Common Accounting and Tax Mistakes by Small Businesses

1. Personal money combined with the business money (separate entity concept)

It will be difficult to assess the status of the company whether earning or not during the period if personal money/transactions are mixed up with valid business transactions. When personal transactions are combined with business transactions, there is no assurance on the reliability of the basic financial statements (balance sheet, income/loss statement).

Basic financial statements:

· Balance sheet – summarized the financial position of the Company as of date covered

· Income/loss statement – summarized the net result of operations during the period

2. Not all business transaction was recorded in company’s books (completeness)

All valid business transactions shall be recorded and accounted accordingly in the Company’s books to have a complete, comprehensive and reliable financial record. Usually, small businesses only records cash related income and expenses but does not record noncash items (e.g., sales and purchases made on account). These should also be considered as part of sales and expenses made during the period to have a complete view of the business.

3. Internal control was not given importance

Most small business owners do not create an internal control policy/measures to safeguard assets at a minimum and ensure reliable financial reporting to give true and fair view of the actual result of the operations and financial position of the Company during the period.

These businesses are prone to fraud/theft (e.g., stealing cash, physical inventory) due to limited manpower and lack of separation of duties and responsibilities.

Some usual indicators of fraud is when the Company lost an obvious large amount of money and if there are sudden drop of the Company’s inventory quantity with no corresponding increase in sales. One of the preventive measures is to implement properly designed internal controls.

4. Monthly financial statement information was misused

Financial statement reflects your net income (loss), assets (cash, accounts receivable, inventory, etc), liabilities (accounts payable, loans, etc) and equity (capital, withdrawals) for a certain period.

It is important to have your financial statement and analysis monthly to have timely information and analysis of your revenue and manage your cost, receivable and payable on a monthly basis. Financial statement analysis is an important tool to early identify a problem, if there are any, and to formulate solutions timely.

5. Did not apply tax minimization

There are many ways how to minimize/lessen your taxes in a legal and effective way. Not all taxes are considered as an expense of the Company because most of them are withholding taxes which the Company merely serves as a withholding agent and will be the one to remit it on the BIR. Proper understanding on each tax type will greatly influence how you see tax in general.

6. Doing it all alone

Most small owner wants to handle personally every aspect of the business from operation, marketing, finance and other related work but it doesn’t have to be that way to save costs or to know/control everything.

Effective delegation (assigning task to a responsible person) can be one of the best and efficient ways for new small business owners to build and prepare their businesses for future growth. Hire qualified workers in areas they are weak and focus on finding ways in growing their business.

7. Avoiding tax and other government statutory remittances

Most businesses consider tax as a burden. But avoiding it makes it more stressful with the troubles you might encounter like penalties (surcharge, interest, and compromise), temporary business closure and criminal charges. Updated and comprehensive knowledge on tax matters is highly important to minimize, avoid or lessen tax penalties.

8. Not making a budget

Budget is a detailed plan of the Company’s future income and expenses which is based on historical and future data. This is like a financial map of the Company towards its business goal. It enables the company to focus on cash flow, control costs and increase their revenue.

We will be happy to help you work in making sure that your business is on the right path.