The biggest part of preparing for year-end is bringing your bookkeeping 100% up to date. This means catching up on all income and expense transactions, avoiding common errors, and completing your bank reconciliation(s).
The first step is making sure all relevant transactions have been entered in Wave, and categorized accurately. Categorizing transactions accurately ensures your reports contain the essential data you need to file your taxes.
Categorizing your transactions is easy, but there are a few common bookkeeping errors to avoid while you're making sure everything is ready to go.
Here's how to avoid the most common errors:
Recording assets as expenses
An asset purchase is a capital expense: you've purchased something that adds value to your business.
Buying an asset is a purchase for your business, but in order to properly account for its value, you don't want to recognize it as a regular expense on your Profit & Loss report. Equipment, machinery, and other expensive tools and technology are considered asset purchases; day-to-day consumables and operating expenses like office supplies are not.
When you purchase a new asset for your business, like a printer, a computer, or a car, don’t categorize the expense using an expense category. Instead, add a long-term asset account for the asset in question.
You can then categorize the asset purchase to this account on the Transactions page. Doing this allows you to accurately track the depreciation of the asset over time.
Accurately tracking the depreciation of your assets can lower your business's annual net income—something everyone wants to do at tax time!
Recording owner’s funds as income or expense
Each time you withdraw money from your business for personal use, or when you pay a personal expense with business funds, make sure you categorize the transaction as an owner investment or owner draw.
There's an important reason for this: Paying yourself from your business or, conversely, investing your personal money in your business, does not impact your business's profits.
That's because profit, as calculated on your Profit & Loss report, only reflects your business's total income and total expenses, not money withdrawn for personal use or personal funds invested in the business.
Accurately categorizing money taken for personal use ensures that your draw or investment doesn't show up on your Profit and Loss report, which could result in overreporting your income or expenses for the year.
The key to keeping your inventory accurate is to be consistent in the methods you use. Track consistently and to stick to the same method throughout your fiscal year.
If you find that your records in Wave aren’t matching your real-world inventory, don’t worry. We'll review how to make inventory adjustments on the next page, or you can skip ahead now.
Forgetting to categorize transfers as transfers
Every transfer of money between your accounts involves two halves: a withdrawal, and a deposit. When you move money to your credit card to pay the balance or move funds from your checking account to your savings account (or vice versa), all of these are transfers.
Transfers between your accounts are not expense or income transactions, because you're not earning or spending funds—you're just reassigning them.
To categorize a transfer transaction in Wave, select the transfer option from the category dropdown. As long as the other half of the transaction already exists in Wave, Wave will automatically match the transfer with its other half.
If the other transaction doesn't exist, just select the account you're transferring to or transferring from, and Wave will automatically create the other half.