4 common bookkeeping mistakes that dentists do and how to avoid them:
I’ve been working as a bookkeeper for several years. Every time I acquire a new client, the very first thing I do is go over their books to look for mistakes. More often than none I find the same types of errors. I’ve summarized the most common ones I see:
- Mixing up personal and business expenses
The importance of keeping personal and business expenses separate can’t be emphasized enough. This is a golden rule that can lead to a lot of trouble if violated. If a personal bank card is being used to pay for business related expenses, you can miss out on tax deductions. If a business account is being used to cover personal expenses you can get into a lot of trouble with the IRS. The best practice is to get your business separate debit and credit cards and to synchronize these with your accounting software (QuickBooks Online). Once this is done, the direct feed between the accounting software and the bank accounts will pull information about your business transactions into the accounting system. This will make the bookkeeping process faster and easier, and it will also help you or your bookkeeper to realize if the wrong card had been used.
If, for any reason, you accidentally used your business card for personal purchases, you can categorize these expenses as either the owner’s draw or the member’s draw in your books. If you accidentally used your personal card to pay for a business related expense, you can create an expense report, record it into your books, and get reimbursed.
So, making this mistake occasionally is not fatal and there are ways to fix it, but you should do your absolute best to avoid mixing up personal and business expenses.
- Doing your own bookkeeping, or allowing someone unqualified to do their books, or pretending that bookkeeping doesn’t exist and “doing the books” once a year
Well, well, well. Where do I even start?! All the above-mentioned approaches are horribly wrong and I’ve seen the consequences. Please, all you great dentists out there, do not try any of these. Cleaning up the mess sometimes costs more time than starting from scratch and re-doing the books altogether.
Properly done bookkeeping gives you a clear picture of your business’ financial health, helps you with business decisions, helps you maximize your profits by highlighting the areas your business needs improvement on, saves you on taxes, makes your books audit proof by having the paper trail electronically stored for all transactions, cuts the costs you pay to your CPA to do your taxes, and I could go on and on.
Improper bookkeeping does just the opposite. Not doing the books right defeats the purpose of doing them at all as you won’t be able to rely on them to make decisions and may get yourself into trouble should there be an audit.
Doing the books yourself may sound like an easy task, but without a relevant educational background in accounting, I guarantee you that it isn’t. Besides, if you do your own books, I bet it’s your least favorite task in your business, aside from maybe paying bills.
So please, relieve yourself from the stress and headache and let someone qualified take over your books, so you can focus on your actual business.
- Not knowing that 1099-MISC forms are required to be filed with the IRS
According to the IRS, you have to file form 1099-MISC for each person to whom you have paid at least $600 during the year and they are not your employees. (Further specifications can be found on the website of IRS). If the vendor is a corporation, you don’t have to file this form. Also, according to a newly introduced regulation, payments made via credit card don’t have to be included anymore. To avoid getting penalized by the IRS for unfiled forms, all you have to do is collect W9 forms filled out by your independent contractors and give them to your CPA, who will take care of the 1099-MISC forms for you.
- Not saving receipts properly in the bookkeeping system
Many of my clients used to wrongfully believe that as long as they use their business accounts to pay for their dentistry’s bills and purchases, they don’t need to save the paper receipts as these charges will show up on their bank statements. Unfortunately, IRS does not share the same view about this and if you don’t keep right records, you could end up in trouble. Receipts should be kept for as long as the IRS or your state’s department of revenue can audit you. Most audits can only go back 3 years but in some special circumstances IRS can audit you back to 6 years.
Thanks to Hubdoc, which is a document management and collection software I use, the task of saving all receipts couldn’t be easier. As long as I get the receipts from you either through automatically forwarded emails, or through a picture you snap on your phone or through a drag and drop window on your computer, I can attach these documents to your transactions in your accounting software and this way everything will be saved online. This will ensure that your bookkeeping is completely audit proof.