For your startup, accounting may not be the first office task that comes to mind, but it is one of the most crucial.
Accounting is critical to running an enterprise because it makes it easier to keep track of income and expenses, ensures compliance with laws, and gives management, investors, and the government access to the quantitative financial information that can be utilised to make financial decisions.
But initially, it might not be obvious how to handle your account effectively. You’ve come to the right place if you have questions about getting started with your accounts. Continue to read more about the essential accounting tips for startups.
Table of contents
- Why is accounting important for the startup?
- Who needs to keep accounts?
- Accounting 101 for startups
- Does my startup business need an accountant?
- Final thoughts
Why is accounting important for the startup?
Can you claim tax deductions at the end of a year if you don’t keep track of your expenses during the year? This is why accounting is essential for any business.
Here is a quick list of things to decide before starting your startup journey.
- Choose a business structure.
- Create a unique bank account for your startup or SME.
- Choose an easy-to-use accounting software
- Create an accounting system for your company
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Who needs to keep accounts?
Every company needs to keep updated, accurate financial records. The costs of not doing so can be high. A startup might not require in-depth analysis in the early stages.
Businesses will likely perform different amounts of research, but it is recommended that every company keep detailed records of every financial transaction.
Accounting 101 for startups
1. How to start your accounts
Every startup must analyse its priorities and choose between cash or accrual accounting methods.
Small businesses tend to employ the cash method of accounting more frequently since it is easier. When using the cash method, accounting occurs in real-time as money is received and spent.
The second method is accrual accounting which is more complicated and consists of accounts receivable and accounts payable line items. This method makes the actual cash transaction from one account to another less important. Larger companies typically use accrual accounting, which is required by law in some circumstances.
While an in-depth review might not always be essential right away, companies might be wise to keep basic records from day one. Keeping track of the financial records mentioned below is a great starting point for a startup.
2. Inventory (a debit balance)
This may be the work-in-progress, raw goods or ready-to-sell inventory. Periodically performing a physical count of inventories is an excellent way to check that the accounting records and inventory agree.
Inventory tracking and distribution can be a highly complex process. Inaccurate tracking of raw inventory used and completed goods sold can lead to discrepancies between actual and accounting inventory or result in theft.
3. Accounts receivable (a debit balance)
This is money you owe your consumers, primarily for goods and services you’ve sold but haven’t yet been paid for. Sub-ledger displays the details of each account, and all of the sub-ledgers should be reconciled to the total accounts receivable listing to make sure they balance.
Some bookkeeping software might perform this task automatically.
4. Loans payable (a credit balance)
These are amounts that have been lent to the company. Usually, these will come from stockholders or close friends and family members in small businesses. Even though the corporation is not currently paying the interest on these loans, it is crucial to be aware of any future interest charges.
Making invoices is one of the first things you should learn how to accomplish. After all, how long can your business survive if you don’t charge your clients for the goods and services you deliver?
Again, any accounting software you purchase will contain an invoicing feature that entails accounts receivable tracking. Remember to send out invoices regularly and follow up on them if you want to be paid.
6. Bank statements
Hefty bank statements are a thing of the past due to the development of online banking. Despite this, it’s still crucial to reconcile your bank account.
Reconciling your bank statement each month allows you to balance your general ledger balance to your bank balance and uncover any potential banking problems that might go undetected if the statements are not reconciled regularly.
7. Tax returns
Businesses must legally retain tax returns for a minimum of three years. Maintaining correct tax records is essential, especially if your business is new.
Maintaining precise accounting from the start can ease your job significantly and save you time and money in the long term. Even if your startup isn’t ready for a thorough financial review, you must, at the very least, ensure that your records are correct.
Does my startup business need an accountant?
Building a successful startup is about efficiency and cost-effectiveness for aspiring business owners. That frequently entails working with a small staff and having little overhead. Making decisions is challenging, so you’ll probably wonder, “Do I need an accountant for my startup business?”
The short answer is yes. Accountants for startups are crucial for everything from tax preparation to company strategy. They are a great strategic partner to help with everything from loan applications to business succession planning.
From the beginning, having a reliable accountant on your team of advisors who can help you make intelligent business decisions is essential. You can concentrate on your core business expansion, growth, and succession rather than the day-to-day operations of your organisation by using a professional team.
It is impossible to run a business or even hope to contribute to its expansion and financial success if you do not understand the accounting fundamentals for startups. The most crucial element of every successful firm is accounting. It keeps track of all revenues, expenses, credits, and obligations.
It uses numbers rather than words to describe the state of the company. It gives you the essential knowledge you require to comprehend how your company expands, generates revenue, allocates profits, and determines your cash flow. So it’s necessary to know the accounting basics before launching your startup.