Accounting is a process of summarizing, analyzing, and reporting transactions to oversight business firms, agencies, and tax collection entities. Be it a machine or a human mistake can be done by anyone. Accounting mistakes happen when we are about to start our business, the casual approach towards accounting leads to more headache and pain in the long term.

Laxmichand Gala is worried when he looks at the state of his books of accounts.  “For the last two quarters I am yet to file my GST returns,” says Mumbai based businessman.  Gala is doing a business of paper and plastic shredder machines. Since the last year, thankfully because of more awareness of Reuse and Recycle, his business is increasing at a brisk pace. However, his Accounting, MIS, and most importantly Statutory Compliance have been the worst.

A lot of SME’s who started computerizing their business after the advent of GST is on the same boat. The ever-increasing statutory liability and demand from customers for compliance has given them sleepless nights with the possible loss of business in the future. The best way to correct them is after the finalization of the Audit. As we are nearing the completion of Audits by September, let’s look at the common mistakes to avoid and measures to correct them.

Mistake#1

Not Preparing Chart of Accounts.

While starting accounting it is essential to draw up your Chart of Accounts. It refers to the structure of ledgers, groups, and vouchers.  While some software does provide for default groupings and voucher types, it is necessary to align the same with the business. 

Debtors can be sub-grouped as per the location (East, West, etc.)  Or Type of Industry (Pharma, Metal, etc) Or Type of Business (wholesale, hypermarkets, retails, etc). Similarly, creditors can be grouped as Creditors for goods, Creditors for expenses, etc. 

The fundamental rule for creating groups is that ledger with similar properties should be clustered together. Further one should also ensure proper update of Masters in terms of Address, Telephone Number, PAN No., Email Address, Contact name, etc. Believe us it saves a lot of time.

Mistake#2

Raising Invoice from Excel, Word, or any Invoicing Software.

As the business grows clients also ask for a computerized invoice and the SME’s tend to provide an invoice from Excel or Word. Although this is the simplest and easiest way, it creates a lot of complications.  There is no serial numbering of the invoice, the user who generates the invoice may save it wherever he may like. Also, an important point for GST compliance is that it requires continuous numbering of invoices. In the case of scattered savings of Invoices, managing outstanding Debtors becomes more difficult and collection is delayed.

Mistake#3

For expenses, making payments without booking through journals.

Anyone asking for payment is made directly debiting books of accounts with an expense account and crediting the bank account.  Users feel it is the shorter way of updating the bank, but in the long-term many important points are missing. TDS Compliance requires users to keep track individual amount of expense as well as the yearly cumulative amount on which deduction has to be made. The penalty is harsh on Non-Compliance of TDS liability sometimes up to Jail also. Further, the business themselves may not be able to take a decision regarding which company is being paid and how much on an annual basis.

Mistake#4

Not maintaining/following bill wise allocation of Debtors and Creditors.

While allocating the receipts many times user tends not to make an allocation to a particular invoice against which payment has been received.  The users feel that ledger account would be enough to reconcile account with debtors, but in reality, it’s a lengthy process. Basic MIS management requires that debtors be clubbed into 30-60-90 days overdue. Bankers and statutory auditors also seek the bifurcations in debtors and creditors. Principal for Cash Flow management requires follow-up with the customer on a specific period as mentioned in terms of the invoice.

Mistake#5

Not selecting a proper software partner and knowledgeable accountant.

Your vendor should be able to give guidance on basic and advanced usage of the software. SME’s face long-term challenges when the one-time price is asked for discounts. It is advisable to select the vendor based on knowledge of the team rather than only on sales talk. Knowledgeable accountants do add value in foreseeing the MIS requirements of the business and help users to face the above challenges and more.

To know more about these mistakes and possible solutions do mail us on sales@aimtechbs.in and subscribe to our blog.