3.5 MIN READ
When new clients come to us with neglected books, the first thing we do is clean them up. This simply means we find mistakes—often the result of bad bookkeeping habits—and correct them. Keeping clean books allows you to meet state requirements and provide financial reports without having to scramble at the last second; keep track of your income and expenses; and understand your firm’s journey, from where you started to where you want to go with your business.
Given how important your books are to your firm's success, I thought it would be worthwhile to cover the most common bookkeeping mistakes we see here at FABC.
#1. A Lack of Actual Bookkeeping
In some cases, business owners come to us without any books at all. Shocking, I know. Bookkeeping is exceptionally easy to avoid as a business owner. After all, who wants to sit down and enter expenses, keep track of receipts, enter income correctly, and reconcile accounts (besides us bookkeepers, of course)?
The thing is, keeping books for an RIA is not optional—it's a requirement.
The financial services industry is heavily regulated and at some point, the state will require you to provide information to prove you are following their guidelines. New firm owners who don’t have many business transactions to keep track of may view reconciling as a waste of time; consequently, they are the most likely to put off bookkeeping. This unfortunately comes back to bite those business owners down the road when their state regulators ask for a balance sheet they can’t produce because, well, it doesn’t exist.
There is no hard and fast rule for doing your bookkeeping, but we strongly recommend that it is done on a monthly basis. It’s so much easier to remember what happened in the last 30 days than it is to remember what happened six months ago.
#2. Mixing Personal and Business Expenses
It’s a common misconception that a business filing taxes as a pass-through entity can mix personal and business expenses. This is a big problem for regulators reviewing those books because guess what? They aren’t interested in your personal expenses. The only expenses they care about are your business expenses.
So, how does a business owner filing as a pass-through entity get paid? By taking a lump sum out of the business each month. That lump sum is marked as "owner pay” or "owner distribution" and appears on the balance sheet as such. The issue is not that the owner is taking payroll out for him/herself—the issue is not keeping personal expenses out of the books.
#3. Not Knowing What and Where Items Go
I can’t tell you how many times we’ve seen a computer (or another similar item) put on the books as a fixed asset, and then left on the books years later when it should have been depreciated. This problem often happens when business owners do their own taxes, or they don’t provide their CPA access to their bookkeeping system (or the balance sheet along with the profit and loss statement).
Why is this an issue? Because the tax preparer doesn’t know the computer had been put on the balance sheet. As a result, the deduction is lost and the balance sheet is incorrect. Business owners should be sure their CPA or tax preparer has access to their books so correct entries can be made and situations like this can be avoided.
#4. Payroll (Enough Said)
When we clean up books, more often than not, payroll has not been posted correctly. For instance, payroll wages are usually understated while payroll taxes are overstated.
There are a couple of components to payroll: gross wages, company-paid taxes, and company-paid benefits. Payroll companies normally make one or two deductions for a payroll run. Companies that only make one deduction pull everything at one time; those deductions should be broken out into gross wages, company-paid taxes, and company-paid benefits.
Companies that make two deductions are normally pulling the net payroll (the direct deposit amounts) and the company-paid taxes and company-paid benefits, along with the employee withholdings. This requires more finesse to be correctly entered into the books. A CPA or good bookkeeper can provide guidance on how this should be done to ensure the amounts are posted correctly.
#5. Failure to Understand the State Minimum Financial Requirements
Put simply, this can be a BIG problem. When setting up your business, you must investigate the state minimum financial requirements for your RIA, and then review those requirements annually. If you’re working with a CPA, it is also imperative that they are aware of these requirements.
We’ve often seen CPAs recommend that the funds initially invested be posted as a loan to the owner. This may offer a tax benefit, but it may also cause a failure to meet the state minimum financial requirements. It is therefore essential that when working with a CPA, they are aware of and understand these requirements so they can advise you correctly.
Accurate and up-to-date firm financials are not only critical to running a successful advisory practice, but they are required by state regulators. And yet bookkeeping is often the last service a business owner wants to pay for. If you feel the same way, you'd do well to remember that putting off bookkeeping or not engaging help to ensure accuracy will likely cost you so much more.
About the Author
Rhonda has been working with XY Planning Network since its inception, first as a subcontractor doing bookkeeping and then as a full-time member of the Bean Team, where she is a Senior Account Specialist. Rhonda handles everything from onboarding new clients and setting up their books to training them on QuickBooks Online (QBO) and, of course, doing their monthly bookkeeping. She loves teaching new RIA owners how to manage their accounts and leverage QBO in their firms to make their lives easier. Rhonda sees a business's books as more than just a way to satisfy state requirements and file taxes; for her, they represent “...the history of your company from the day you made that decision to go into business for yourself to the day you decide to retire from your company.”