Are you a small business owner or an aspiring entrepreneur that wants to know more about accounting strategies for startups? If you are, then you are at the right place. Accounting for startup companies involves keeping an up-to-date record of financial transactions as well as analyzing the financial records to discover areas for improvement and development.
Building a strong accounting foundation is necessary for startups because it would help the business to be run in an organized manner. It would also help to boost productivity, acquire more funding, control spending, and identify potential dangers and prospects for the company. Whether you want to hire an accountant or make use of accounting software, it is still necessary that you understand the fundamentals of startup accounting.
In this article, we would discuss some of the reasons why accounting is necessary for a startup. You would also be introduced to the fundamentals of Bookkeeping and given tips and strategies on how to start a business accounting.
Why Do You Need Accounting for a Business Startup?
For your business to succeed, you must take accounting seriously. Accounting is the most important aspect of running a business and if you do not get it right from the start, you could be faced with too many challenges than you can handle. Your startup’s success is dependent on so many factors, some of which are effective budget management, balancing of books, and modification of financial plans. Effective accounting strategies and financial management would yield a return on investment in the form of dividends for business owners and stakeholders.
Benefits of Accounting For Startups
Here are some advantages of good accounting for startups:
- Procedures enable business owners to assess where their company is and how it is progressing financially. It helps businesses to analyze their past start-up accounting processes as well as where they are now so that they can be equipped for the future.
- Accounting helps start-ups to keep track of their expenditures and revenue for items manufactured and services delivered.
- Financial accounting is used by small-business owners to transmit information to persons and organizations (like banks, suppliers, the IRS, prospective investors, and creditors) that need the company’s financial information.
- Accounting also conveys a company’s strengths and shortcomings to its workforce.
- Accounting information can also be used by small-business owners to assess the competition and prospective investments.
Fundamentals of Bookkeeping
When launching a startup, you must decide how you want to handle the financial records. Every startup needs an organized system of accounting, which includes documenting the money that comes in and goes out of the firm. This will allow you to keep track of revenue and expenditure, and make decisions if problems emerge.
Here are some fundamentals of bookkeeping that all business owners should know:
The accounting process includes keeping track of business transactions and entering them into appropriate accounts. The accounting system comprises a chart of accounts, which contains all of the accounts and account types. For example, all sales should be recorded in income accounts, and all cash outflows should be recorded in expense accounts.
A journal can be used to keep a comprehensive record of transactions in chronological order. Journal entries are created from primary documents that contain all the transaction information, such as purchase orders, sales receipts, and invoices. When you are using a journal entry, each transaction is allocated to a distinct account, and changes in the accounts are documented using credits and debits.
A ledger is a collection of related accounts. This comprises accounts receivable, account payable, and the general ledger. When a journal entry reflects an account change, the account balances in the relevant ledger accounts are updated. The chronologically ordered information in the journal is summarized within the ledger on an account-by-account basis.
Trial balances may be done occasionally to ensure that journal entry was correctly recorded and posted. A trial balance helps to ensure that the ledger accounts’ debit and credit balances are equal. If not, it means that an error has occurred and must be carefully tracked and corrected.
A bookkeeper’s primary responsibility is to reconcile the statements monthly to ensure the accuracy of the financial statements. Adjusting entries are used to amend the account balance so that it correctly reflects the real situation at the close of an accounting period. This is done when the numbers in the internal records and bank statements do not match. Adjusting entries are often unrecorded expenditures and income related to ongoing transactions.
Temporary expense and revenue accounts are used by most businesses to provide information for their income statement. These temporary accounts are closed when the accounting cycle comes to an end, leaving a zero balance in the account. To reveal the net income or loss for a certain accounting period, a Profit and Loss account is prepared.
Small business owners benefit from comprehensive and accurate records that help in audits and decision-making. It is a necessary component of successful business management.
How To Start Accounting For New Businesses
This checklist should be followed by business owners when starting a new business accounting.
- Business Account
For you to be able to keep track of your business revenue, you must open a bank account for the business that is separate from your private bank account.
- Track All Financial Transactions
Track your expenditure on a regular basis, including bills, receipts, invoices, financial statements, payment proofs, and tax returns.
- Create Bookkeeping system
Design a bookkeeping system based on your accounting needs and business structure. You can do this yourself, outsource it, or hire an in-house bookkeeper.
- Know your tax obligations.
- Audits and Checks
Regularly assess your company’s financial health using the balance sheet or other documents.
As your startup grows and generates more income, your bookkeeping system will become more complicated to manage. That is why it is critical to start your firm with a very organized structure. You can simplify the accounting process and receive an up-to-date report of your cash flow by using easy and straightforward accounting software designed for startups.