Bookkeeping software sorts transactions by pattern, such as the payee name and amount. It cannot see why money moved, so transfers, loans, owner draws and processor payouts are often recorded in the wrong account. Reviewing your books each month against your statements catches these errors.
1What the software actually sees
Bookkeeping software, including the automation inside QuickBooks and Xero, works from the bank feed. For each transaction it sees a date, an amount and a line of description text. It then suggests a category based on patterns: the payee name, past transactions and any bank rules you set.
What it does not see is why the money moved. Pattern matching works well for routine items such as a monthly software subscription. It works poorly when the same description can mean different things.
2Transactions that are often recorded wrongly
- Transfers between your own accounts: moving money from checking to savings can be recorded as an expense in one account and income in the other, so both income and expenses are overstated
- Owner draws and contributions: money you take out or put in is not an expense or income, and coding it as either one makes profit wrong
- Loans: loan proceeds are not income, and only the interest part of a loan payment is an expense, because the principal reduces the loan balance
- Payment processor payouts: a deposit from Stripe, PayPal or Shopify is usually sales minus fees and refunds, so recording the deposit as income can hide the fees
- Credit card payments: paying a card from the bank is a transfer, and if it is also coded as an expense the same spending is counted twice
A PayPal transfer is a good example. It might be a customer payment, a loan from a family member, an owner draw or a vendor payment. The description often looks the same. Only a person who knows the business can say which one it is.
3Why it matters
- Your Profit & Loss shows the wrong profit, so pricing and spending decisions rest on bad numbers
- Your Balance Sheet shows the wrong loan, equity or card balances
- Your CPA has to sort the errors out at tax time, which costs time and money
- A wrong bank rule repeats: once a rule miscodes one transaction, it can miscode every similar one afterward
4How to check your own books
- Reconcile every bank and card account each month, and compare the result to the statement
- Review the list of bank rules and turn off any that code things too broadly
- Look at transfers: each one should have two sides, and neither side should be income or an expense
- Check that your loan balance in the books matches the lender's statement
- Look at the owner's draw and contribution accounts, and check the amounts match what you actually took out or put in
- Compare processor payouts to the sales and fees reports from the processor
- Look through the uncategorized and "ask my accountant" accounts, which should be empty or close to it
Bank rules and automation save real time, so do not turn them off. Review them regularly, and check the results against your statements instead of accepting every suggestion.
5Where software helps and where a person is needed
Software is good at speed: importing transactions, matching routine items and keeping data entry down. A person is needed for judgment: asking what an unusual item was, recording it in the right account and noting it for your records.
That is how we work. We use bank feeds and rules to save time, then review each month against your statements. Anything unclear goes into an exception log with a question for you, instead of being guessed.
6When to get help
If your books have transfers coded as income, loan payments in the wrong place, or months of uncategorized items, a review can sort it out. We look for duplicates, miscategorized items and unclear transactions, and tell you what we find before changing anything.
Want help with your books?
Book a free 15-minute consultation. Tell us where you are stuck and we will recommend the right next step.