Common Coding Errors and How to Avoid Them
I’ve said it before and I’ll say it again, rubbish in means rubbish out!
Your accounting system is vital to understanding what is happening in your business. It also determines what tax you need to pay. That’s why getting things right in your accounting system is key to the health of your business. Unfortunately, errors happen and regardless of how easy to use your accounting system is human error is a real factor.
Common Coding errors
- Entering items in the wrong code – e.g putting the fuel you purchased to vehicle expenses. Whilst this still results in reporting as an expense and the GST impact will be the same, you are not able to accurately determine your costs when looking at your reports and may decide you need to replace a vehicle as the expenses are reporting higher than they should. You may also not charge enough to cover fuel costs as your fuel is reporting low.
- Treating expenses as income or vice versa
Like when coding and sending an invoice, you could easily put the mileage you’re on charging to a mileage expense code, this will put a negative in your expense code, essentially crediting the expense, and creating a negative GST expense on your return. This understates your income and reduces your expense.
- Failure to record an item
This is just simply failing to keep a good system for receipts, and we’ve all had those pesky eftpos one’s fade beyond recognition. Failing to record expenses means you will be overpaying tax, failing to record income means you will be underpaying tax. This can especially happen if you sometimes use your personal account for business transactions.
- Coding to the wrong customer or supplier
Someone has dropped a lump of money in your account and the system helpfully “makes suggestions” as who this could be from. Its all too easy to hit reconcile and apply the payment to the wrong customer. This means when you start debt collection process to bring in unpaid money you will be chasing the wrong person. And if you enter the wrong supplier’s name you could pay out to the wrong supplier when you upload your batch payment.
- Transposing numbers or incorrect GST coding
Recording the expense or income around the wrong way eg $594 as $954 means you have overstated or understated the amount. Either way it will mean you are under or overclaiming which will affect your tax obligation, your cashflow and the accuracy of your accounts.
- Error of duplication
Just as it sounds, tired and often interrupted minds can forget, or the receipt could have been sent in twice. Which ever the case entering an item twice causes a serious imbalance in your books and your tax obligations
- An error of accounting principle
Just as ugly as it sounds, it means recording something in a way that does not comply with the generally accepted accounting practices in NZ. This usually happens when an entry is entered in the wrong place, eg entered as an expense rather than an asset, or entered as an expense when it is actually owners personal draw. These sorts of errors can have serious consequences.
How to avoid them
- Know your accounting system and how to use it
If you are using an accounting program, there will be checks in place to help highlight coding errors. Most accounting programs have a bank reconciliation function, make sure you balance at months end with your physical statements. If you are using Excel or another manual form of bookkeeping, you will need to put these checks in place yourself.
- Implement internal controls
Having at least two people who know what they are looking at in your system helps to pick up human error. That can be an experienced bookkeeper (or account savvy business owner) and an Accountant. The more eyes the better for internal control, as regardless of qualifications humans can still make human error.
- Check for differences between budget and actual expenses
Running your actuals against your budget can pick up coding errors and operational faults. It is a good practice to do this monthly, so you can pick up errors quickly and know exactly how you are tracking financially.
- Ensure your accountant reports on any errors at the end of financial year
Too often business owners are not aware of the errors that the accountant is fixing at the end of the financial year. If you do not know what errors are being made, they could easily continue to be made. Also, your accountant is human and may not understand the transaction properly, so you need to make sure anything they are re-coding is correctly being recoded.
- Understand best accounting practices and standards
Get trained or make sure anyone in your system is properly qualified and then make sure you (and/or them) stay aware of the latest updates to any new rules and legislation. The best practice is not to wait until your accountant tells you of the errors you’ve made when they are doing your years end, as this means you have been working off incorrect data for the whole year (and then some).