Accounting for Startups: Tips to Get Your Startup on Track
Accounting for startups involves keeping accurate records of financial transactions and examining your finances to identify opportunities for growth and improvement.
It is essential for startups to build a solid accounting foundation to stay organized, increase efficiency, obtain financing, control expenses and identify possible risks and opportunities for the business. Whether you choose to hire an accountant or opt for an accounting software, you need to understand the basics of startup accounting.
What this article covers:
- Why Is Accounting Important for the Startup of a Business?
- What Are the Basics of Bookkeeping?
- How Do You Start a New Business Accounting?
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
Why Is Accounting Important for the Startup of a Business?
Running a business is based on the bottom line. The success of your startup is based on efficient budget management, balancing the books and modifying financial strategies when needed. Effective accounting practices and good financial management results in the return on that investment in the form of returns for the stakeholders and business owners.
Here are some of the key benefits of accounting for startups:
- An accounting process allows business owners to see at a glance where it stands and how it is performing financially
- It allows the businesses to understand their past activity and where they currently stand in order to plan for the future
- Accounting allows startup businesses to keep track of their debts and receivables for goods produced and services rendered
- Small-business and startup owners use financial accounting to communicate information externally to people and organizations that use the financial information of a company such as banks, the IRS, suppliers, creditors, future investors and leasing companies
- Accounting is also used to share company strengths and weaknesses with employees
- Small-business owners may use financial accounting information to analyze competitors and evaluate investment opportunities
What Are the Basics of Bookkeeping?
When starting a new business, you have to decide how you are going to tackle the financial records.
Every business needs to have a structured method of bookkeeping which entails recording the money coming in and going out of your business. This will help you monitor revenue and expenses, track budgets, and take action if problems arise.
Here are the basics of bookkeeping that every startup owner should know about:
Analyzing Business Transactions
The bookkeeping process involves tracking business transactions and making entries to specific accounts. The accounting system has a chart of accounts that lists the accounts and the account categories. For example, post all sales to income accounts and cash outflows to expenses accounts.
Writing Journal Entries
A journal is used to keep a chronological record of all transactions. The journal entries are made from source documents that contain information about the transactions such as sales receipts, purchase orders and invoices.
Each transaction is assigned to a specific account using journal entries and the changes in the accounts are recorded using debits and credits.
Posting to Ledger Accounts.
A collection of related accounts is known as a ledger. This includes accounts payable, accounts receivable and general ledger. When a journal entry indicates a change in the accounts, the account balances are changed in the appropriate ledger accounts.
The information in the journal that appears chronologically is summarized in the ledger on an account-by-account basis.
To ensure that the journal entries have been recorded and posted correctly, the business may make trial balances occasionally. A trial balance ensures that the debit balances and credit balances in the ledger accounts should match. If not, then one or more errors have been made and must be found.
Reconciling Bank Statements
One of the important tasks of a bookkeeper is reconciling the statements on a monthly basis to ensure your financial statements are accurate. In case the amounts in the bank statement and internal records do not match, adjusting entries are made to modify account balances so that they more accurately reflect the actual situation at the end of an accounting period.
Adjusting entries are generally unrecorded expenses and revenues associated with continuous transactions.
Most businesses have temporary revenue and expense accounts that provide information for the company’s income statement. At the end of the accounting cycle, these accounts are closed which means the balance of the temporary accounts is reduced to zero.
An account called Profit and Loss is created to show the net income or loss for a particular accounting period.
Good bookkeeping provides entrepreneurs and small business owners detailed, accurate and timely records that assist in the decision-making process and audits. It is an essential part of good business management.
How Do You Start a New Business Accounting?
To start a new business accounting, business owners need to follow this accounting checklist.
Open a separate bank account for the business to keep your business finances separate from personal accounts
Track your expenses regularly including receipts, bills, invoices, proof of payments, financial statements and tax returns
Based on your business structure and accounting needs, establish a bookkeeping system for your business by either doing it on your own, outsourcing it or hiring an in-house bookkeeper
Understand your tax obligations
Use the balance sheet and other documents to evaluate the financial health of your business regularly
As your startup grows and starts making more revenue, your recordkeeping system will become more complex and crucial to maintain. This is why it’s important to start with a well-organized system as you run your business. You can use a simple and intuitive accounting software for startups to automate the accounting process and get an up-to-date view of your cash flow.