Why Are Your Books a Mess? How to Clean Up Accounting Records?

Updated: May 6, 2021

WHY ARE YOUR BOOKS A MESS?


Every small business owner has the best intentions from the beginning, but heavy responsibilities and busy schedules often lead to important tasks falling to the backburner. One area that is often overlooked is the company's financial tracking. You may have to pay monthly or annual fees for high-quality accounting software programs. However, unless you use it correctly, it will be ineffective. This can lead to a lot of confusion and mistakes. It’s tempting to just ignore the problem, but I assure you that it won’t just go away. Any issues or mistakes with your bookkeeping will grow and spread until it’s a tangled mess. If your books are a mess, you’re putting unnecessary stress on yourself and your business.

So what does it mean, if your books are a mess? Here are some common signs:

  • You don’t know how much you’re spending each month.

  • You have a wallet (or file folder) full of receipts or you don't have enough receipts attached for proof.

  • You’re not sure if your business is profitable.

  • You’re afraid to log into your bank’s online system.

  • You have leftover funds in your account every month.

  • Your monthly reconciliations aren’t happening

  • You never know the exact standing of your bank accounts

From an accountant’s point of view, your books are a mess when:

  • There is no clear distinction between business and business owner transactions. Business owners have used personal funds for business expenses or business assets for personal purposes.

  • The original documents of the transaction are obviously missing on the bank statement. If an accountant cannot clearly distinguish sales revenue from loan/capital revenue, or cannot distinguish between equipment payments and inventory payments, it is almost impossible to accurately determine your profits and tax liabilities.

  • Trying to save money, small business owners classified the financial transactions according to their own rudimentary understanding of bookkeeping.

  • The books/records you provide to the accountant cannot be reconciled. For example, the bank statement doesn't reconcile with the cash at the bank account, your physical inventory does not reconcile with your Inventory account, the money owed to you from your customer's list does not reconcile with the accounts receivable account, the list of money you owe to suppliers does not reconcile with the accounts payable account or your list of physical assets does not reconcile with your asset register.


HOW TO CLEAN UP THOSE MESSY BOOKS?


1. Stop Any Further Damage and determine if you have a problem

Therefore, the first step is to prevent damage from occurring from now on. This means that all new, incoming source documents will be routed through a reliable bookkeeping system.

Before a formal inspection of a book, it must be determined whether there is a problem. Often, companies with very messy or incomplete accounting records know they have problems that need to be resolved. However, companies with smaller differences or less obvious problems may not have the vision to understand the root cause and the expertise to solve the root problem.

These common signs can signal accounting record issues:

  • General ledger errors

  • Negative cash or credit balances

  • Asset overestimation

  • Inconsistent fixed asset depreciation

  • Restricted payment terms from suppliers

  • Static inventory levels

  • Unaccounted for interest on cash and credit accounts

  • Muddled business loan records

  • Missing retained earnings

  • Cash discrepancies

  • Unauthorized withdrawals

  • Excessive business expenses

  • Bank fees and penalties

  • Customer and vendor invoice inconsistencies

If there are any of the above red flags, the company should clean up its accounting records.

 
cpa

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