Three acounting mistakes made by entrepreneurs
I read an article on entrepreneur.com a few months ago. It recounted the experiences of some entrepreneurs in terms of the common accounting mistakes made. The 3 top mistakes/misconceptions according to this article are:
1. Treating sales as revenue before the product is delivered or service provided. A common mistake actually. For example, if you have agreed to sell goods in March, you cannot record the sale until then. There are some exceptions, but let’s keep it simple.
2. Capital expenditure is not reflected in the accounts immediately. If you buy a new asset, you part with some cash. But in accounting, the cash amount spent is recorded against profits over several years. Sometimes the cash outflow may be too much, so you need to consider the cash situation of the business.
3. Proftit and cash flows are confused. The best way to explain this is to think of selling on credit. If you sell on credit, the sale is recorded, but you don’t get the cash for some time later. So, you could be profitable but have no cash – a bad scenario.
The article gives some real examples, so have a read.