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Entrepreneur’s Guide to Accounting for Startups

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Accounting for startups can come as the most significant challenge when one begins their ventures. Moreover, it is difficult for an entrepreneur to carry out the accounting operations themselves as they need to dedicate themselves to core business activities and their leadership instead.

Business owners and entrepreneurs mostly don’t have time and interest to conduct everyday accounting tasks. Therefore, they tend to delegate the accounting operations to a third-party service provider.

Yet, a business owner must know the accounting basics to oversee the whole procedure well. Therefore, you must be inclusive in the accounting operations when you begin with your startup.

Often, some questions arise when you begin with a small business startup. Do you need an accountant for a start up? Is accounting for startups as crucial as the business operations itself?

The thing is, you cannot separate the accounting from the core business operations. Accounting is a tool to keep track of, analyze, and enable you to manage the trade you do.

It is deeply involved in producing and delivering the products and services, managing the taxes and charges incurred, and maximizing the overall profit.

In fact, accounting is more than just a tool for the company. It is actually the backbone that supports every business transaction and act.

Therefore, you cannot put the accounting operations on the back burner. A business must establish, operate, and manage its accounting operations proactively.

In this startup accounting guide, we will cover the basics of accounting for small businesses. These tips for small business startups will help you manage your accounting like a pro in no time.  

What is Accounting?

Accounting is the process that covers recording, summarizing, analyzing, and reporting the financial transactions in a business entity. These reports are communicated to the management, overseeing agencies, and regulatory bodies such as the IRS.

Accounting operations record day-to-day transactions and track every penny flowing in and out of the business. Accounting operations is a system that processes raw data and produces useful final reports and financial figures.

Importance of Accounting for Startups and Small Businesses

The importance of accounting for any business organization, be it a large enterprise, small business, or a fresh startup, is many and significant. Accounting provides crucial information on things like profit and loss, earnings, cost, expenses, assets, liabilities, equity, etc.

The accounting operations generate financial records and reports that help in planning and controlling business operations and support decision-making. Without record keeping, there will be no way to track the cash flowing through the business, evaluate income and expenses, and calculate the profitability of the business.

Do you need an accountant for a start up?

A question entrepreneurs and owners of small business start-ups often ask is whether they need a dedicated accountant.

The answer is that it depends on the volume of transactions in your business, the number of staff and employees, and also on their capability to handle accounting for startups.

If the financial transactions are limited and you need to distribute paychecks to only a handful of employees, you can handle the accounting operations independently.

That is when you have the knowledge and skillset to utilize the accounting software and tools to simplify accounting tasks. You can take the help of a third-party tax provider to prepare tax returns.

However, if the transactions are too many, or if you need to distribute paychecks to many employees, you can no longer handle the accounting and payroll operations on your own.

In this case, you need a dedicated accountant to manage company bookkeeping and accounts every day.

Doing so is essential not just to elevate the quality of accounting operations and benefit from powerful insights but also to stop the business from crashing down since no business can run smoothly without the help of an efficient accounting system.

Accounting Software for Small Businesses

Today, almost every company utilizes accounting software to carry out the financial operations. This is way more convenient and less time-consuming than maintaining physical records on paper.

Accounting software, like QuickBooks, has revolutionized the way you carry out basic accounting tasks like bookkeeping, invoicing, bank reconciliation, etc.

It offers error-free, quick ways to conduct tasks and saves the time spent on repetitive tasks with the help of automation.

Take a look at some popular accounting software used in the USA and abroad.

1. QuickBooks

Proprietary software

2. Sage Business Cloud

Proprietary software

3. GnuCash

GNU General Public License

4. TurboCASH

GNU General Public License

Basics of Accounting for Startups

When you begin with accounting for startups, you must know its fundamentals to carry out or oversee the whole process easily. Take a look at some essential elements in accounting and what they mean.

1. The Accounting Equation

Have you heard of the famous equation, which balances the assets, liabilities, and equity?

Assets = Liabilities + Equity

The above equation defines a tripartite relationship between the company’s assets, liabilities, and equity. It can also be written as:

Assets – Liabilities = Equity

The company’s value (equity) depends on the assets minus the liabilities. Therefore, the company assets must hold a higher value and have minimum liabilities.

2. Chart of Accounts

The chart of accounts lists all the accounts of the business used to record transactions. These accounts are separated as per their purpose as assets, liabilities, equity, expenses, etc. Maintaining charts of accounts is a crucial task a bookkeeper is trusted with.

3. Double-entry bookkeeping

As the name suggests, double-entry bookkeeping records an entry twice in two separate accounts. However, when an entry is added somewhere, it is either entered as a debit or a credit. If it is entered as a debit in account one, it will be entered as a credit in the second account.

4. GAAP (Generally Accepted Accounting Principles)

Accountants must stick to the ethics of accounting issued by reputed institutions in the finance industry. Generally accepted accounting principles (GAAP), as directed by the Financial Accounting Standards Board (FASB), define the standard methods and principles for carrying out accounting operations.

5. Financial Reports

The four core financial reports are important for the purpose of analysis, management, and communicating the company’s financial position to the investors and regulatory bodies.

a. Balance Sheet

At any date, the balance sheet lists the assets, liabilities, and equity. However, the balance sheet is a synopsis of a company’s finances at a particular date or moment. It is not a story of the company’s performance over an extended period of time.

b. Income Statement

The income statement is a measure of the company’s earnings and success over a time period. It lists the revenues and expenses and evaluates the income of the company.

c. Cash Flow Statement

As the name suggests, a cash flow statement tracks the money flowing through the business. It lists the cash flowing out of the company, expenses, and cash flowing into the company income. The difference between the two is used to determine the company’s profitability.

Cash flow metrics and KPIs are used to judge the company’s real-time financial health and make instant decisions in times of crisis.

d. Statement of Owner’s Equity

The statement of owner’s equity is a chart exhibiting the owner’s investments, withdrawals, and retained earnings. The capital value of the business is constantly changing. Therefore, the total value of the company is deduced by subtracting the liabilities from the assets.

Accounting Tips for Small Business Startups

Beginning with accounting for startups directly leads to choosing the accounting method. You can use two accounting methods – cash-based accounting and accrued-based accounting.

Cash accounting is a basic method of accounting when you register transactions when the money is received or spent. This doesn’t consider liabilities, such as the company’s liabilities to the client when they make a prepayment.

The truth is that money collected from a client as a prepayment is only a liability until the products or services have been delivered. When the services or products are delivered, it then turns into revenue.

The accrued accounting method notes cash as revenue when it is earned. Therefore, this accurate accounting method keeps important information about the cash flow.

Final Words

When you get started with the accounting operations for your startup, you need to know how to approach it. We have listed some things that will come in handy in kick starting the accounting operations for your new venture.

However, experts strongly recommend that you take the help of a seasoned accountant or a firm to establish your accounting system. For that, we invite small and mid-sized businesses to benefit from our accounting and taxation services.

We offer all kinds of services under the accounting umbrella, such as accounting, bookkeeping, audit and assurance, tax advisory and preparation, financial planning, and more. Contact our accountants at +1(800) 580-5375 to find the right service and plan for your business. Take our free trial today, and don’t pay a penny until you are satisfied with our services.

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