10 Bookkeeping Errors Novices Make—and How to Do Better

10 Small Errors That Can Cause Big Problems

1. Duplicating Revenue

The first thing that can cause big issues if not caught in time is duplicated revenue.

This isn't going to happen in all sets of books, but for people who are invoicing inside their bookkeeping software, it can happen.

If you’re invoicing inside QuickBooks Online or Xero, when you mark an invoice as “Paid,” it goes to something called “Funds.”

A lot of times I've seen the revenue coming in on the invoice and being marked “Paid,” which automatically puts it into a business owner’s revenue. Then when the funds actually hit the account, they get marked as “Paid” again, which puts it into their revenue again.

This doubles revenue, overstates revenue, and materially overstates your income, your profit, and your tax.

This is one easy clicking error that can cause a host of issues if you don’t know what you’re doing. But a good bookkeeper will know how to catch and prevent it!

2. Missing Expenses

The next bookkeeping error that’s easy to miss is missing expenses, which can happen for a variety of reasons. Oftentimes, it's that the payment is happening outside of what you have deemed to be a business account, and the business owner has forgotten about it.

In my business, this is one of the first things that I talk about on a sales call between myself and a business owner. We talk about it on an onboarding call to make sure we catch it early and put a stop to it.

But if the bookkeeper hasn't talked to them about their process to make sure that they’re not doing any of that (and the bookkeeper typically won’t!) then a business owner won’t know to watch out for it.

If they don't put it down as an expense because they’ve paid for it in a way where they're not seeing it on their business account, then they’re not recording the expense. And when they’re not recording the expense, then they have overstated profit again.

When their profit is overstated, they don’t get credit for the deduction, and their tax is overstated as well. Nobody wants that.

Missing expenses are easy to mess up if the business owner doesn’t have a good system in place, which isn't always about bookkeeping. It's often about their operations, which is also why AI is so far from replacing us, because it can’t catch something like that.

3. Payment Reversals

The third bookkeeping error is not noticing payment reversals.

This one just came up with one of our clients recently. What happened was, they were invoicing in the software, and we as the bookkeepers noticed the money coming in. So the client did pay…but for whatever reason, we also noticed that the payment was reversed.

We pointed out to the client, explained that it wasn’t something we did, but something that the bank did instead. It was a check payment the bank reversed.

There could be a couple of reasons why this happened. It could have been a stop payment for some strange reason. The money might not have been in the account, or maybe it was just a bank error. But had we not been in the books to see it, the client would have only known that they invoiced the person, that person paid them, and now they’re good.

But they're not good. They’re out several thousand dollars. And you might think, “How do you not notice that much money missing from your account?” but this is a high-volume business. They have a higher bank balance than that, and cash is always rotating in and out.

Our client was then able to go back to their client and get the money they were owed, which is huge. If they don’t realize that payment is missing, that often costs a business owner more than our bookkeeping fee for an entire year. It pays for itself.

4. Loans – Miscategorizing Income

The next bookkeeping error that is easy to make has to do with loans, and this is actually a two-parter.

The first part is miscategorizing income. This happens when you see money come in the bank—whether it’s a loan or the owner putting money in—and label that money as income, which it is not.

Whether it’s a loan or a deposit, they belong on the balance sheet, not the profit and loss. One is a liability. One is equity. Neither are income.

In a lot of self-prepared or novice-prepared books, or books prepared by virtual assistants with no bookkeeping training, they will plop that in as income so easily.

And to trace through the impact of this, when you do that, it once again overstates income, overstates profit, overstates the amount you pay in tax, etc.

5. Loans – Not Splitting Out Interest

The fifth bookkeeping error with major ripple effects is also related to loans: not splitting out the interest from loan payments.

When you're repaying the loan, there is a split of principle and interest. The principle reduces the amount of the liability. That's still on your balance sheet. And then the interest is the portion that you get to expense and deduct, and therefore pay less in taxes on.

If you are not doing that, you are understating interest, making the client pay more in taxes, creating a discrepancy on the balance sheet, and overall creating an unnecessary and avoidable mess.

6. Duplicating Credit Card Expenses

The sixth bookkeeping error is one no bookkeeper should be making, but business owners can easily make: duplicating credit card expenses.

A business owner will connect their credit card, and when the expenses feed in, they classify them as expenses—as you should. But then, instead of marking those payments as transfers, they may see the payment going to the credit card from the checking account and then mark that as a credit card expense.

Sometimes they don't connect to the credit card at all, and they'll just call all of those payments credit card expense. And that's just a mess because maybe you're paying the full amount, but you're probably not. So you’re not getting to take the full deduction, and you have no balance of what you owe, and that can really throw off your P&L sheet—and therefore your tax.

7. P&L Basis

The seventh bookkeeping error I want to discuss is an interesting one that I've seen happen a couple of times.

This is a little complex, and if you don't understand what I'm saying, then you’re either a bookkeeper in need of more training or you’re a business owner who needs to hire an experienced bookkeeper.

When you're running your P&L, you can have either the cash basis or the accrual basis. Most small businesses are able to be cash-basis taxpayers. And in most cases, that is more favorable, because you claim the income only when it's received—not billed, but actually paid. You then get to record your expenses when they're paid as well.

Sometimes there's a timing difference when it comes to what you're paying for. So if you're paying for something that runs the span of the year on the accrual basis, you would break down that expense into each period. But on the cash basis, you would expense it all at the time, when it’s paid.

Some people, when they're calculating the sales tax, will just go off of their books and run it on an accrual basis when they are a cash-basis taxpayer. When they do that, they will be calculating the sales tax that was billed to their clients, but has not all been paid, and then they will pay sales tax off of what was billed when they are only supposed to pay on what was received.

When this happens, and you're in industry where you may not always collect all of your invoices, then you have actually overpaid, as well as paid early. It makes your whole paper trail wrong.

8. Coding Sales Tax as Income

The eighth bookkeeping error that I have here, similar to the last one, is coding sales tax as income.

It's not income. It's a liability. It's money that you have received from customers that belongs to the state.

So even though you collect it yourself, it's not income. It is money that you owe, and that amount should just go in and out. You collect it from the customer. It's a liability. You pay it to the taxing authorities. Now you've just reduced your liability.

It's not income, and it's not expense. It goes on the balance sheet.

9. Beginning Balances

The ninth bookkeeping error that’s easy to mess up if you aren’t sure what you’re doing is messing up your beginning balances on your balance sheet.

I just saw this recently with one of our clients as well. Essentially, I saw on somebody's books that their tax preparer was actually reaching out asking questions because the opening balances of 2024 in their books were really far off from their ending balances of 2023. They changed their software, and whoever did the conversion did not do it correctly.

This is something that the tax preparer notices right away, because you tie a tax return and tax return software in through the balance sheet. You make sure that the ending balance sheet of one year ties to the opening balance of the next year.

If it doesn't, it indicates that something is awry, because if your balance sheet doesn't tie the ending balance to the opening balance, it means that your balance sheet is off. And if your balance sheet is off, so is your P&L. It’s one of the first check figures that any tax preparer would go in and look at.

And look, I’ll be honest: I would be shocked if a business owner doing their own books ever got their balance sheet correct. It's not the way that most business owners think about things, because they hardly know what a balance sheet is or the importance of it.

It's not just numbers. The ending has to equal the beginning, and it has to also tie into your source documents. So if your balance sheet is wrong, then something else is, too, and you've got to get it right.

10. Coding Owner’s Draw as Expense

The tenth bookkeeping error to watch out for is coding owner's draw as an expense.

Owner's draw is the profit that you're able to take out of the business as an owner, and it's not an expense—it’s just equity. So if you're coding transfers to yourself as expense, then you're reducing the profit of the business, and that’s incorrect.

You may get away with this, especially if you're self-filing for a little bit. But if for any reason this gets looked at, then you have underpaid your taxes, and you're going to have to pay that money back plus penalties and interest and the time it takes to get it right.

How to Do Better

This is why it’s still so important to have a good bookkeeper. And if any of these items were unfamiliar to you, don’t panic—there’s a way to do better as a bookkeeper.

If you as a bookkeeper are making any of these mistakes, you need to get more educated, and you need to get more help and support.

The first stop for that is my program, Become a Bookkeeper. Head to katieferro.com/become to see what that’s all about. We just finished revamping this program, and the new and improved version will be launching very, very soon, so keep your eyes peeled for the presale!

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Learn how to take your bookkeeping skills and turn them into a business that allows you to replace (or surpass) your corporate salary, be present for your life, and profoundly impact your clients without selling your life in the process by joining Life by the Books (LIBBY).

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