Are you still operating your company from a box? In fact, you very well maybe if you work for a start-up. Ideally, you have switched to a software platform that can help with file organization by this point. If so, you may already be aware that not all accounting platforms are made equal. Here are some of the most typical accounting challenges and fantastic software package solutions that can support the success of your business.
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Businesses may experience accounting difficulties and issues as a result of regulatory compliance issues and delays in using new software technology. These accounting problems can result in huge fines and prison terms for regulatory non-compliance, as well as inaccuracies in financial statements, fraud, and security risks. Modern software that automates regulatory compliance and is used by skilled business finance teams can solve common and new accounting issues. So without wasting time let’s go through this article.
What is Accounting Problems?
The usage of outdated accounting software is a cause of some accounting issues. Other financial issues are brought on by intentional fraud brought on by greed and weak internal control. Accounting issues may result from low staffing levels. Lack of financial team training contributes to accounting issues brought on by improperly applying GAAP. The business needs to protect itself against cyber attacks and stay up-to-date with challenges related to changing regulatory compliance.
How are Accounting Issues Resolved in Businesses?
To avoid or resolve severe accounting issues, financial experts in businesses should use software with advanced technology capable of managing current accounting standards, such as revenue recognition and lease accounting. Businesses can handle accounting issues by requiring CPA workers and accountants to frequently enroll in relevant continuing education courses. Accounting problems can be resolved by accountants with adequate staffing levels.
Key expectations, corporate values, employee empowerment, and an ethical tone must all be communicated by top management.
Here is the List of 15 Common Accounting Problems and Solutions
Find the list of common accounting problems and solutions below:
1. Revenue Recognition
Problem: Revenue recognition issues include incorrectly applying GAAP revenue recognition standards, creating fraudulent revenue schemes, including incorrectly accounting for consignments and third-party product shipments above the level of possible usage, and making unreasonable estimates.
Solution: Find an ERP or accounting software that can help your business correctly recognize revenue. To comply with GAAP revenue recognition, your accounting and finance teams need sufficient training on FASB accounting rules. Spreadsheets in Excel are widely used. However, spreadsheets are ineffective and prone to inaccuracy. Look for a different software solution if at all possible.
2. Impairment Write-downs and Fair Market Valuation
Problem: The necessary adjustments or impairment write-downs for registering required assets or liabilities at fair market value may not be made by accountants.
Accounting experts must routinely assess whether changing economic and business conditions have negatively impacted asset valuations (to recognize the loss of value). Accountants must also take into consideration changes to the fair value of specific assets and liabilities. Accounting professionals use journal entries and financial statement disclosures to make changes as required by GAAP.
The COVID-19 outbreak and supply chain backlogs caused economic conditions that necessitated monitoring for accounting issues, including impairment and fair value accounting, according to EY, a renowned accounting company.
Some Examples of Asset Impairment include:
- Annually assessing the impairment of goodwill from M&A deals
- A consideration of the impairment of capitalized lease assets
- Inventory is recorded at the lower of cost or market, with market value limited to a range that does not exceed net realizable value and a range that is net realizable value less a normal profit margin.
Examples of Fair Market Valuation include:
- Available-for-sale securities (debt and equity) are held as investments to be sold before maturity; net gains or losses on these securities are included in shareholders’ equity as other comprehensive income (loss), which is listed below.
- Trading securities (debt and equity) held as short-term investments; gains or losses on trading securities flow to Net Income on the income statement.
- Liabilities for Fair Value are measured in accordance with ASC 820 Fair Value Measurements and Disclosures.
Solution: When required by GAAP, accountants must have adequate training to accurately record asset impairments, fair market valuation, and make the relevant financial statement disclosures? Look at the financial statement areas that have impairment accounting issues.
3. Lease Accounting
Problem: Lessee companies must capitalize their operational leases with tenant right of use (ROU) and terms longer than a year as a result of changes to GAAP lease accounting requirements. Office space leases and shorter operations leases can both still are recorded as monthly rent expenses. The leases are gradually amortized.
The Financial Accounting Standards Board codifies accounting principles (FASB). Other changes to the Lease accounting standard that accountant must follow.
Solution: To follow the most recent GAAP standards on Lease accounting, business accounting personnel must receive proper training. Moreover, they will gain a lot from using specialized leasing accounting software.
4. Payroll Errors
Problem: Payment errors and accounting problems could happen if a small business decides to calculate its own payroll, payroll taxes, and benefits. Employee morale and productivity are negatively impacted by payroll issues such as incorrectly computing paychecks for hourly wages and salary charges.
Solution: Payroll should be outsourced to a very experienced provider of those services, such as ADP or Paycheck. If the correct amount of hours worked and payroll information are provided, payments and taxes withheld should be computed correctly and in compliance with tax laws. You can count on reliable reporting to take those factors into account. Your business can timely submit payroll tax payments as necessary.
5. Not Enough Financial Analysis
Problem: Without effective accounting systems, an accounting team spends too much time on closing the books and has not had much time for work that adds value. By calculating ratios, identifying and managing business trends, and offering decision assistance for new opportunities, financial analysis creates value.
Solution: Automation of accounting procedures and financial analysis should be done to the greatest extent possible by using improved cloud-based ERP systems and third-party add-on software with integrated artificial intelligence/machine learning. You need real-time dashboards with trend analysis and your company’s KPIs, which all functional areas with permission credentials can see (key performance indicators).
Add to these systems real-time data analytics tools like Tableau or Microsoft Power BI, as well as the regular automated report runs for data your company tracks as temporal trends. Data visualization software and machine learning tools are combined to provide business intelligence.
6. Cash Flow Statement
Problem: The categorization of activities by type and the exclusion of restricted funds, a more recent GAAP requirement, are both subject to error in the cash flow statement. Misclassification of the type of activity for interest and dividends earned and paid is one example of a classification error in the cash flow statement. The interest earned and paid is categorized as an operating activity in the cash flow statement. Dividends received are an operating activity in the cash flow statement, whereas dividends paid are a finance activity.
The CPA firm RSM compares how certain components in the cash flow statement are classified under U.S. GAAP (vs. IFRS), including interest and dividends, and restricted cash.
Solution: Understanding the fundamentals is necessary for cash flow statement issue solving, so it’s important to stay current on FASB revisions and training subjects relating to cash flow statement preparation.
7. Outdated Accounting Software Technology
Problem: Outdated accounting software is inefficient, does not provide real-time results for visibility in managing the company or its sales & marketing processes, and does not automate regulatory compliance because it relies on manual data entry and paper documents for business transaction processing and recording.
Earlier ERP systems might not have been cloud-based. On-premises software access is less efficient, and upgrading the system and resolving hardware and software issues locally requires additional IT department resources. The new realities of remote or hybrid work situations do not suit these non-cloud ERP solutions.
Solution: By switching to modern cloud-based software, you can update outdated accounting software or ERP systems. If you don’t have enough money to completely rebuild your ERP system, think about integrating third-party add-on software to handle your demands for:
- Software for global mass payments and automated regulatory compliance is also available.
- Data visualization applications for business intelligence and data analytics
- Billing for subscriptions ( these are applicable to a SaaS, publishing, or utilities business model)
- Software for financial management, budgeting, and forecasting
- CRM software improves efficiency and allows for better tracking of the sales and marketing process
- Leasing-specific accounting software
- If not included in your ERP, revenue recognition software functionality
8. Inadequate Internal Control
Problem: Small businesses might not have enough staff to ensure task separation, which is essential for efficient internal control. Their accounting processes might not be sufficient to prevent fraud and duplicate payment errors.
Solution: Get the business owner involved in the approval process as a matched vendor invoice document reviewer and second signature when segregation of duties is not being fulfilled. The finance and accounting department needs the required software and human resources in order to fulfill its duties and deliver results.
9. Regulatory Non-Compliance
Problem: Regulatory compliance includes, but is not limited to, taxation, data privacy and security, sanctions lists like OFAC, and the Foreign Corrupt Practices Act (FCPA).
The Foreign Corrupt Practices Act prohibits making bribes in foreign countries. Additionally, the FCPA’s reach extends far beyond preventing bribes.
The Foreign Corrupt Practices Act and other laws could be broken in the following ways that are mentioned below:
- Massive fines for convicted individuals and businesses
- Tarnishing the reputation and ethics of a business and a convicted individual
Solution: Inform your company’s financial and accounting staff about the regulatory issues affecting your industry and company. Perform a project to compile information on regulatory issues, and then broadly distribute the results widely. Hold a training session for the organization’s staff. Highlighting company ideals like ethics encourage employees to act as the conscience of the company. Look for automation software that manages regulatory compliance.
Problem: Employee collaboration and insufficient internal controls may lead to fraud, including embezzlement.
Solution: Use cutting-edge cloud-based automation tools to assist in the detection of fraud and mistakes like duplicate payments. Use variance analysis to spot any big disparities between your budget and your actual spending, then take action. Before paying vendors, check their master files, run a 3-way document matching on the invoices, and validate vendors for authenticity.
Work to assign tasks to employees in a way that ensures proper separation of duties. Different personnel must exercise control or custody over assets and record transactions in the books.
11. Inadequate Security
Problem: Cybersecurity is a serious problem that might compromise your system’s employee records, data of the customer, and intellectual property.
Solution: Use the most cutting-edge Cybersecurity tools. Make and distribute a current company policy outlining the activities that must be taken to achieve acceptable Cybersecurity. Teach staff members how to avoid email and other scans that could lead to hacks that compromise the security of the company.
12. Incorrect Bookkeeping
Problem: Incorrect bookkeeping is a problem that small businesses frequently encounter. If a company is ever required to conduct an audit but is unable to provide the necessary documents, this could be devastating to the company. A company may face costly fines, increased interest, and perhaps even jail time if it cannot provide the government with proof to support its claim.
Solution: It is crucial to make sure that every transaction, no matter how minor, is thoroughly logged and maintained in order to stop this from happening to your company. These records will help in advising the company’s present state and help to avoid any errors when it comes time to file taxes.
13. Poor Communication
Problems: Ineffective communication with their accountants and co-workers is another major mistake made by small business owners. However, failing to include specific costs and paperwork might result in inaccurate budgets and claims.
Solution: Communication with individuals in charge of the finances must be open if this is to be avoided. This means that owners must give access to all necessary records and thorough information. Additionally, owners ought to try to provide as much information as they can, no matter how minor they may feel the transition to be.
14. In-House Accounting
Problems: A common misconception among small business owners is that they can manage their business bookkeeping. Although it can be a time-consuming process, keeping internal accounts can sometimes lead to errors. If there is a budget computation error, these flaws may result in improper handling of funds.
Solution: It is advised that you consult a financial expert or accountant to help you avoid this happening to your company. Using a third party will help you keep track of all of your financial transactions. They will also be able to accurately record, evaluate, and check all of the company’s financial information.
15. Assuming Budgets
Problems: Budgets are a common mistake made by small business owners. When business owners are ignorant of their financial situation, this frequently occurs. Companies frequently spend earnings before deals are closed and work is finished as a result of this ignorance.
Solution: Owners of small businesses must consistently examine their money by logging into their accounts in order to prevent this from happening to their operations. This will help them stay informed about their current financial situation and avoid making assumptions about their income. In order to determine and provide advice on the company’s finances, it is best for owners to speak with an accountant or financial advisor.
After reading the above blog your mindset will be cleared regarding some common accounting problems and their solutions are also mentioned above. Even while many small business owners think they can manage their finances independently, It can easily become overwhelming. They not only run the risk of suffering additional costs and costly interest rates as a result, but it also has the potential to lead to financial devastation. In case you still face any issue related to this then you can connect with Dancing Numbers team via LIVE CHAT.
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Frequently Asked Questions (Faqs)
What are the Three Common Accounting Errors?
• Transposing numbers
• Omitting or duplicating an entry
• Entering items in the wrong account
What issue does an Accounting System Fix for Your Company?
You can not only keep your financial information using an accounting application, but you can also access them whenever you need to. When your system is online, you can access your financial records while relaxing anywhere in the world.
What is the 3 Accounting Equation?
Assets, Liabilities, and Shareholders equity are the three elements in the accounting equation. The equation is simple: Total assets of a company are equal to liabilities plus shareholders equity.