8 Common Bookkeeping Mistakes & How to Avoid Them
As owners of our own law firms, we’ve made our fair share of mistakes. Unfortunately, bookkeeping mistakes have consequences for your business, income taxes, and license. The good news is that these mistakes are easy to avoid. We’ll show you a few common ones to keep in mind.
01. Intermingling Personal & Business Expenses
Anyone wanting to run a legit business should never combine personal and business expenses. After all, it’s also frowned upon by the IRS. Intermingling the two makes it nearly impossible to claim your expenses, not to mention track the financial wellness of your firm.
To ensure you don’t intermingle, keep separate accounts for your business and your personal finances. For bookkeeping purposes, ensure you’re only tracking transactions that occur within your law firm’s accounts. If for any reason you make a mistake (such as depositing a personal check in your business account), make sure to track it in your books.
02. Losing Track of Business Expenses
Speaking of expenses, one of the most common mistakes attorneys make is losing track of business expenses. It’s best to capture and record your business expenses on the daily, so you don’t lose those receipts or invoices. Then, set aside a time each week to make sure they are coded properly in your books.
It’s also a great practice to record the details of each expense. For example, if you’re expensing a meal, you might record who you were with and what you discussed. After all, if the IRS audits you (shudder), you’ll want these records to prove your expenses were for business purposes.
03. Ignoring Professional Help
Bookkeeping requires dedication and attention just like everything else in your firm. We understand what it’s like to have everything fall on your shoulders. That’s also why we recommend eventually hiring a professional bookkeeper to ensure nothing falls through the cracks.
Guess what? You can’t wait until right before tax time to start tracking your finances. In fact, you can’t even afford to wait a week until you make time to enter your transactions. We recommend scheduling a time to track your finances at least weekly.
Yes, put it on your calendar. It really is that important. A small amount of time each week will prevent you from spending hours on end trying to catch up.
05. Making Data Entry Mistakes
Have you ever tried to balance your checkbook, only to find you’re a quarter off somewhere? One number mistake on your law firm’s books can cause pandemonium. That’s why it’s important to take your time, double-checking your entries as you go.
The only way to make it happen goes back to our previous point: don’t procrastinate. Take time each day to enter your numbers, taking the extra few minutes to double-check your work.
06. Losing Track of Transactions
The goal of bookkeeping is to have an accurate picture of your current financial standing. Missing transactions cause inaccuracies that can cost you. For example, you might think you have plenty of money in the bank and buy a new computer before realizing you forgot to record that check to the court reporter. Yikes! A simple mistake could send your firm into the red for the month. Or, you might lose track of critical transactions that affect your taxes.
To avoid this type of situation, use accounting software that allows you to automate these processes. For example, keeping track of invoices or monthly recurring expenses. Again, you should also be spending time daily recording your firm’s transactions.
07. Fumbling Cash Reconciliation & Accrual Statements
In accounting, there are two types: the cash method and the accrual method. In the cash method, you record transactions as the cash is exchanged, regardless of when the transaction takes place. In the accrual method, you record a transaction when it actually occurs.
We recommend choosing one or the other to prevent confusion and for the most accurate overview of your firm’s finances.
08. Failing to Accurately Maintain Your IOLTA (Trust) Bookkeeping
As an attorney, you’re aware that when you receive money that belongs to a client, you must place those funds in a trust account separate from your own money. These funds are stored in IOLTA or “interest on lawyers trust accounts” accounts.
You don’t have to struggle with IOLTA accounts. In fact, some basic rules dictate how you must handle this money to ensure compliance.