Stop the Profit & Loss roller coaster by avoiding 2 common accounting mistakes

Ever look at your company’s monthly Profit and Loss (P&L) statement and feel like you’re on a wild ride? One month profit is soaring, the next it’s plummeting, leaving you scratching your head about your true profitability.

Often, the culprit isn’t your business performance itself, but rather common accounting errors that distort the financial picture. Let’s look at two of the most frequent issues:

Mistake 1: Mishandling Customer Deposits

Many businesses make the mistake of recording customer deposits directly as revenue. While it’s great to receive cash upfront, that money isn’t truly revenue until you’ve delivered the goods or completed the service. If a customer can cancel an order and get their deposit back, it’s not yet yours to count as profit.

The Fix: Instead of coding deposits to your Sales/Revenue account, record them in a liability account on your balance sheet, often called “Customer Deposits” or “Unearned Revenue.” Once the goods are delivered or the service is complete, then you can record the full sale amount as revenue and offset it by transferring the deposit from the liability account.

Pro-Tip: Always confirm the GST implications with your accountant, as customer deposits generally don’t include GST.

Mistake 2: Incorrectly Accounting for Inventory Purchases

Another common pitfall is coding all inventory purchases directly to your P&L, regardless of whether the items were sold that month or are still sitting in your warehouse. This can significantly inflate your Cost of Goods Sold (COGS) and deflate your gross profit in months when you purchase a lot of inventory, even if sales are low.

The Fix: Unless your inventory system seamlessly integrates with your accounting software to automatically track COGS, you should be making a monthly adjustment to your inventory balance. This ensures that only the cost of goods sold in a given period is expensed, providing a much more accurate reflection of your true profit margin.

By addressing these two areas, you’ll gain a clearer, more consistent understanding of your company’s financial performance, empowering you to make better business decisions.

Is your P&L painting an accurate picture?

If you’re struggling to understand your financial statements or need help implementing these accounting best practices, don’t hesitate to reach out to your accountant or a trusted business advisor.