Common Bookkeeping Mistakes #5 - Categorizing Income/Expenses Incorrectly

Categorizing income and expenses properly is essential to produce accurate financial reports, measure your operation's performance, budget for the future, and more. Without placing transactions in the correct category, a bookkeeping system is essentially worthless, since the final numbers don't mean anything. Is an operation even profitable in this situation? Who really knows?

Having a standard Chart of Accounts is incredibly helpful. Sometimes you may need to add an account here or there, depending on your operation. But this Chart of Accounts can give you some guidance when it comes to placing transactions in categories. Your CPA may be able to give you some advice on the accounts that would be beneficial for you.

Keeping the receipts helps when it comes to categorizing transactions, especially when it's not obvious as to what the income/expense was. Categorizing in a timely manner is another help. You may not remember six months later what a particular item was purchased for.

Along these lines..."credit card expense" is not a proper expense. Your credit card should have its own liability account, and then the transactions that are posted to that account should be categorized correctly.

If your transactions have been categorized incorrectly, it may take some time to correct them, but it will be worth it. Soon you will discover the true profitability of your operation, and you will be able to make better decisions because of the more accurate information.