Top Bookkeeping Mistakes That You Should Avoid (how to navigate and when to ask for help) 2023
It’s easy to code your Xero file with little effort.
However, you do need to be informed and understand the different types of transactions that go into coding your numbers. I have heard some clients say all they have to do is click the button, non non non mon Cherie, it takes love. Like when you cook, you buy all the ingredients, do you just click a button on the oven? Non. There is preparation, research, testing, understanding, satisfaction, love. Trust me you can feel this way about numbers too.
If you are a terrible cook and terrible with numbers however, prob best you click off now.
Emily from Cloudhouse Consulting can help with your number numbness
Chart of Accounts
Your Chart of Accounts is set up for a reason. Each account has an account type which is used to determine where the account appears in your financial reports. Some account types are used for specific purposes. If you purchase an item and code it to an account with the Fixed Assets account type, Xero adds the item to the fixed asset register as a draft fixed asset.
In Xero (and this is really general, if your chart of accounts has been set-up specifically then this will vary, this is not gospel just a guide):
200s – These accounts are located in the Income section of the Profit and Loss. These accounts are for Revenue which means accounts such as Sales, revenue, and interest income.
300s – Cost of Goods Sold (COGS)– These accounts are located in the Direct Costs section of the Profit and Loss. These are any items that you purchase that help you generate income. If you are a service business like me then you either won’t have COGS or only minimal COGS. If you sell goods, then you will have COGS.
400s – These accounts are located in the Expenses section of the Profit and Loss. Expenses are costs that the business pays to generate income. Examples of these bank fees, accounting fees, rent, wages, subscriptions such as Xero and Adobe.
Cloudhouse setting you up for success
500s – These are other expenses such as Dividends Paid or Income Tax Expense. This account will not reduce your income however it will reduce Retained Earnings which is on the Balance Sheet.
600s – Current Assets. Current assets are located in the beginning of the assets section of the Balance Sheet. This part of the Balance Sheet contains those assets most easily convertible into cash in the short-term (usually less than 1 year). So, this would include items such as bank accounts, accounts receivable (money owed to you), and inventory.
700s – Non-Current Assets. Non-current assets are long-term, as they have a useful life of more than a year. Examples of these would be fixed assets such as computer equipment, goodwill, trademarks, and IP.
800s – Current Liabilities. Current liabilities are typically settled within one year usually by using up funds from your current assets (like cash from your bank account). Examples of current liabilities include accounts payable, GST and super payable as well as income taxes owed.
900-959 – Non-Current Liabilities these are liabilities which sit on your Balance Sheet and usually take more than one year to settle, an example of this would be a business loan which is paid off over 5 years.
960 – 999 Equity. Equity measures the value of ownership and is what is attributed to the owner. If you are a sole trader then the Retained Earnings will be allocated to your account at year end. If this is a company then the Equity what is used to measure the value of your business. On the Balance Sheet the Equity = Total Assets less your Total Liabilities.
The diagram below shows how the accounts affect the reports.
If you code your Chart of Accounts all over the place, then it doesn’t make sense. What I mean by this is that we have seen some clients set up their chart with Sales as a 900 account, and BAS excluded (let’s say for argument’s sake you are registered for GST). This is wrong in two ways, a Sale should show on the Profit and Loss, and if you are registered for GST then you will be understating your GST.
If you code it to 900 as BAS Excluded, the transaction won’t show on the P & L, it will show on the Balance Sheet, so the income you report will be incorrect, the GST won’t show in the GST on Sales section of the BAS report and could be under reported. When you go to do your tax, this will come to light. You will then have to amend BAS, declare the correct GST, and pay the ATO.
This can result in tears and stress, if you’re not sure, ask your advisor or get in touch with us.
Cloudhouse = happy clients
Using Incorrect GST Codes
This follows on from the above point. If you are registered for GST, then by using incorrect GST codes you could be either over or under reporting GST which can lead to a nasty surprise at year end. Cue tears, first name basis with ATO officers, and payment arrangements which could have been avoided if this had been set up correctly from the start.
We check our client’s file each month/quarter depending on how they are registered however if you are doing this yourself then you should have a certain level of understanding.
Take bank fees for example. Depending on how you code the transactions the following could apply all coded to the one bank fees account:
Bank fees – transaction fees charged by the bank for operating your account. These are input taxed supply, so we code as INP.
Merchant fees are coded to bank fees, these are fees charged for using EFTPOS machines, these include GST.
Safety deposit box fee – these fees have GST included.
Stripe fees – Stripe fees have GST included
Use these ideas from Cloudhouse Consulting
Another tricky one is Facebook fees. Beginning August 2018, Facebook ads in Australia sold by Facebook Ireland LTD became subject to GST. This applies to advertisers whose 'Sold To' country on their business or personal address is set to Australia and who haven't added their Australian business number (ABN) to their Facebook ad account. If you're running ads for business purposes, Facebook is required to confirm your GST registration through your ABN.
In the Ad Accounts Settings of Ads Manager, you can add your ABN, so it shows up on your ads receipts. If you add your ABN to your account, Facebook doesn't add GST to your purchase of Facebook ads.
Basically, if you are registered for GST and depending on the GST codes set up:
GST on Income – Code used on Sales
GST on Expenses – Code used on Expenses which have GST
GST Free - Code used on Expenses which have no GST
CAP - If you purchase capital items such as a computer or a car
INP - Bank fees, Interest expense and stamp duty component of insurance would be INP.
INS - Interest income would be INS.
BAS Exc - Payments you make for BAS or Super would be BAS Excluded. If you run payroll in Xero, you will notice that the payroll transactions show the wage and super expense as BAS Excluded.
Again, not gospel, just guidance. Your bookkeeper or advisor may have set these up differently.
Other mistakes when it comes to GST:
· Claiming GST credits without valid tax invoices
· Claiming GST credits for full amount of purchase when goods are used partially for private purposes. When this happens you need to split the transaction into two lines which record the % for business and % for private use
· Claiming GST credits where supplier is not registered for GST
If you are not sure a supplier is registered for GST check here by typing in their ABN: https://abr.business.gov.au/
If you also use software such as Dext (formerly Receipt Bank), this takes care of this for you. It scans the doc, extracts the name, amount, GST component and can then be processed and pushed through to Xero. The transactions show as a DRAFT bill with the invoice attached, you click approve and it can then be matched in the Xero bank feed when it shows.
Not keeping records
The records of the information you use to complete your tax return need to be kept for tax purposes for five years, starting from when you prepared or obtained the records, or completed the transactions or acts those records relate to, whichever is later.
You should keep records long enough to cover the period of review (also known as the amendment period) for an assessment that uses information from the record. If you get audited you need to produce records, so get into the habit of uploading invoices into your file. Permanent record = easy sleep.
More info on keeping business records ATO info here: https://www.ato.gov.au/business/record-keeping-for-business/detailed-business-record-keeping-requirements/running-your-business---records/income-tax-return-records---business/
Under Fair Work Law, employee records must be retained for 7 years https://www.fairwork.gov.au/how-we-will-help/templates-and-guides/fact-sheets/rights-and-obligations/record-keeping-pay-slips#Record-keeping-and-pay-slip-templates-for-employers
Under Section 286 of the Corporations Act (for companies) requires financial records to be kept for at least seven years after the transactions covered by the records are complete https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/what-books-and-records-should-my-company-keep/
Not reconciling transactions sent through
The simplest way to stuff up a data file is to code transactions willy-nilly. It can also be expensive.
Some DIYers use enthusiasm as their first choice of attack and pour excessive transactions into their data file. By this I mean they forward the transactions, leave it sitting as a draft bill, and then code the transactions in the bank account. They code transfers to imaginary places and invent wonderful lands of multiple transactions.
If you are sending through tax invoices through the Xero App or Dext (which we use) make sure that these are being reconciled correctly. Sometimes the invoice will sit as a DRAFT bill, you need to click on ‘Bills you need to pay’ on your Dashboard and see if there are any DRAFT invoices that need to be approved. If your invoices are showing as DRAFT, then they do not appear as a match in the bank feeds.
The same goes if you enter invoices as Expense Claims – make sure that these are looked at regularly, and if you need a hand reconciling ask your advisor. This can be a bit tricky especially if you are reimbursing the expense claims through payroll.
Being over enthusiastic can sometimes lead to more issues than it actually solves because:
If you put rubbish in your file, you get rubbish out
You may need to pay someone to clean up the file
It is more effective to do a one on one session with a qualified advisor or trainer who uses the software in their business as well so they can help you understand how things work.
If your advisor cannot rely on the data in the file, they may have to start from source documents to make sure it is correct.
Be smart, there are loads of free resources on Xero, sometimes the best way to fix something is to pay someone who knows what they are doing.
Hot tip – there is also a handy little report in Xero. Go to reports, Accounting (third tab left hand side), Duplicate Lines report, add the accounts and the dates. This will show you transactions entered on the same date and for the same amount. This gives you a starting point. Another hot tip - if you don’t know what you’re doing STOP.
You can then speak with your advisor or book in here with us.
Handling Bookkeeping without the Correct Software
Enthusiasts also make the common mistake of installing or purchasing software that is not compatible or needs a plug. Unfortunately swearing does not make software integrate better or faster, if only.
This can lead to more work. If you are using an inventory app then you need to make sure that the software is playing nicely. Shopify manages sales and inventory through your website. This is great and means that your Shopify inventory is up to date. This does not flow through into your Xero file, you require an app such as a2X, Bold or OneSaas to pull through the data.
What happens if you do not fix this?
Your inventory in your Xero file is out.
This can be frustrating, time consuming and costly.
Another trap to look out for is switching from one software provider to another, will you lose data, are you able to do the conversion easily, who can help you. Look into these things prior to making the switch.
Always ensure you have sufficient time to install and test. I had a terrible moment the last time I updated my phone, I thought 4 hours would have been ample to get going, sadly no.
Bronwyn from Cloudhouse Consulting can get you back on track
Lacking the Appropriate Expertise
To put it simply, if you do not know what you’re doing should you really be doing it? If the software is beyond your understanding, then you need to find someone to teach you or outsource to.
If you do not understand super and payroll obligations, then are you the right person for the job?
You can easily find an affordable bookkeeper/advisor online. Ask your friends for recommendations and meet online or in person.
I am a huge believer in education if you are in business as the buck stops with you
I did not know is not an excuse
Xero has a myriad of resources; you can literally type in whatever your problem is and there will be a support article or a conversation
Use Xero Support – if not in the above resources be very specific and ask
Contact your advisor
Jump on a one on one session
The difference between cash flow and profit
New players can also get confused about the difference between cash flow and profit. A small business can have positive cash flow and still not make a profit. This can happen if you put money into the business to start it off, make minimal or no sales for the financial year but you have lots of expenses.
Sometimes in small business you might not understand where your money has gone and what the difference is between cash flow and profit. You may look at your Profit and Loss (P&L) and you may have Sales of $20K less COGS $8K = Gross Profit of $12K. Expenses are $5K for the year leaving you with a Net Profit of $7K.
Great you think I made $7K, but when you check your bank account, it’s empty. How can this be? This can be for a couple of reasons, you have spent the money (taken as drawings), if you have a goods based business you might have bought stock, this takes all your cash and until you sell some stock, you have no $. You have paid liabilities such as super payable, or BAS (which covers your GST and PAYGW on wages and these payments reduce the liabilities on your Balance Sheet).
So, what is the difference between cash flow and profit? Profit is your income less COGS less expenses – this is what you pay tax on.
Cash flow is the life blood of your business – it is the cash that flows in and out and through the business. Think of cash flow like the blood flowing around your body.
Cash flow is what allows you to pay your expenses on time, including suppliers, employees, rent, insurance, and other operational costs. In many cases, cash flow is used as a metric for the health of your business, and often used by banks to tell how well your business is doing.
So have a read through, pop any questions in the comments and if you would like to book a session you can do so here or you can grab our eBook here.
Happy reconciling.