Bookkeeping foundations mistakes, and the fixes that hold

The mistakes that damage a small business's books are rarely exotic. They are a handful of specific errors, each with a recognizable symptom, each caused by a plausible-looking shortcut. Here they are with the mechanism spelled out, because knowing why an error happens is what stops it recurring.

What to take away

Nearly all of these come from coding a bank line by what it looks like rather than by what it was for. The bank knows the amount and the counterparty; it does not know the reason.
Two of them, the unallocated payment and the growing holding account, do their damage by making a report untrue rather than by making a total wrong.
Every one is cheap to fix in the month it happens and expensive to fix in month eleven, which is the whole argument for a monthly routine.

1. Counting your own transfers as trade

What you see. Sales are higher than you know they were. Expenses are higher too. Profit looks roughly right, which is why nobody notices.

What happened. Money moved from the current account to the savings account, or to a card, or to a second business account. The bank feed showed a deposit in one place and a payment in the other, and both were coded as trading.

The fix. Every internal transfer is one transaction seen twice. Code both sides to the same transfer account, which should net to zero at all times. If it does not net to zero, one leg is missing or miscoded, and you have found it before it reaches a report.

2. Treating borrowed money as income

What you see. A month with unexplained strength, usually the month a facility was drawn.

What happened. Cash arrived and was coded to sales because it was a deposit and deposits are usually sales.

The fix. Loan proceeds are a liability, not revenue. Nothing about receiving them touches the profit and loss statement. Any deposit you cannot immediately match to an invoice needs investigating rather than coding: it is at least as likely to be a refund, a transfer, a loan, or a customer's overpayment.

3. Expensing the whole loan repayment

What you see. Costs that are too high, and a loan balance on the balance sheet that never comes down.

What happened. A monthly repayment covers two entirely different things. Part of it repays principal, which reduces a liability and is not a cost at all. Part is interest, which is a cost. Coding the full amount to an expense double-counts the borrowing: once when it was spent, again as it is repaid.

The fix. Split every repayment using the lender's schedule. Principal reduces the loan, interest goes to the profit and loss statement. If you do not have a schedule, ask the lender for one: do not estimate the split.

4. Reconciling to the balance instead of to the items

What you see. A bank reconciliation that agrees, in a set of books that is wrong.

What happened. The closing balance matched, so the job was called done. Two errors of the same size in opposite directions agree perfectly at the bottom.

The fix. Reconcile item by item. Every line on the bank statement is matched to a line in the books, and everything left over on either side is explained by name: an unpresented payment, a deposit in transit, a charge you had not recorded. A reconciliation is a list of differences with reasons, not a single number that agrees.

Then look at the leftovers. An unpresented item that has been rolling forward for months is not outstanding; it is an error that has learned to hide.

5. Deleting instead of reversing

What you see. A gap in the invoice numbering. A balance that changed since a report was printed, with nothing explaining the change.

What happened. Something was wrong, so it was removed.

The fix. Correct with a new entry that leaves both the original and the correction visible: a credit note, a reversing journal, an amended invoice with its own number. Deletion destroys the only evidence of what was originally decided, and it makes the books unable to answer questions about their own history, which is the whole reason they exist.

6. Letting the uncategorized account grow

What you see. A suspense or "ask my accountant" account with a material balance and a long list of entries.

What happened. Each individual item was genuinely unclear at the time, and the sensible-looking move was to park it.

The fix. Parking is fine; leaving it parked is not. Empty the account every month while the transaction is still recent enough that someone remembers it. At year-end, nobody remembers, and the choice becomes guessing or paying an accountant to guess. Anything that has been there more than a month should be a question sent to a named person with a deadline.

7. Payments left unallocated

What you see. An aged receivables report showing old unpaid invoices, alongside a credit balance on the same customer.

What happened. A payment was recorded against the customer but not applied to specific invoices, or applied to the wrong ones.

The fix. Allocate at the point of entry, using the remittance advice. Where a round-sum payment covers several invoices and no remittance came, ask rather than guess. Unallocated cash makes the aged report untrue in both directions at once: it chases customers who have paid and reassures you about invoices that are open.

8. Recording the payout instead of the sale

What you see. Revenue that is lower than your own sales records, and fees that appear nowhere.

What happened. A platform, processor or marketplace took the customer's money, deducted its charges and sent the balance. The net figure that hit the bank was recorded as the sale.

The fix. Where you are the seller, record the full amount the customer paid as revenue and the deduction as a cost. Otherwise your revenue is understated, your costs are understated, and you cannot see what the channel actually charges you. Whether you are the seller or an agent passing a sale through is a question about the contract, and one worth putting to an accountant if it is not obvious.

9. Ignoring the period edge

What you see. One month that looks poor followed by one that looks strong, with no business reason for either.

What happened. A cost belonging to March was recorded in April because the invoice arrived in April. Or revenue was recorded when payment landed rather than when the work was delivered.

The fix. Cut-off discipline at every period end: what was delivered before the line, and what was consumed before the line, belongs before the line regardless of when the paperwork moved. Expense recording covers the accruals and prepayments that do this work.

10. Mixing personal and business spending

What you see. Costs that do not correspond to anything the business did, and an owner's account that nobody can explain.

What happened. One card, one account, two lives.

The fix. Separate accounts, and where something genuinely mixed occurs, resolve it at the point of entry rather than at year-end: the business portion is a cost, the rest is drawings, and the basis for the split is written down. This is not a moral point. It is that a year-old mixed transaction cannot be reconstructed by anyone.

How to catch these before a year-end does

Five checks, monthly, in about an hour:

How to catch these

The transfer account nets to zero.
The uncategorized account is empty.
The bank reconciliation lists its differences by name, and none of them is old.
The receivables and payables ledgers agree to their control accounts, with no unallocated cash.
This month's profit and loss statement has been read next to the previous two, and every movement you did not expect has a known cause.

None of that is difficult. It is all much easier in month one than in month eleven, which is the entire argument for doing it monthly.

Evidence questions and advice questions

Every fix above is a matter of evidence: which document, which date, which account, which side. That is bookkeeping, and it should be settled without asking anyone.

What is not bookkeeping: whether a cost is deductible, how an asset should be depreciated, and whether a payment to a person is employment or contracting. Also outside it: when a bad debt should be recognized, and which accounting basis your entity must use.

Those depend on rules that vary and change, and they are an accountant's call. The best preparation for that conversation is a clean set of books and a short written list of what you were unsure about, which is exactly what the monthly checks produce. For the underlying method, see bookkeeping foundations.

Common questions

Which of these ten is most common?

The first, by a distance, because a transfer between your own accounts looks exactly like trade on a bank feed and nothing about it is flagged. The transfer account netting to zero is the check that finds it.

Our holding account has three years of entries in it. What now?

Work backwards from the largest, and expect to resolve fewer than you would like. Anything genuinely unidentifiable should be discussed with your accountant rather than coded to a plausible account. A guess made here becomes a permanent line in whichever account it lands in, which is why the definitions kept with the chart of accounts are what should settle it rather than the nearest plausible name.

Is deleting an entry ever acceptable?

Only for something entered in error and never reported, in the same session, before anyone has seen it. Beyond that, reverse rather than delete. The cost of deletion is that nobody can later reconstruct what was decided.

We record the net payout from a platform because that is what the bank shows. Is that really wrong?

It understates both revenue and costs, and it hides what the channel charges you. Whether you are the seller or an agent is a contract question worth putting to an accountant, but either way the entry should show the gross and the deduction separately.