An entrepreneur can determine a startup’s future profitability with the help of accounting. It assists in keeping track of the business’s development and making changes as required. Through accounting, business owners will get to know where they must put their assets to generate profit.
A solid accounting foundation is crucial for startups to maintain organisation, boost productivity, get funding, manage expenses, and spot potential risks and business opportunities.
You must know the basic accounting for startups to get your business on track.
Table of contents
- Why is accounting important for a startup business?
- Tips to get your startup accounting on track
- How do you start a new startup accounting?
- How can accountants help startup businesses?
- Final thoughts
Why is accounting important for a startup business?
Making a business success depends on the bottom line. It also depends on effective budget management, maintaining a financial position, and adapting financial plans. Effective accounting practices and a sound financial management system result in higher shareholder returns.
Here are some of the main advantages of accounting for startups UK:
● A clear financial picture of the business
● An accounting method allows business owners to evaluate financial performance.
● Better planning by analysing past performance.
● Startup firms can use accounting to monitor payables and receivables.
● Small-business and startup entrepreneurs use financial accounting to convey information externally to individuals and organisations that use the business’s financial records, such as investors, banks, the HMRC, suppliers, creditors, and leasing firms.
● It is also used to share company strengths and flaws with employees.
Tips to get your startup accounting on track
When starting a business, you have to determine how to tackle financial records.
Every business needs a structured approach to bookkeeping, which involves keeping track of the income flowing and leaving your business accounts. This will let you monitor your income and outgoing expenses, maintain a budget and respond quickly to issues.
Here are the tips to get your startup accounting on track:
1. Analysing business transactions
The accounting process involves tracking business transactions and making entries to particular accounts. The accounting procedure has a chart of accounts which lists the accounts and their categories.
2. Making entries in a journal
A journal is a thorough account that details a company’s financial activities in formal accounting records, like the general ledger, to facilitate future account reconciliation and the transfer of information to other formal accounting records.
The details of a transaction, including date, VAT amount, quantity, nature of the transaction, ledger classification, and amount, are kept in a journal in a double-entry accounting system.
The best way to do this is to use bookkeeping software like Xero.
3. Recording in the general ledger accounts
A collection of related accounts is called a ledger. The accounts are usually grouped into the five main account types: assets, equity, liabilities, revenues, and expenses. When a journal entry signifies a change in the accounts, the account balances are modified in the appropriate ledger accounts.
The data in the journal that appears chronologically is summarised in the ledger on an account-by-account basis.
4. Trial balance
A financial report known as a trial balance displays the general ledger’s current closing balances at the moment of the statement’s creation. The first step to be taken whenever an accounting month finishes is to produce a trial balance.
A trial balance ensures that the ledger accounts’ credit and debit balances are balanced. If not, then one or more mistakes have been made and must be found.
5. Reconciling bank statements
Bank reconciliation is the method of determining whether or not there are discrepancies between the transactions recorded in the accounting records and the transactions documented in your bank account.
Reconciling your bank accounts is an essential component of accounting since it is the last step to determine whether or not there are errors in your records after all other information has been recorded.
6. Closing accounts
Most companies have revenue and expense accounts, sometimes known as temporary accounts, which supply data for the company’s income statement. At the end of each financial cycle, these accounts are closed, implying that the temporary accounts’ balance is decreased to zero.
An account called Profit and Loss is made to display the net income or loss for a specific period. To make decisions, file taxes, and pass audits, entrepreneurs and small business owners need complete, accurate, and timely records. It is an important part of effective business management.
How do you start a new startup accounting?
To start, company owners need to follow this accounting checklist.
● Open a separate business bank account and maintain your company’s finances separate from personal accounts.
● Monitor your expenses frequently, including receipts, invoices, bills, and proof of payments; ensure they are recorded on financial statements and tax returns.
● Establish an accounting system for startups based on your business structure and accounting requirements by doing it yourself, outsourcing it, or engaging an internal accountant.
● Ensure you know your tax obligations, the filing deadlines, and associated penalties.
● Utilise the balance sheet, cash flow statement, and other papers to regularly examine your company’s financial situation.
How can accountants help startup businesses?
Financial advisors with accounting skills have watched many startup companies flourish. They will also try to learn as much as possible about the startup owner and their objectives.
The financial expert will be the “critical” friend who can spot opportunities and difficulties during the initial stages.
They can provide backups, models, and solutions to help you plan and monitor your finances so startups can benefit from the strategy. Accounting experts can provide information beyond the figures on financial statements, improving a business’s ability to make decisions.
A startup needs reliable accounting procedures so that its founders, executives, and financial managers can see a real-time picture of the firm’s financial status.
Keeping track of the organisation’s financial success requires timely accounting. It enables management to make an informed decision knowing how the company is achieving and what corrective actions are required.
So, entrepreneurs should not overlook the importance of accounting for tech startups as it is a measure of financial performance in terms of money and not a burden.