7 Bookkeeping Red Flags You Can Look for Yourself

7 Bookkeeping Red Flags

You don’t have to be a bookkeeper to spot signs that something may be wrong with your books.

Whether you do your own bookkeeping in QuickBooks Online, Xero, or another accounting program, there are a few things you can check yourself to get a better idea of the health of your books.

Finding one of these bookkeeping red flags doesn’t automatically mean your books are a disaster. But it may be a sign that something needs a closer look.

Here are seven places to start.

1. Your Bank Balance and Book Balance Are Very Different

Open your accounting software and compare the balance showing for your bank account with the actual balance at your bank.

They don't have to match exactly. Outstanding checks, deposits in transit, and timing differences can create legitimate differences.

But if your accounting software says you have $42,000 in the bank and your actual bank balance is $18,000, that's worth investigating.

One of the first questions to ask is:

When was the account last reconciled?

Bank feeds bring transactions into your accounting software. Reconciliation is what helps verify that your books agree with what actually happened at the bank.

2. Your Accounts Haven't Been Reconciled in Months

This deserves its own red flag because it's that important.

Look at your reconciliation history for your bank and credit card accounts.

When was the last completed reconciliation?

Last month? Six months ago? Never?

If accounts aren't being reconciled regularly, you could have:

• Missing transactions

• Duplicate transactions

• Deleted transactions

• Incorrect beginning balances

• Payments recorded incorrectly

• Bank or credit card activity that never made it into your books

  
  

Categorizing downloaded transactions is not the same thing as reconciling your accounts.

If your accounts haven't been reconciled, it's difficult to know whether you can trust the reports you're looking at.

3. You Have a Lot of Uncategorized or "Ask My Accountant" Transactions

Run your Profit & Loss Statement and look for accounts such as:

Uncategorized Income

Uncategorized Expenses

Ask My Accountant

A few transactions waiting for clarification aren't necessarily a problem.

A large balance is another story.

These accounts are intended to be temporary holding places, not permanent categories.

If transactions have been sitting there for months, your Profit & Loss may not accurately show where you're earning or spending money.

And if you're waiting until tax time for your accountant to figure out hundreds of transactions, you're probably making tax season harder and potentially more expensive than it needs to be.

4. Your Balance Sheet Is Missing Things You Know the Business Owns or Owes

Take a look at your Balance Sheet.

Don't worry if you don't completely understand it. Instead, start with what you know about your business.

Does your business own a vehicle? Major equipment? A building?

Does the business have a bank loan, equipment loan, vehicle loan, or line of credit?

If the answer is yes, can you find those items on your Balance Sheet?

For example, if your business owns two work trucks but there are no vehicles listed under assets, that's something to investigate.

Likewise, if you're making payments on three business loans but none of them appear under liabilities, your Balance Sheet may be incomplete.

Your accounting software can only report what has actually been recorded.

5. Your Loan Balance Never Seems to Change

Speaking of loans, here's another easy thing to check.

Look at the loan accounts on your Balance Sheet.

Are the balances changing as you make payments?

A common DIY bookkeeping mistake is categorizing the entire loan payment as an expense.

Usually, a loan payment includes at least two pieces:

Principal — reduces what the business owes.

Interest — generally recorded as an expense.

Depending on the loan, there may also be fees or other components.

If every $750 loan payment is simply being categorized to "Loan Expense," for example, the liability on your Balance Sheet may never decrease and your expenses may be overstated.

6. Your Accounts Receivable Report Has Really Old or Negative Balances

If you invoice customers through your accounting software, run an Accounts Receivable Aging Report.

This report shows who your books say owes you money.

Look at the balances that are more than 90 days old.

Do those customers really still owe you?

You may discover invoices that were actually paid months ago but the payment wasn't properly applied.

Also look for negative customer balances. Those can be caused by overpayments, duplicate payments, credits, or payments that weren't matched correctly.

If your Accounts Receivable report says customers owe you $30,000 but you know most of those invoices have already been paid, your financial reports aren't giving you an accurate picture.

7. Something on Your Financial Reports Just Doesn't Make Sense

Sometimes the best bookkeeping diagnostic tool is common sense.

Run a Profit & Loss Statement and Balance Sheet and actually look at them.

You know your business better than your accounting software does.

Ask yourself:

Does this make sense?

If you know you spent thousands on advertising but Marketing Expense shows $200, where did those expenses go?

If you had a profitable month but your Profit & Loss shows a huge loss, why?

If you have employees but barely any payroll expense appears, what's happening?

If your Balance Sheet shows a negative credit card balance when you know you owe money on the card, why?

If something looks strange, don't assume it's correct just because QuickBooks or Xero produced the report.

Software does a great job of calculating the information it's given.

It can't always tell whether that information was entered correctly.

Bonus Red Flag: You Avoid Looking at Your Reports

This one isn't technically an accounting error, but I think it deserves a mention.

If you only open your accounting software when you need to send an invoice, categorize transactions, or get something for your tax preparer, you're missing one of the biggest benefits of keeping books in the first place.

Your bookkeeping shouldn't only tell you what happened last year at tax time.

It should help you understand what's happening in your business right now.

Can you afford another employee?

Is there enough cash to buy equipment?

Are customers paying you quickly enough?

Are expenses increasing faster than revenue?

Can you afford to pay yourself more?

Those are business questions your financial information should help you answer.

Found a Red Flag? Don't Panic.

One red flag doesn't necessarily mean you need a full bookkeeping cleanup.

Sometimes the problem is one account, one workflow, or a handful of transactions that were recorded incorrectly.

But several red flags, especially unreconciled accounts, questionable Balance Sheet balances, and old transactions that have been accumulating for months—may indicate that it's time for a deeper review.

That's where a Bookkeeping Health Check, also called a Diagnostic Review, can help.

A Health Check takes a deeper look behind the reports to identify what's working, what needs attention, and what steps may be needed to get your books back on track.

Because the goal isn't simply to have numbers in QuickBooks or Xero.

The goal is to have numbers you can trust.

And when your books are both tax-ready and decision-ready, they can do more than help you file a tax return.

They can help you run your business with confidence.

Clean books. Clear insights. Confident decisions.