Bookkeeping Mistakes Limited Companies Make
Accurate bookkeeping is vital for the financial health and compliance of limited companies. However, there are common bookkeeping mistakes that can lead to inaccurate records, unreliable reports, and potential legal and tax implications that as a business owner you really need to be aware of. Thankfully, in this article, we’ll explore these bookkeeping mistakes and provide insights on how to avoid them, ensuring sound financial management for your limited company.
Recognising and avoiding the following common bookkeeping mistakes is essential for the financial stability and compliance of limited companies, so let’s get into it…
Not Using an Accruals Concept
Limited companies often overlook the importance of the accruals concept in bookkeeping. This concept requires transactions to be recorded when they are incurred or earned, rather than when the physical exchange of cash occurs. Failing to adjust for transactions that span across financial years can result in inaccurate financial reporting.
Seek guidance from your accountant to ensure proper year-end adjustments and the correct allocation of transactions.
Not Knowing the Difference Between Balance Sheet and Profit and Loss
Understanding the distinction between the balance sheet and the profit and loss statement is crucial for accurate bookkeeping. Mistakenly recording transactions in the wrong category can lead to incorrect financial reports. Educate yourself on the purpose and structure of these statements or consult a qualified bookkeeper to ensure proper classification and reliable financial information.
Accounting for VAT Without Proper Records
For VAT-registered limited companies, failing to maintain comprehensive VAT records can result in the inability to claim VAT on costs. It is essential to keep VAT invoices and receipts as evidence for HMRC inspections.
Whether stored digitally or in print, ensure accessibility to these records and validate that your suppliers have charged VAT on the expenses you incurred.
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Not Using a Qualified Bookkeeper
Bookkeeping should not be treated as an administrative task but as an essential part of accounting. Working with a qualified bookkeeper who understands accounting rules and tax implications is crucial. Even if you plan to handle your own bookkeeping, seeking guidance from a qualified professional can help you avoid costly bookkeeping mistakes.
Establish an early connection with a bookkeeper to receive guidance and support from day one and beyond. It doesn’t have to be a regular bookkeeping support if you can’t afford it yet. But make sure you at least book a session or two so you can receive a professional training from a qualified bookkeeper.
Combining Business and Personal Finances
Mixing personal and business finances is a really common bookkeeping mistake, especially for businesses operated by sole proprietors transitioning to limited companies. Limited companies are separate entities, and maintaining distinct bank accounts and financial records is imperative. This separation streamlines bookkeeping, reduces costs, and ensures compliance with regulations.
What if you have no choice and you need to pay for business expenditure out of your own pocket? This can be very often the case when you’re a start-up. Our recommendation is to consider injecting personal funds into the business when necessary rather than using personal accounts or cards for individual business transactions. Then you can make purchases using your business bank account and cards.
Failing to Check Closing Bank Balances
Regularly checking closing bank balances is a critical practice that helps maintain accurate financial records. Ensure that the balances in your accounting system match the actual balances in your bank accounts, credit cards, and other payment solutions.
By reconciling these balances on a weekly, monthly, or quarterly basis, you can identify discrepancies promptly and rectify them.
Ignoring Bookkeeping Completely
One of the gravest bookkeeping mistakes is neglecting bookkeeping entirely and leaving it until the last minute. This leads to a rushed and stressful process when preparing corporation tax returns and annual accounts. Even the most experienced bookkeepers require time to handle a backlog of bookkeeping tasks. Avoid this situation by prioritising regular bookkeeping throughout the year, saving time and reducing costs in the long run.
By adhering to proper bookkeeping practices, seeking professional assistance, and maintaining accurate records, you can ensure that your company’s financial management remains on track.
Take proactive steps to prevent these pitfalls and establish a solid foundation for your business’s financial success.
Collaborating with an accountant or bookkeeper can prove beneficial not only when it comes to tasks related to tax and VAT, but also in avoiding bookkeeping mistakes in your limited company. Don’t hesitate to contact the Oxford-based accounting team at Joanna Bookkeeping.
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