The mistakes DIY books hide, and what they cost at year end
Last week we put a price on doing your own books. The part people pushed back on was the mistakes.
Fair enough. A miscoded transaction is a five minute fix, and anyone can see that.
It is a five minute fix in the month it happens. That is the whole problem, because almost nobody finds it in the month it happens.
Last week's post listed four of the errors we see most often. This one is about what happens to them over the following eleven months, because the cost is never really in the error. It is in the repetition, and in the delay before anyone looks.
One decision, made once, charged fifty times
Coding is a habit rather than a series of judgements. You decide what to do with a supplier the first time their bill arrives, and after that you are matching, not deciding. Xero helpfully remembers and suggests the same treatment next month.
So say you get one wrong. A $400 monthly subscription from an overseas supplier, coded as though it carries NZ GST. The GST component you have claimed is $52.17 a month.
You made that call once, in April. By March you have claimed $626 you were never entitled to, spread across six GST returns, without ever revisiting the decision.
Fixing it is not twelve times the work of fixing it once. It is worse than that, because six of those returns have already been filed and the correction has to go back through them.
Nothing checks what you meant
This is the part that surprises owners. Xero will not flag it, and Xero is not being careless. It validates form, not intent.
It checks that the debits equal the credits and that an account was selected. Whether that was the right account is not a question software can answer. A wrong entry is, structurally, a perfectly good entry.
Three things catch these errors in a well-run file, and a DIY file usually has none of them. A monthly review rhythm, so nothing sits for a year. A second pair of eyes, because you cannot proofread your own habits. And a reconciliation that goes past the green tick to the actual bank balance.
The two that hide the longest
Most errors get found eventually. These two tend to survive right through to year end.
Wages that have drifted from what you filed. Your payroll filing goes to IRD every payday. Your wages expense and PAYE payable sit in the ledger. When payroll is entered by hand, or half automated and half manual, the two drift apart by small amounts, and nothing looks wrong on either side in isolation.
How to catch it: once a month, total the gross wages and PAYE in your ledger and agree them to what was actually filed. Five minutes. If they differ, find out why while you still remember the pay run.
The suspense account. Or whatever yours is called. "Ask my accountant" is a popular one.
Strictly it is not an error. It is a parking bay, and it works perfectly well right up until nobody comes back for the car. By April there are fourteen transactions sitting in it and no memory of any of them.
How to catch it: check the balance is zero on the last day of every month. If it is not, clear it that week, while you still know what the transaction was for.
What the delay actually costs
Three separate bills, and only one of them is obvious.
Your accountant's time is the visible one. Unpicking a year of small errors is slow work, because each one has to be traced, understood and corrected without breaking a filed return. That gets charged at their rate, not yours.
Then there is IRD. If a correction means you underpaid, use of money interest runs from the date the original return was due, not from the date you found the problem. Finding your own mistake is always better than IRD finding it, but the clock started months ago either way.
The third bill never arrives as an invoice. For twelve months you looked at reports built on those numbers and made decisions from them. A wrong GST code shifts your expenses. A payroll drift shifts your wage cost. You worked out whether you could afford the hire using figures that were quietly out.
Why bookkeepers work monthly
Bookkeepers reconcile every month for a reason, and it is mostly economics.
An error found in the month it happens costs five minutes and nothing else. The same error found eleven months later costs professional time, possibly interest, and a year of decisions made on the wrong figure. The work involved is identical. Only the timing changed.
You do not need to do it the way a bookkeeper would. Four checks at month end will catch most of it:
- Reconcile to your real bank balance rather than the green tick.
- Confirm your suspense account is empty.
- Agree wages and PAYE to your payroll filing.
- Open your profit and loss by month and look for a row that jumps.
If you would rather hand that over, or just want someone to tell you honestly what is sitting in your file right now, we are happy to take a look.