Bookkeeping & Accounting for Startups: A Beginner’s Guide

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A start-up business owner can be very different – a lawyer, a designer, a chef, a baker, or a qualified carpenter: they are generally not experienced, bookkeepers or accountants. However, keeping track of your financial transactions properly is part of being a business owner, whether you are a start-up or an established business owner.                                                                                                                                                

Start-up accounting can be fundamental, as you are most likely running your new business on a tight budget. However, even if you are privileged enough to have millions backing your business, your investors will want to know what you are spending their money on.

What Is Bookkeeping?

It is the process of accounting and organizing an enterprise’s financial operations, and an accountant is the person responsible for this process.

Accounting is the primary way that business owners can determine whether their business is profitable. By keeping track of your numbers, you can identify financial problems early and solve them before developing into full-fledged crises. 

Accounting also helps you identify areas of increased profit—areas that you might overlook without clear financial statements that you can easily interpret.

Generally, the bookkeeper records the transaction, sends invoices, makes payments, manages the accounts, and prepares financial statements. 

Bookkeeping and accounting are similar, but accounting lays the foundation for the accounting process—accounting focuses more on analyzing the data that accounting collects.

Why Is Accounting Important For Startups?

Congratulations on starting your own business. As an owner, your main aim should be to sell your products and services. But how do you know when your customers are paying you if you don’t record their payment?

How can you get tax deductions at the end of the year if you don’t track your expenses? Will getting a call from the bank be the first sign that your account is overdrawn? That is why accounting and bookkeeping are so important, especially for start-ups.

Before you get started, there are a few things you need to do:

  • Define your business structure
  • You should open a separate bank account for your business
  • Find accounting software that is convenient for you
  • Create an accounting system for your business

Once these items are completed, you should be ready to start managing financial transactions for your small business.

Understand Business Accounts

In the accounting world, an account does not refer to a separate bank account. Instead, an invoice is a record of all financial transactions of a certain type, such as sales or payroll.

There are five main types of accounts:

  • Assets that represent cash and resources owned by a business (for example, accounts receivable, inventory)
  • Liabilities that represent the liabilities and debts of an enterprise (for example, accounts payable, loans)
  • Revenue or income, which is money earned by a business, usually through sales
  • Expenses are cash flows from a business to pay for a product or service (for example, wages and utilities.)
  • Equity, which is the value remaining after deducting liabilities from assets representing the owner’s retained interest in the business (e.g., shares, retained earnings)

Accounting starts by setting up each required account so that you can record transactions in the appropriate categories. 

Most likely, you won’t have the same accounts as the business next door, but many accounts are common.

Accounting Basics Every Start-Up Needs To Track

While you can manage your business accounting in a manual accounting system, you would be much better off using accounting software. You can consider doing your bookkeeping with Bench. They can help manage your accounts online.

Today, most entry-level apps on the market are designed for people just like you: business owners with limited knowledge of accounting and the basics of accounting. 

They are also designed to easily track financial transactions and most of them at an affordable price for even the tiniest budget.

If you are not sure if something should be tracked, rather be on the side of caution and assume that it should be tracked. The following financial items should be managed correctly.

Bank Statements Are Necessary

With online banking, bulky bank statements are a thing of the past. However, the reconciliation of your bank account is still necessary. 

Reconciliation of statements each month allows you to balance the general ledger balance with the bank balance, account for any bank charges, and find any possible bank errors that may go unnoticed if the statements are not reconciled monthly.

Credit Card Statements

It is just as important to check your credit card statements as it is your bank statements. Credit card fraud often occurs, and it can sneak up on you with a lot of small fees. 

Make sure you have a backup for each payment on your credit card statement. It is imperative if you have a company credit card that several employees use.

Payroll

If you don’t have employees yet, you don’t have to worry about wages. However, if you have at least one employee, you will need to track the payroll properly. 

It includes everything from managing employee personnel records to saving employee time records. It also means that you need to manage all related forms of salary, including 941s and W-2s, and 1099s. If you have employees, you should process and save a copy of their W-2 form.

The best way to manage your salary is to subscribe to a payroll service that does most of the work for you. However, if you do it yourself, you are still responsible for keeping proper payroll records.

Create Invoices

It would help if you learned to create an invoice. How long do you stay in business if your customers don’t get billed for the products and services you provide?

Again, any accounting software you buy should have an invoicing component, which also means tracking accounts receivable. If you want to receive money, make sure that you regularly issue invoices and keep track of these invoices.

Proof Of Payment

Your supplier calls to inform you that they will not ship the goods until you pay the bill. The problem is that you sent them a check three weeks ago. 

Although you can no longer store physical checks, make sure that your bank statements are always at hand so that you can determine if the check has passed and if so, ask for a copy of the check to be handed over to your supplier.

If you don’t use receipts, keep a confirmation of your payment along with the invoice if the payment goes missing.

If you pay electronically via PayPal, you will receive a receipt that must be attached to the original invoice. 

Start-Up Costs

If your business is brand new, be sure to keep track of all your start-up expenses, because according to the IRS, you can deduct up to $ 5,000 in start-up and organizational expenses per year when your business goes live. Any expenses that exceed the deduction must be amortized.

Determine The Payment Modes

To succeed in today’s business environment, you should constantly adapt to the needs of your customers. For example, you should increase the number of payment methods in your business to include more than credit cards.

Think about third-party payment systems like PayPal, BitPay, Stripe, PayU, BlueSnap, and others. It should increase access to more markets and create a better customer experience in your store.

Track Your Bills

As a new business, you should establish good credit with your suppliers from the start. It means paying the bills when they need to be paid. However, be sure to examine each bill to make sure it is accurate.

Paying the wrong bill is easier than you think, so don’t let that happen. After entering your invoices in the accounts payable section, you should keep track of them weekly to ensure they are paid on time. If this is not the case, you will most likely have to pay late payments, interest, or both.

Also, you will probably want to keep track of these small expenses, such as parking fees, postage, printing, and mileage. 

Properly tracking business expenses will ensure that your year-end deductions are accurate and that you have documentation to prove it.

It Is Required During Tax Time

To prepare your taxes, you will have to show your accounting records to an accountant or tax inspector. 

These records include journal entries, an income statement, and a balance sheet. You can print these items or send them as digital files.

It should also help if you keep as many documents as possible, including gross receipts, interest on checks and savings accounts, sales reports, employee salaries, insurance premiums, and office rent.

Financial Statements

You should print a set of financial statements monthly or quarterly, depending on your business. When using accounting software, it takes less than a minute to compile financial statements, but the details in these reports can tell you a lot about your business.

Suppose you maintain closed financial statements at the end of the month. In that case, your bank reconciliation should be included in the financial statements to ensure that your general ledger balance and bank balance are the same.

Other Small Business Accounting Tips

  • Determine your salary
  • Keeping inventory records
  • Tracking invoices and receivables
  • Making financial forecasts for future years
  • Determining your tax liabilities
  • Periodically reassessing your methods
  • Setting up various credit lines.

Decide On A Bookkeeping Method

Suppose you plan to keep your ledgers yourself rather than outsource them to an accounting firm. In that case, you should make a vital choice before setting everything up. You should decide if you are going to use a single-entry or double-entry bookkeeping system?

With single-entry bookkeeping, you will enter each transaction only once. If a client pays you, you enter it only in the assets column.

This method can work if your start-up is simple— very simple. If you work outside of the home, don’t have any equipment or inventory to offer, and don’t take too many risks in monetary transactions, you might consider this method.

However, most bookkeeping is done using a double-entry system, which is similar to Newton’s Third Law of Motion, but for finance. Newton’s law states that “for every action (in nature), there is an equal and opposite reaction.”

Similarly, in double-entry accounting, any transaction on one account requires an equal and opposite entry on the other account. It is not physics, but it is just as crucial for business management.

You will record two entries for each transaction in a double-entry bookkeeping system: debit (Dr) and credit (Cr). The debit and credit are recorded as journal entries in the general ledger. The debit is usually written first (on the left), followed by the credit (on the right).

A debit doesn’t necessarily mean money is flowing; similarly, credit isn’t necessarily money you have earned. The account type determines whether the transaction will debit or credit this account.

Double-entry bookkeeping is more challenging than single-entry bookkeeping, but don’t let the difficulties hold you back. Double-entry ensures that your books are always balanced, meaning that you will be immediately alerted if profits start to fall.

Also, most accounting programs start with double-entry bookkeeping anyway. With the software completely ready to go, you can easily handle double-entry bookkeeping.

Accounting And Bookkeeping Options For Your Start-up

If you still can’t handle your business’s basic accounting or accounting issues, you are not alone. If the thought of doing your bookkeeping is too much, you have many other options, including enlisting the help of a CPA. 

You can also hire an experienced accountant or bookkeeper for your business or outsource the entire process.

When Should You Do Your Startup Accounting Yourself?

There are times when you should probably get into the accounts for your business.

  • When you are just starting: Enlisting an expert’s help to set up your business accounting can be a good idea. However, if you are starting, you will probably handle accounting without too much extra work.
  • When you use Accounting Software: Modern software applications are designed to make the accounting process much easier. 
  • When you want to manage all business areas, it may be tempting to outsource accounting to a third-party agency. However, tracking your financial performance with reports like the cash flow statement can give you a much better idea of how your business performs.

When Should You Look For Extra Help?

Are you still unaware of the difference between the balance sheet and an income statement? Do you start counting numbers in your sleep? 

Do the numbers in your financial report still confuse you? If you don’t know the difference between an analysis of financial statements and a financial forecast, you may want to ask for help.

  • If you find yourself spending more of your time on accounting and less time on your business, it’s time to look for alternatives.
  • When transactions start piling up: Do you have a pile of unpaid bills? Has it been a while since you recorded a transaction, looked at your statements, or recorded a payment? If so, it might be time to ask for help.
  • If you have taken a bank loan or an active investor, it is even more important that your finances are managed appropriately. Find an accountant or a CPA who will help you sooner rather than later.

To Sum Up

It is not easy to be a jack-of-all-trades as a business owner or entrepreneur. When deciding to take on the risk of starting a company, you probably didn’t plan on spending most of your time learning the basics of accounting, administering payroll, preparing financial statements, and fighting to meet tax filing deadlines.

Spending too much time on these accounting and bookkeeping operations can distract you from essential tasks related to your business’s management and development, such as innovation, sales, customer service, and finding opportunities to expand.

However, as an entrepreneur, your accounting system helps you learn key financial information about your company, such as cash flow, and the knowledge that can help you make crucial decisions. 

If you wish to achieve this goal and achieve financial understanding, it is necessary to keep your books.