Show me an entrepreneur who says they’ve never encountered an accounting problem and I’ll show you a liar. That may sound a bit extreme, but the point is simple: from a lost invoice to overlooked write-offs to something perhaps more nerve-wracking (audit, anyone?), perfection in accounting is pretty much a myth. And that’s OK.
But just because perfection is a myth, it doesn’t mean that as you discover an accounting issue, you can shrug it off and chalk it up to the imperfect nature of the universe. Why not, you ask? Because accounting issues are like wounds: untreated, they fester. And they can get nasty -- quickly.
Let’s say you do some car detailing and repair out of your garage. It’s a side gig -- sort of. You quote jobs verbally and “invoice” the same. After all, you’ve only done work for friends and neighbors, although you have started gaining a few referrals to folks you didn’t previously know. When you collect payment, you prefer cash, but will take a check and deposit it into your personal checking account. You're now pulling in a nice chunk of change each month from your “side gig.”
It should be pretty obvious by now that this scenario is a bad one for more than a few reasons -- all of which are rooted in accounting issues. For starters, you should stop kidding yourself: this is not a side gig. It’s a business, and you should incorporate it not only for financial reasons, but also for your own protection.
From a tactical perspective, verbal quotes and invoices would make any accountant uneasy. What happens when there’s a dispute or a non-payment? What recourse do you have? No paper trail will inevitably spell trouble.
Then there’s the commingling of funds. You’re putting money earned through what is clearly a business into your personal bank account. How, then, could you accurately report your earnings for tax purposes? If you have a day job from which you receive a W2, it’s not going to accurately reflect what you’re taking in for the year. And that’s a dangerous game. At a minimum, you need to open a checking account for this business.
But it’s cool, you say. This is all under the table. You’re doing work for friends and family. If you want to run that risk, go ahead -- but remember what I said about festering. These habits will catch up to you. They will start to get confusing. Numbers won’t match up. And then you’ll open the mailbox one day to find an unexpected letter from you-know-who: the IRS.
So what’s the lesson here? If you’re in business, you simply must keep accurate accounting records. But beyond that -- remember, perfection is a myth -- the “out-of-sight-out-of-mind” mentality does not apply here. When you come across an accounting error, make it right. Avoid the festering and the downward spiral that can follow.
The scenario painted in this article is completely fictional and the hypothetical outcomes are just that: hypothetical. As with all accounting and tax-related issues, your accountant or tax prep professional knows best. And they really, really appreciate it when you’re honest with them!