss about that, so stay tune till the end.
What Is Accounting Errors?
All unintended accidents in accounting caused by a slip of the hand, like entering an incorrect key when filling in finances in an accounting application, or transposing a number. Common errors can occur due to many factors, from data entry to errors in principle.
There are two broad categories of accounting errors that can be detected easily, but require a closer look. First, errors that impact the trial balance like unbalanced journal entries and single entry accounting, and second, errors that have no trial balance impact like duplicate entries, omitted transactions, reversed entries, incorrect values, incorrect general ledger accounts, or incorrect accounting treatment.
What causes inaccurate financial reporting?
Innacurate financial reporting can occur both internally and externally. It creates a cascading effect and impacts your organization's health. Some of the things below are examples of why financial reports can be wrong.
- Data incosistencies
Minor or inconsequential inconsistencies can create storm clouds over your operational money. For example, when you are rounding your figures in disclosures, there's a result in data that is a single digit different from your financial statements. Every slightly differing figures can make mistakes in all financial reports, and are ill-prepared.
- No-post close review process
You can improve on your closing by taking notes on what needs to be fixed in the system. Any inefficiencies must be identified in post-close reviews. The absence of a review on the closing process can miss any misses on business changes, guidance updates, or costs that don't stay on track.
- Incompetent staff
Inadequately trained staff can directly and indirectly cause errors, such as miscount inventory, miscount in expense reports, etc. They do not understand financial rules, and may not be up to date with accounting standards and regulatory requirements.
How can small businesses reduce accounting errors?
Every prevention is worth as a cure. The accounting departments must have control procedures in filling out reports carefully and preventing any mistakes. You can do preventive and detective controls to minimize any errors.
- Use accounting software
Any accounting software or application includes error-reducing features, such as block lopsided transactions. Many software provide the highest level of automation and system integration to minimize data entry errors. You can find software that suits your needs by applying the specified standards, and policies to limit errors of principle and errors of commission.
- Staff training
Investing does not have to be in resources or capital, but can also be through staff. By training your staff properly, you can provide adequate resources and ensure maximum performance. Provide staff with manageable workloads. It is better to have more than one staff for financial checking, because overstretched accounting departments are easier to generate errors.
- Provide adequate review
You can review another person's work product to minimize errors. It might be challenging for companies that still have a small staff, but you can try using an accounting person, or someone professional to review accounts periodically.
- Stay organized
Try to have properly organized records to reduce the overlooking of accounting transactions that can produce errors of omission. Organized records are needed in the event of a tax audit.
Comparing accounting balances with bank statements, credit card statements, and loan statements requires account reconciliations. It can also apply to comparisons of subsidiary journals to the general ledger. Subsidiary journals are chronological records of frequently occurring transactions. Even though this step can be skipped by using integrated accounting software, there's nothing wrong with trying it.
- Comparing actual and budgeted balances
Highlight the variances of actual balances and budgeted balances. By analyzing variances that seem unreasonable, you can find any accounting errors. For example, omitted transactions are compared with the possible duplicated entries that could make the larger expected balances, and you can see which might make sense. Another procedure you can try is to compare the actual balances from the current year and the prior year with several key performance indicators.
How to ensure financial records are accurate?
After reducing the possibility of errors, you need to ensure that your financial statements are correct. Keep up with your financial statement regularly by creating an annual balance sheet or income statement that is developing monthly updates. It will help you pinpoint concern areas and research which ones need to be fixed. If you are not familiar with the balance sheet, then you will not be able to realize which errors occur frequently or where unexpected errors occur.
If you feel overwhelmed because you have to check the balance sheet alone, get an accountant and work with you regularly. Choose a professional accountant like Smebrother as a third party to review your records and books. An accountant can see a hard look at reported numbers and patterns to determine which ones can become concerns. Having a second set of eyes will help you spot mistakes.