Common Accounting Mistakes by SMEs

Accounting is simply the process of recording and reporting the financial transactions of any business in a systematic manner. But it’s definitely easier said than done. Why? Because the scope of mistakes, when it comes to accounting, is so vast that’s it’s difficult for businesses to escape all of them. 

Today, we’ll discuss all the common mistakes that SME’s make so that you clearly know what you need to avoid. 

  1. Assuming that Accounting is a cakewalk: Many business owners are of the belief that accounting is a task they can handle all by their own. If you’re one of them, you probably need to rethink that statement. Because when you actually take the leap, you’ll realize accounting not only requires skills but precision and expertise. And that’s the reason there’s no one better than accounting professionals to handle the tasks. Speaking of the cost incurred, here’s a fact -  hiring a professional is definitely way cheaper than paying penalties and rectifying mistakes. What would you choose?  All in all, partnering with experts is the most beneficial and cost-effective step an organization can take.

  1. Not following Accounting Standards: Accounting standards are a set of rules, principles, and procedures that you need to follow while recording, reporting, as well as disclosing any financial transaction. And there are obvious benefits of doing that - accounting standards make the financial statements easily understandable, comparable, transparent & most importantly-  effective for decision making. So, basically, you’re preparing to miss out on all these if you do not follow the standards. Also, to be precise and to avoid discrepancies - nothing short of expertise is required.

  1. Unavailability of effective internal control procedures:

Internal controls and accounting are required to stay in sync at all times. 

Internal controls are a set of procedures, policies, mechanisms, and

rules that are developed within an organization to ensure integrity, promote accountability & prevent fraud. 

Its effective implementation is imperative in order to ensure that the accounting is precisely regulated. The Internal Control System makes certain that the books of account remain authentic, valid, and reliable 

To exemplify the same, you can implement the system of authorizing the crucial transactions by Managers/HODs in order to confirm the accountability. You can also set up specific access to specific personnel to avoid fraud or set up inter-department check procedures.

  1. Ignoring the importance of MIS Reports: MIS reports are more important than you think. Business owners are not expected to look into everyday accounts but require MIS reports to keep a check on the business process and to monitor the same. 

MIS reports are related to:

  • Cash flows: They mention the inflow & outflow of cash and the sources & applications thereof. These reports are made on a daily or weekly basis depending on the number of transactions and management’s requirements.

  • Receivable & Payables: Management must always have an update on the upcoming receivables and payables in real-time in order to plan the budget and funds.

  • Sales & Purchases: Sales report are crucial to making comparatives and also to know the impact of certain decisions on the performance of an organization. Purchase reports, on the other hand, are used to keep a track of the costs and appropriation of funds.

These reports vary in complexity as per the management’s requirement and there can be many such MIS requirements as per the industry & usage.

  1. Not aligning the accounting process with applicable Laws & Regulations:

The books of accounts must always adhere to the applicable laws & regulations. Not only the tax laws (both direct & indirect), but also the labour laws, law related to the form of organization, local authority regulations, and many more. The accountant shall also ensure that the laws & standard practices related to the respective industries are followed while recording and reporting the transactions. A lack of awareness of related laws & regulations can cost an organization - well, its existence.

  1. Selecting inappropriate Accounting Software & Accounting Personnel:

Finally, there must be no compromise in terms of accounting software and accounting personnel. Why? Because that’s an asset to your organization!

While choosing the accounting software the business owner must first identify the accounting needs and requirements of the organization. Further, you need to make sure that the software you choose is capable of fulfilling those needs in the most accurate and efficient manner (data safety being a priority). 

While hiring an Accounting Personnel, the business owner must remember that the personnel in context shall be liable for one of the most crucial segments -  accounting of the business. The chosen person must recognize the sensitivity of the information he/she’ll be dealing with. 

Wrapping up - Efficient accounting doesn’t only depend on the accounting team. It also, to a large extent, depends on the decisions of the business owner. 

The wrong choices will deliver blunders while the right ones will do wonders in defining your brand.