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Messed Up Accounting: Books Breaking Bad

Messed Up Accounting: Books Breaking Bad

by Sanjeev Archak

We have given you a guide on effective accounting and setting up financial systems.  What if these guides are not followed? The result will be messed up accounting and a bad set of books. Here is a primer on how to identify mistakes in your books of accounts.

 Accounts not Reconciled

Bank accounts, credit card statements, inventory, debtors and creditor accounts have to be reconciled. If the accounts aren’t reconciled, it’s very likely that there are erroneous transactions or missing transactions. It is very important to reconcile the TDS & GST accounts. Left undone, these could lead to tax issues for the business.

High Accounts Receivable & Payable

Accounts receivables & payables are dynamic numbers. Old invoices need to be paid and the new ones marked as to be paid. If these two are static then your accountant is not marking money received or paid against invoices. This can lead to double counting of revenue & expenses. A customers & vendor balances report will throw up this anomaly.

Negative Inventory Balance

This means that you have sold products that you do not have. This can have an impact on your profits as well. If the negative balances add up over time, it takes huge efforts to bring it back to the current position.

Incorrect Capitalization

Another recurring problem we see is that accounts which need to be capitalized are not done and instead expense accounts end being capitalized. Missing out on capitalization will lead to lower depreciation claim and thereby higher taxes.

Payroll not booked correctly

Payroll is a significant cost for your business. This is an expense and a liability as well. Wages have to be paid to employees and payroll taxes to the Government.  A simple thumb rule is there must 12 entries in the payroll expense accounts and payroll taxes account must not have any balance. Variations from these norms mean that there is an error.

Inconsistent method of accounting

You must adopt either cash or accrual method of accounting. This often depends on the nature of the business. Once chosen, follow the method consistently. If you have switched between methods or have used a hybrid of these two will mess up the books.

Negative Balances in Accounts

Accounting is much more than arithmetic. Accounting rules do not permit negative balances in any account. If you spot negative balances then it is another case of bad bookkeeping.

Incorrect Capital Accounts 

Funding rounds raised by your company needs to show in the capital. The cap table is also derived from this account. Different categories of capital need to be shown separately. Further funding rounds could become complicated if all types of capital are lumped together.

 

So hire Integra Books to make your life easy. Integra Books is a modern and effective way of managing your business finances. We use a combination of technology and human expertise to make sure you get the best financial services for your business.

 

 

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