Top Accounting Mistakes SMEs Make That Don’t Meet the Malaysian Accounting Standards

Running a small or medium-sized enterprise (SME) in Malaysia is no easy task. Beyond sales and operations, ensuring proper financial reporting is crucial not just for business health but also in compliance with Malaysian accounting standards.

Unfortunately, many SMEs unintentionally make accounting mistakes that could lead to inaccurate records, tax penalties, or even audit issues.

Are you one of these SMEs? If you're unsure, let's highlight the most common accounting mistakes SMEs make, along with practical steps to avoid them.

1. Mixing Personal and Business Finances

One of the most frequent mistakes among SMEs is failing to separate personal and business transactions. This often happens in small businesses where owners use the same bank account for both personal expenses and company funds.

Why it’s a problem:

• It creates inaccurate financial statements.
• Missed tax deductions.
• It complicates tax filings and may trigger red flags with LHDN.

How to avoid it:

Open a dedicated business bank account. Use accounting software to track every transaction so your financial reports remain clean and compliant.

2. Incomplete or Inaccurate Record-Keeping

Some SMEs do not record all transactions, while others delay updating their accounts. Missing invoices, cash payments not recorded, and incomplete receipts are common issues.

Why it’s a problem:

• Without clear financial statements, your loan application may be affected as you wouldn’t be able to justify the true financial position of your business.
• Non-compliance with Malaysian accounting requirements for accurate reporting.
• Increased audit risk and penalties.

How to avoid it:

Implement a proper bookkeeping system. Cloud-based accounting tools, especially those equipped with OCR technology, allow SMEs to capture expense receipts on the go and keep records updated in real time. This ensures accurate bookkeeping and seamless generation of financial reports.

3. Misclassification of Expenses

Another common mistake is incorrectly categorising expenses, such as recording capital expenditure (like equipment purchase) as an operating expense, or vice versa.

Why it’s a problem:

• Skews profit and loss reporting.
• Violates Malaysian accounting guidelines on classification.
• May cause underreporting or overreporting of tax-deductible expenses.

How to avoid it:

Ensure that your accountant or bookkeeper understands the guidelines for expense classification. Regular training or consulting a professional accountant can help prevent costly errors.

4. Ignoring Accrual Accounting

Many SMEs still use a cash-based accounting approach, recording transactions only when money changes hands. While this may seem simpler, it does not give an accurate picture of the business’s true financial position, as income and expenses are not matched to the correct periods.

Why it’s a problem:

• Financial statements become misleading.
• Potential non-compliance and does not meet audit requirements.

How to avoid it:

Adopt accrual accounting practices. Learn how to record revenue and expenses in the correct financial periods.

5. Lack of Proper Documentation

Some SMEs fail to keep proper supporting documents such as invoices, receipts, and contracts. Inadequate documentation can lead to issues during audits or when verifying transactions.

Why it’s a problem:

• Breach of documentation requirements.
• Difficulty in defending financial statements during audits.
• May affect future loan applications.
• Risk of penalties for insufficient tax evidence.

How to avoid it:

Digitise and organise all records. Many accounting solutions allow SMEs to attach receipts and invoices directly to transactions, ensuring compliance and easy access.

6. Overlooking Financial Reporting Deadlines

Late submission of annual reports or statutory filings is another pitfall. SMEs often underestimate the importance of timely financial reporting.

Why it’s a problem:

• Non-compliance and inaccurate or incomplete reporting timelines.
• Risk of penalties and legal implications.
• Loss of credibility with stakeholders and investors.

How to avoid it:

Create a compliance calendar. Set reminders for reporting deadlines, or better yet, engage a professional accountant to ensure timely submissions.

Learn the regulations, such as the Malaysian Standard Industrial Classification (MSIC), classification codes, and units of measurement (UOM) according to the most recent lists from the LHDN.

Final Thoughts

SMEs in Malaysia play a vital role in the economy, but even small accounting mistakes can have serious consequences. By understanding the rules and regulations in Malaysian accounting and implementing proper financial practices, SMEs can maintain accurate records, avoid compliance risks, and strengthen business credibility.

The key is consistency and the right tools. A solution like AutoCount Accounting is designed to help businesses simplify their accounting, automate record-keeping, and ensure financial reports are always accurate. With the right system in place, you can focus less on paperwork and more on growing your business.