Reasons for Incomplete Records in Accounting
While every small business-owner has the best intentions to maintain accurate and complete accounting records, sometimes accidents happen. Incomplete accounting records can cause problems when reporting to the IRS, during financial statement audits and while planning for future years. Knowing some of the most common reasons why gaps occur in accounting records can help you avoid these situations at your business, saving you time, frustration and money.
Incomplete accounting records occur most often when employees forget to record transactions. Often, small businesses begin with the owner attending to nearly all accounting matters. When one person is responsible for accounting for all of the transactions, it's less likely for records to get misplaced or to believe that another employee already has made the accounting entry. However, as the business grows and responsibility for the accounting process expands, this can change. If policies and procedures are not enacted to consolidate responsibility for each transaction to a specific person, then entries can get lost in the shuffle.
To keep this from happening, make sure that every business activity can be sorted into a category and have one person responsible for accounting for each category. For example, you could require that one employee record all sales transactions. This way, there is no confusion as to who is responsible for recording the transaction and if entries are missed, there is a person to hold accountable.
As companies move to paperless accounting records, and more transactions are processed by computer, small-business owners should be taking steps to preserve data. The best way to help prevent data loss is to create frequent and redundant software backups of accounting data, either on a daily, or more frequent, basis and that at least one backup copy of the data should be off site, to guard against data loss from natural disaster or theft.
If your business is moving toward a paperless accounting records system, time spent thinking and planning for ways that things could go wrong and how they would be addressed in the front end can save you time and money down the road.
Sometimes when employees leave the company, they inadvertently, or sometimes intentionally, take accounting records with them. This can cause serious problems for multiple reasons. First, if there is no other record of the information, the company will have difficultly substantiating transactions if audited. In addition, this information is often proprietary. Accounting records may be used by competitors to gain a competitive advantage against the company. In addition, if the information contains information about other companies, you may be held liable if the information is released to third parties.
Sometimes accounting records will be incomplete because of intentional manipulation. Employees that are trying to perpetrate fraud or otherwise steal from the company may neglect to record accounting transactions to cover their tracks. For example, a common accounting fraud involves theft of incoming checks from customers. As the mail comes in, the perpetrator will take the checks and deposit the checks into a bank account belonging to the criminal. Usually, the criminal will open the bank account with a business name that is similar to the company being ripped off. Because the thief is stealing the checks, the receipt of funds will not be recorded in the accounting records, leaving them complete.
To combat this, and other similar fraud, make sure that receipt and custody of assets are segregated. In this case, simply breaking apart the responsibility of checking the mail and preparing the deposit would most likely stop the risk of this fraud occurring.