Signup to get my Free Bookkeeping Checklist!

3 most common miscategorization Errors in Bookkeeping

Everyone likes to see their income and expenses broken down in a way that makes sense and shows us the information we really need to see. A great bookkeeper will customize your chart of accounts to accomplish this, as well as to be easy when it comes to tax time. But until you’ve got someone else categorizing your transactions for you, here are 3 errors I see people making that are super easy to avoid.

  1. Double recording income – this is the biggest one I see with the most destructive consequences. Many people do this accidentally, because they are recording an invoice or sale as income, and then when the money comes hits the bank account (from a merchant such as PayPal, Square, Stripe, Shopify, or some other), they record it as income again, rather than matching up the payment with the sales they entered manually. Suddenly you’re making business decisions based on income you don’t have, and you’re reporting a much higher tax liability than you should!

    Another way this happens is when you have that merchant (Paypal, Square, etc.) hooked up as a bank account in Quickbooks. When you’re in your merchant bank feed, you’re recording the sales as money, and then when you transfer that money into your business checking, you’re going into your business checking and recording it as that type of income again. If this is the case, a simple solution is either to NOT hook up your merchant in QBO, OR to simply record the transaction in your merchant account as the type of income, and in the business checking just record it as a transfer.
  1. Recording your own pay as an expense – If you are a sole proprietor or a single member LLC who is NOT on payroll, transfers to your personal account to pay yourself (which I highly encourage, by the way), are called Owner’s Draws or Owner’s Distributions, NOT a payroll expense. Owner’s Draws are equity or capital accounts, not expense accounts.

    If you are an LLC that reports as an S Corp or C Corp, then you should pay yourself through payroll – in that case, it does count as an expense.
  2. Keeping it too vague – When people are not sure what to categorize things, they often lump them into an “uncategorized” category, or a miscellaneous, general, or other. This means when you’re running your reports (you’re running your reports, right? :0)), it’s not giving you the valuable information you need to see, because all those transactions are hiding.

    It’s also going to be much tougher at tax time, because the Schedule C or any tax return form you’re going to want to fill out is going to ask for your expenses in different categories. This means you and/or your CPA is going to need to spend more time getting these categorized properly, and you know more time means more money!!! When you’re not sure how to categorize something, it’s okay to put it in an uncategorized account for now, but make sure you’re adding to your To Do list to check out that account, do some research, and then move them to the proper account before it gets too overwhelming.

Leave a Comment

Your email address will not be published. Required fields are marked *