Maintaining proper books and records for a dental practice makes all the difference when it comes to year-end tax planning, cash flow analysis, and proper financial reporting. However, simple bookkeeping mistakes can distort income and may lead to unintended consequences at the end of the year. Proper bookkeeping can save thousands in accounting fees and ensure that dental practices are competitive. This article will highlight the top 3 bookkeeping mistakes dental practices make and how they can be avoided.
1) Making Prior Year Changes
Making changes to prior year numbers will lead to increased accounting fees 100% of the time. Changes to prior year balances can be accidental or intentional but they should be avoided. Below are some common mistakes that will cause prior year balances to be misstated and how to avoid these errors.
Voiding/deleting a check: voiding a check can cause the prior year balances to change. This is especially true for checks that were written in the prior year. Quickbooks has a feature that allows you to void checks automatically but this is not advised. Instead, use a journal entry to debit cash and credit the corresponding account using the current date. For example, if a check was written for office supplies then you would debit cash and credit office supplies to reverse the check. (Make sure this journal entry is dated in the current year and not when the check was actually written).
Reversing/deleting accounts payable or accounts receivable: deleting invoices or reversing payables that were created in the prior year will cause prior year balances to change. Instead of deleting the invoices create a credit memo in the current period. This will ensure that the balance is corrected while keeping prior numbers intact.
2) Misclassifying Personal Expenses and Distributions
Depending on the structure of your dental practice you will either take a salary or take regular distributions. Either way, cash distributions are not considered expenses for your practice. Cash distribution are often misclassified as “salary” or “payroll” and will understate income, causing underpayments of estimated taxes.
However, if your dental practice is set up as a partnership then you may take guaranteed payments which are tax-deductible. However, these guaranteed payments will be considered income on your personal income tax return.
Additionally, personal expenses like individual estimated taxes, personal meals, entertainment, or other general personal expenses are not tax-deductible and therefore should be recorded as distributions as well.
3) Double Posting of Income and Expenses
Double posting of income and expenses is common and can lead to an overstatement or understatement of net income. This can be done in multiple ways:
Recording checks twice: recording the same check twice is a common mistake and can be easily spotted. Checking monthly bank reconciliations is the best way to spot this error. Any checks that are hanging around for a while and haven’t cleared in months may be double posted checks. Ensure these checks are still valid and if not then post a journal entry to void these checks.
Picking up income twice: Picking up income twice is another common mistake. This is especially true for practices that record accounts receivables. When the initial invoice is created, income subsequently increases. When the cash is actually received the cash should be netted against the open receivable. However, sometimes the cash will be lumped into income instead of being properly recorded against the receivable. The best way to spot this mistake is by examining the accounts receivable aging report and eliminating any open receivables that have already been paid.
Avoiding these simple mistakes will ensure your books and records are up to date and accurate. This will make tax planning simple and ensure you aren’t surprised when it comes to tax time. Working with a CPA is also a must to ensure your practice isn’t making other common mistakes that could be costing you hundreds, if not thousands, in taxes.