Misclassification Of Expenses In An Accounting System

Wednesday, 25 Sep 2019

Accounting is an integral part of running a business, and no one can deny its significance. From small and medium-sized enterprises to big corporations, accurate accounting supports the maintenance of financial data in an organised fashion.

The accountants utilise this information to come up with valuable insights that allow the business owners to make informed decisions. However, many small businesses in Melbourne delegate the responsibility of recording the transactions to a naive and unqualified employee who can end up making mistakes.

This is the reason why seasoned entrepreneurs rely on experienced bookkeepers in Melbourne to make sure the books are in order and up-to-date. The data generated by the bookkeepers is helpful in assessing the financial well-being of the organisation and avoids the risks of misrepresentation or errors.

Nevertheless, there are times when mistakes do take place, and the most common one among these is the misclassification of expenses. Let us take a look at this problem and how it can be resolved.

Reasons behind the Misclassification of Expenses

If you are using cloud-based accounting software in Melbourne, it does not give you a cover from misclassification-based errors. They are possible in both manual and automated platforms which are used for bookkeeping.

The mistakes usually occur when you enter expenditure in the wrong account, feed incorrect figures, or use an inaccurate description or code. The bookkeepers during their audits look for these errors and rectify them before they can lead to a major setback for the organisation. The usual suspects in this regard are the following:

Making A Subsidiary Entry

It happens when transactions are recorded incorrectly, and the error becomes visible during bank reconciliation. This is a data entry mistake where sometimes a zero goes missing or extra digits get added to the figures.

It can be identified with the help of a double-entry system when the accounts don’t get balanced. The key is to make the entries without rushing through the process so that ‘23’ doesn’t become ‘32’ while typing.

Classifying Capital Assets As Expenses

Sometimes business owners in Melbourne classify depreciating assets as expenses, such as equipment, computers and furniture. The value of these business assets goes down with time. So they must be depreciated over a period of time instead of deducting the entire cost in the year of its purchase.

Recording Expenses Under Wrong Business Entity

An organisation might have several lines of businesses in Melbourne which are being managed in the same accounting system. This can lead to incorrect insertion of expenses by associating them with the wrong products and services that are generating revenue.

Inaccurate Start-Up Expenditure

It is difficult to categorise the start-up costs. Thus some part of this expenditure should be spread over several periods, and the rest can be expensed as incurred. You must consult your bookkeeper to help in this reporting exercise as it can be challenging.

Expenses Recorded Under Incorrect Account

An unprofessional employee who has been assigned with the task of data entry can make the mistake of entering expenses in the wrong account number. Thus you must hire a professional bookkeeping company in Melbourne to make sure that the expenditure is appropriately allocated.

How Can These Human Errors Affect The Business?

The errors must be corrected with immediate effect as they distort the financial statements and can pose serious consequences for businesses in Melbourne, such as:

Bearing The Cost of Correcting Entry

A correcting entry fixes the mistakes so that the financial records are perfectly maintained. It entails finding out all the affected accounts and identifying the amount that is to be adjusted while making new corrective entries. It is a long process and takes up a lot of time and effort as well as costs.

Incorrect Financial Results

Inaccurate financial reports with erroneous expenses can alter the operating profit margins and lead to the false puffing up of the Melbourne-based company’s income. It will make the business owner believe that they are earning more and create false impressions that can lead to wrong decisions.

Paying Late Fee Charges

If you have not entered an invoice in the system, and finally when you figure out the missed entry at the end of the year, it is too late. In most cases, you have passed the deadline of disbursement and have to pay the late fee charges as well as interest.

Not Being Able to Claim Deductions

You might miss out on tax deductions in Melbourne as you made the mistake of omitting a business expense from your accounts. Some of the business expenses are tax-deductible, such as business travel, motor vehicles used for business purposes, etc. If you forget to include them in the financial records, you cannot claim the deductions and thus end up losing money.

Erroneous Reporting

The mismatch of income and expenditure can lead to inaccurate reporting, so the bookkeeper must make sure that the expenditure is matched with the income it generates.

Ways To Prevent Misclassification of Expenses

Hiring a professional bookkeeper is the best way to prevent any such blunders from happening. They offer a plethora of services including prevention of misclassification of expenses. However, if you are managing things on your own, you need to cautious and follow the tips given below.

  • You will have to create a planned effort and create timelines for the financial recording work and reconciliation so that you can identify the mistakes easily and correct them in time.
  • If you are making an unqualified person do the accounting work, then train them in the data entry processes and make sure that they are well-aware of the accounts and their descriptions.
  • Compare your budget forecast with the actual expenses to ensure there are no discrepancies.
  • A bookkeeper can audit the accounts and compare last year entries with this year to check for any anomalies. Also, misclassification can be identified if the description does not match the entry. A professional bookkeeper can come handy in spotting such mistakes.

Conclusion

Now that you know all about the misclassification of expenses and the ways of avoiding them, you are better placed to keep your accounts accurate. Most businesses in Melbourne need the assistance of a bookkeeper to manage this process efficiently and without any hassles.

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