If you run a business, chances are you’ll undergo financial audits at some point. Audits can feel intimidating, but they don’t have to be scary if you maintain organized, compliant bookkeeping records. 

As a business owner myself, I totally get how nerve-wracking audits can be. An auditor combs through your financial statements with a fine-tooth comb trying to find problems. Anything questionable they uncover reflects poorly on your business. But audits are also unavoidable rites of passage if you want to build a sustainable company. 

The good news is, with some focus and preparation, you can develop bookkeeping habits that make audits proceed smoothly. Excellent bookkeeping provides huge benefits beyond just impressing auditors too. It gives you greater visibility into the real financial health of your business and helps you make smarter decisions.

In this post, I’ll share the bookkeeping best practices I’ve learned over the years that sail through audits and strengthen overall financial management. I’ll also touch on common bookkeeping mistakes to avoid at all costs when auditors come knocking! Even if your books are currently disorganized, you can turn things around with some diligence. Let’s dive in!

Why Bookkeeping Really Matters During Audits

Let’s get real – auditors rely heavily on your company’s bookkeeping records to do their jobs. They use your books as the baseline for judging the accuracy and validity of your financial statements. 

If your bookkeeping records are a chaotic mess, auditors have no choice but to dig deeper. This turns a straightforward audit into a prolonged, painful exercise for everyone. Instead of a clean bill of financial health, you’ll likely get hit with a laundry list of “findings” and exceptions. 

But when your books are meticulous and watertight, auditors can breeze through their review confidently. They don’t have to second-guess or micro-analyze every entry. This leaves you with a positive audit result that reassures banks and investors about your company’s discipline.

So proper bookkeeping isn’t just a “nice to have” during audits. It makes the difference between a smooth process versus a disruptive ordeal. But it benefits your business far beyond just impressing auditors too.

Why Excellent Bookkeeping Matters All the Time

The best companies don’t practice good bookkeeping solely to pass audits. They do it to steer their business more strategically day-to-day. Strong bookkeeping habits provide ongoing advantages like:

Informed decision making – With accurate financial data, you can make smart forecasts, budget decisions, pricing moves, and other strategic calls. No more flying blind!

Spotting trends – Watch sales spike for a new product line or expenses creep up year-over-year. Identify issues early.

Smoother tax filing – Maintain the documentation you need to maximize write-offs and avoid issues with tax authorities.

Financial transparency – See where the business really stands at any time, not just right before audits. Identify problems before they spiral.

Better cash flow control – Project cash flow needs accurately using real data. Avoid those dire “out of money” situations.

Fundraising potential – Banks and investors want to see pristine books. This opens up financing options as you grow.

Peace of mind – Some say ignorance is bliss, but financial ignorance is dangerous. Great records let you rest easier knowing the dollars and cents add up.

In short, excellent bookkeeping means running your business looking through a windshield, not just a rearview mirror. Don’t wait until an audit to fix bad habits!

Key Bookkeeping Practices to Prioritize

Okay, so stellar bookkeeping matters. But what specific habits and disciplines make your financial records audit-proof? Here are the most vital ones to implement:

Use double-entry accounting – Single entry books are a red flag to auditors, while double entry balances the books elegantly. 

Record detailed documentation – Note dates, amounts, descriptions, document numbers, etc. so entries make sense later.

Stick to an accounting method – Pick cash or accrual accounting and be consistent. Don’t flip flop randomly.

Do the work promptly – Enter transactions on time. Don’t let bookkeeping tasks pile up.

Reconcile everything – Regularly compare subledgers, bank statements, invoices, inventory counts, etc. Fix what doesn’t match.

Mind the cutoffs – Close books at period end and log transactions in the right reporting period.

Follow the matching principle – Match revenue and expenses to the same time period.

Keep general ledgers – Maintain centralized books to efficiently aggregate activity.

Perform trial balances – Prove debits and credits match when totals are run.

Consider GAAP principles – Following GAAP guidelines demonstrates leading practices.

Let’s explore why each one matters when those dreaded auditors arrive.

Double-Entry Bookkeeping

Double-entry accounting is the gold standard for accurate books. Every transaction gets logged twice across different accounts. This keeps the books in balance and builds in cross-checks. 

Single entry accounting or “lazy booking” is asking for pain during audits. It leaves gaps for errors and irregularities since activity only gets recorded once. Auditors will cast a skeptical eye on any business still using outdated single entry methods.

Meanwhile, double entry accounting balances the books elegantly. The dual recording also makes errors easier to spot and reconcile. Take the time to learn this straightforward but powerful approach if you haven’t already.

Detailed Documentation

For a transaction to make sense later, document details like:

– Date

– Dollar amount 

– Account names

– Description of goods or services  

– Invoice numbers

– Check numbers

– Customer info

– Vendor info

Creating an audit trail this way lets auditors validate figures against supporting documents. Also ask staff to be consistent. Don’t abbreviate account names randomly or truncate descriptions. Sloppy documentation suggests sloppy controls.

Consistent Accounting Method

Choose either the cash or accrual method, but be consistent. The cash method recognizes revenue/expenses when cash actually changes hands. Accrual accounting books them when sales or purchases occur, even if cash doesn’t flow yet. 

Both methods are fine if applied consistently. But switching back and forth can look dubious to auditors, like you’re manipulating timing to show smoother earnings. Pick a method and stick with it.

Timely Data Entry

Do your books regularly, not in big batches weeks or months later. Rushing to catch up on backlogs leads to errors. Plus, spotting problems early on helps correct them without major impact.

Ideally, enter transactions daily or weekly. Maintain digital files of supporting documents so records are organized. No excuses for sloppy, last-minute bookkeeping!

Regular Reconciliations 

Frequently compare subledgers, bank statements, credit card statements, receivables reports etc. against each other. Identify and fix discrepancies between the balances. Don’t just force accounts to match artificially!

Common key reconciliations include:

– Bank accounts – Compare your books to the bank’s records.

– Accounts receivable/payable – Match open invoices against ledgers.

– Inventory system vs. accounting system – Verify inventory count agrees with books.

– Payroll reports vs. tax filings – Confirm payroll figures match.

Consistent reconciling means fewer alarming surprises for auditors. It also means you catch honest mistakes faster before they spiral.

Mind the Period Cutoffs

Establish clear cutoff procedures for closing books at period end. Make sure you log income and expenses in the proper reporting period. Don’t let transactions fall into the wrong fiscal year or quarter.

Also watch for items like:

– Prepaid expenses – Don’t double count expenses paid in advance.

– Outstanding invoices – Don’t overlook unbilled revenue not yet recorded.

– Inventory received – Log it to the correct period.

Honoring cutoffs prevents financial reports from looking wonky due to transactions assigned to the wrong period.

Follow the Matching Principle

The matching principle dictates recording revenue and related expenses in the same reporting period. This gives the truest picture of profits for that time period.

If you booked all expenses upfront but revenue later, profitability would skew low initially. Then it would balloon misleadingly when revenue hits finally. 

Matching revenue and related expenses avoids this wonky effect. Auditors like seeing this GAAP principle followed consistently.

General Ledgers

Maintaining proper general ledgers provides the 30,000 foot view of everything happening across subledgers and journals. General ledgers aggregate transactions for reporting by account categories like payroll, utilities, rent, etc.

But the ledgers only work if subledger transactions match cleanly. Sloppy booking creates reconciliation headaches and errors. 

Clean general ledgers let auditors efficiently analyze activity at the highest level. Messy ledgers demand they dig deeper to unravel problems.

Trial Balances 

Run trial balances regularly, especially at reporting period end. A trial balance sums up all debit and credit account balances to prove they equal out. If they don’t match, a problem exists somewhere needing fixing.

Unbalanced books are an automatic red flag for auditors. But trial balances help you identify and correct discrepancies first. Look for missing transactions, duplicate entries, incorrect sums, etc.

Consider GAAP Guidelines

GAAP represents “generally accepted accounting principles” considered best practices for reporting. Following GAAP lends credibility with auditors versus overly creative “custom” accounting.

Some examples of GAAP principles include:

– Recording revenue when earned, not just billed.

– Using conservative valuation methods, not aggressive ones.

– Recording assets at historical cost, not inflated current values.

– Disclosing all relevant details, not obscuring anything.

While private companies don’t have to adhere to GAAP, it helps present your books consistently and objectively. Auditors rightfully view GAAP-compliant statements as more authoritative.

Dodgy Bookkeeping Practices That Get You In Trouble

Now that we’ve covered the bookkeeping habits that make auditors smile, what about the sketchy practices that get you into hot water? Avoid these at all costs:

Recording bogus transactions – Making up fake sales or assets is fraud. Auditors double check documentation.

Delaying expense recognition – Don’t try to smooth earnings by shifting expenses to a later period.

Recording personal and business expenses together – Keep business-only spending separate.

Changing accounting methods haphazardly – Stick with cash or accrual accounting consistently.

Sloppy documentation – Auditors need to clearly understand your records and processes. 

Skipping reconciliations – Unfixed discrepancies between accounts raise doubts.

Forcing account balances – Fudging imbalances misrepresents the books.

Recording transactions in wrong periods – Puts profits out of whack for those periods.

Lacking audit trails – No support means auditors can’t verify figures.

Backdating entries – Out of sequence records look fishy. 

Even if you have no intention to deceive, sloppy practices suggest your controls are deficient. Before an audit starts, take time to fix bad habits that crept in over the years. The cleaner your books, the less auditors will dig.

Leveraging Accounting Software The Right Way

Modern accounting software makes maintaining excellent books much easier. But it’s not a magic bullet on its own. You still need to implement the software properly and back it up with organized practices.

Here are some tips to use accounting systems effectively:

Choose the right software – Get a solution with all the features you need but avoid overbuying. Leverage free trials to test options thoroughly.

Set up your chart of accounts – Map accounts correctly to produce clean reports. 

Enter valid, detailed data – Garbage in, garbage out. Don’t take shortcuts.

Control access – Restrict permissions so only authorized staff access sensitive financial data.

Use approval workflows – Have supervisors review and approve transactions.

Back up regularly – Prevent data loss with redundant copies.

Integrate related software – Sync your accounting, inventory, ecommerce, and other systems.

Automate reports – Schedule reports to distribute automatically.

Supplement with organized paperwork – Retain organized supporting documents.

Think of software as a productivity booster, not a bookkeeping panacea. Garbage data or unauthorized access can still lead to nightmare audits.

Get Your Physical and Digital Files In Order

Along with your accounting system, you need to get paper and digital records organized and easily accessible for auditors. Some pointers:

Use cloud storage – Services like Box and Dropbox make financial files accessible from anywhere while backing them up externally.

Organize computer folders – Keep digital files in clearly labeled folders by year, record type, etc.

Standardize file naming – Follow a convention like “YYYYMMDD Invoice CompanyName” for scanned documents.

Back up data – Copy critical files to external drives in case you need to retrieve an outdated version.

Organize paper records – If you have not gone paperless, maintain neat physical files for documents not digitized. Use alphabetical, chronological or numerical filing conventions.

Label everything – Whether paper folders or digital files, describe the contents clearly.

Control access – Store sensitive financial records securely without restricting appropriate employee access.

Destroy obsolete records – Safely destroy old records following document retention guidelines (but preserve documents still needed for active audits).

Use long-lasting formats – Save records in universally readable formats like PDF instead of proprietary apps.

Well indexed, cleanly organized files speed up document retrieval and cut down on auditor headaches.

Remember Those GAAP Principles

Earlier we touched on why GAAP guidelines represent accounting best practices. Let’s recap some of the key GAAP principles to follow:

Matching principle – Match related revenue and expenses in the same reporting period.

Revenue recognition principle – Book revenue when it’s earned, not just when you bill.

Reliability principle – Use objective evidence and conservative good faith estimates.

Going concern principle – Assume the business remains a going concern into the future.

Cost principle – Record assets at historical cost, not inflated current valuations. 

Disclosure principle – Disclose all relevant details, don’t obscure important info. 

Materiality principle – Focus on transactions with real financial impact, not immaterial ones.

Conservatism principle – When in doubt, choose the most conservative valuation approach.

Adhering to these makes your financials more GAAP-compliant. Auditors rightfully consider GAAP-compliant statements as authoritative and transparent.

Reconcile Early, Reconcile Often

We’ve touched on this before, but frequent account reconciliations are so vital they warrant another reminder. Reconciling compares balances from different sources and identifies variances. Common reconciliations include:

– Bank accounts – Your books vs. bank’s records 

– Accounts receivable/payable – Ledgers vs. customer invoices 

– Inventory – Accounting vs. warehouse counts

– Payroll – Tax returns vs. internal payroll reports

Don’t just force accounts to match artificially. Research and fix the underlying discrepancies. This prevents snowballing inaccuracies and provides auditors with perfectly lined-up balances across your systems.

Reconcile at least monthly, if not more frequently. Business happen fast, so account variances can get out of control quickly. Nip them in the bud through regular reconciling.

Maintain Clear Audit Trails

Auditors need to verify your recorded transactions are valid. That means retaining supporting original documents like:

– Signed contracts

– Invoices 

– Shipping documents

– Inventory receipts

– Purchase orders

– Payment confirmations

– Payroll records

– Tax forms

Organize these paper and/or electronic records neatly by year. Digitizing documents through scanning improves accessibility and backup.

Try to link related transactions across systems. For example, connect invoice records to the corresponding journal entries in your accounting system. This connects the dots for auditors reviewing your books. 

Well preserved audit trails provide the proof auditors need to confirm your books are accurate. Don’t make them hunt for documentation.

Document Your Processes

Beyond documenting transactions, auditors review your internal processes and controls too. These operational documents help them evaluate if your procedures are buttoned up or too lax.

Some examples include:

– Employee handbooks – Demonstrate corporate policies and rules in writing.

– Procurement guidelines – Show proper oversight and approval of expenditures.

– HR processes – Document hiring, payroll, and termination procedures.

– IT/data policies – Detail cybersecurity, access controls, backup processes.

– Business continuity plan – How the company continues operating through disruptions.

– Authority matrices – Show who can sign off on what transaction types and dollar amounts.  

– Inventory management protocols – How warehousing tracks and counts stock.

Documenting these procedures provides auditors confidence in your operational discipline. It also aids employee training and consistency.

Trust Your Books to a Pro

While software helps, most growing companies benefit from a professional bookkeeper. Look for someone with:

– Relevant education and certifications

– Experience with your accounting platform and industry

– Attention to detail and organization

– Knowledge of GAAP guidelines

Give them enough paid time to maintain great records. Review their early work to ensure they record appropriate detail. But then get out of the way and let them work their magic!

Qualified bookkeepers produce financial statements ready for audits and provide helpful business insights too. Just be sure to segregate duties to maintain checks and balances on the role.

Implement Internal Controls

Speaking of checks and balances, segregate key financial duties across multiple employees. Don’t let any one person control an entire process.

For example:

– Separate staff who initiate payments from those who approve. 

– Divide staff who place orders from those who receive shipments.

– Have different staff manage cash accounts vs. accounting records.

– Don’t let a single employee handle payroll end-to-end.

You should also build oversight controls like requiring co-signatures on big checks.