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Top Dental Bookkeeping Mistakes & Their Solutions

Bookkeeping mistakes that Dental Practices should avoid and their solutions

By Stacey HowardPublished 2 years ago 6 min read
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While running a dental practice, it is essential to ensure your finances are on track. Unfortunately, most dentists are not aware of creating and maintaining an accurate bookkeeping system that gives them an accurate picture of their business finances. A small bookkeeping mistake can have a considerable impact that results in costly financial trouble.

Most Common Dental Bookkeeping Mistakes and their Solutions

1 . Not working with a veteran dental accountant

Working with an experienced accountant specializing in dental bookkeeping will make sure a clear view of the financial conditions of the practice at all times. In addition, it guarantees that the practice financial statements are built as per the General Acceptance Accounting norms, the dental industry norms, and the IRS guidelines.

Hiring an in-house and inexperienced bookkeeper is a pricey mistake, and the dentists will observe these mistakes when they gain a high tax bill. Also, theft happens because of lacking internal controls and imprecise reconciliation of cash and high receivable figures. Therefore, the best solution would be to consider outsourcing your dental bookkeeping as it's a cost-effective practice.

• Stella Cooper - CEO at PaydayLoansUK

2 . Categorizing All Incoming Money as Income

Categorizing All Incoming Money as Income is one major mistake top dental bookkeepers make. The common school of thought is that all money flowing into your practice's bank account should be classified as income. However, this is not the case. You can have several reasons for incoming funds that aren't classified as profits, such as the sale of equipment or supplies and even reimbursements to your practice.

The key takeaway is to remember that you will pay taxes on your profits. Misplacing incoming money as profits falsely inflates your profit percentages, ultimately leading to an increased tax bill.

• Becky Usanga, an Ohio-Based Accountant & the Co-founder of Techy10

3 . Entering transactions from a prior period

The majority of dentists and their in-house bookkeepers cannot read and comprehend financial statements. Therefore, when the dentist asks the accountant for data for a specific time, it is a typical and costly error for the bookkeeper to provide the dentist with the profit figures. For a certain period of time, profit is the difference between income and costs. The money going in and out of the firm from the beginning to the conclusion of the month is referred to as cash flow.

Accidentally entering transactions from a prior period, which results in balance changes that don't match the bank balance or financial reports, is a regular and costly blunder. If this blunder remains unchecked, all future reports, tax paperwork, and cash numbers will be wrong. This might result in a doubling of the expense of repairing the financials, monetary deception, or IRS fines.

• Sarah Ross, Marketing Manager & Co-Founder of CocoLoans

4 . Not properly categorizing expenses and capital assets

The top bookkeeping mistake we see for dentists is that they do not properly categorize expenses and capital assets, which then often impacts the tax treatment on their return.

Currently, dentists can expense assets that are purchased for under $2,500, called the de minimis safe harbor. In order to do this, you need to make the de minimis election on your tax return, which is a statement that can be generated in most tax softwares.

If you want to ensure the tax treatment is correct, then in the books, you would categorize assets with a total purchase price of under $2500 on the profit and loss statement and assets that are greater than $2500 on the balance sheet. It's important to note that assets with a price over $2500 but paid in multiple smaller payments remain on the balance sheet.

And similarly, if you purchase a lot of small assets for a dollar value greater than $2500, it would still remain on the profit and loss. What that means is that where the purchase is categorized cannot always be determined solely based on the dollar value of the transaction. The proper categorization of expenses and capital assets will become even more important in coming years as accelerated depreciation is phased out, since it can then result in more substantial tax differences.

In case this is relevant:

The top tax mistake we see for dentists is that they'll elect for an S-Corporation without proper tax planning. While this type of tax entity can work well, it can also cause double taxation, particularly for dentists, because their businesses usually have significant equipment. If that equipment is financed, the accelerated depreciation often results in S-Corp double taxation from what's called 'exceeding tax basis.' This is one of the worst tax results, and to avoid it, it's important to pay attention to the timing of the cash distributions near the end of each calendar year.

• Jasmine DiLucci, CPA Firm

5. Combining business and personal finances

In my opinion, combining business and personal finances is a common blunder that goes unnoticed by the majority of individuals. Of course, the vast bulk of your personal money will not be factored into your accounting scenario, but there may be a few things that you assume are business expenses but aren't.

These areas can be difficult to manage because some are business expenses while others aren't. Learn what expenses you may and cannot deduct from your income with the help of an accountant.

Second, If you think that marking expenses as “miscellaneous” is part of the accounting process, well…you’re right. As a rule of thumb, people tend to misuse the miscellaneous category, which might lead to complications. Bank fees, subscriptions, and the like may appear to be unrelated expenses, but in the vast majority of cases, they have a specific purpose. The "misc." category should be avoided at all costs.

• Veronica Miller, Digital Marketing & Growth Director at VPNoverview

6 . Not understand the difference between profit and cash flow

The biggest mistake dentists or their bookkeepers make is that they do not understand the difference between profit and cash flow. They think that the profit made by their business/practice is the cash available and liquid at all times. As a result, they make purchases and incur extra charges and overdraft fees.

This problem can be solved by preparing separate profit and loss (PnL) and cash flow statements. And when dentists want to make a purchase, they should look at the cash flow statement to see how much cash is available, rather than the PnL statement.

Conclusion

Avoiding and taking care of the above mistakes is essential, so consider experts for dental accounting services rather than letting your financial side become a stumbling block. It will help free up your time and save your efforts to focus on your business success.

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About the Creator

Stacey Howard

Stacey Howard has 6 years of experience in accounting. Due to her passion, she has contributed significantly through her write-ups about multiple accounting industries.

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