Accounting for Startups: Tips to Get Your Startup on Track
A startup requires solid accounting practices to provide its founders, business leaders, and investors with real-time visibility to an accurate picture of its financial health.
Access to accurate financial information is vital to analyzing and identifying opportunities for improvement and growth. It is also crucial for providing strategic decision-making insights. This is especially true for startups, which tend to be more unpredictable and less stable by nature.
Accounting and bookkeeping are crucial for all businesses and the importance of those processes cannot be overlooked. It is essential for startups to build a solid accounting foundation to stay organized, increase efficiency, obtain financing, control expenses, and identify possible risks and opportunities for the business.
Accounting for startups involves keeping accurate records of business and financial transactions, organizing the information, and understanding its financial information. These tasks include recording, analyzing, studying, reporting, and interpreting all the financial matters of your business. Those are crucial steps for examining your finances to identify opportunities for growth and improvement.
Financial statements provide a concise summary of your financial transactions over a specified accounting period and illustrate your startup's cash flow, operations, and performance, providing an accurate picture of your startup's level of success and financial health.
Why Is Accounting Important for Startups?
Without good financial health, the success of your startup will be impossible. Effective accounting practices and sound financial management are essential in achieving good financial health for your company and better returns for the stakeholders and business owners.
Here are some of the benefits of accounting for startups:
What Are the Basics of Bookkeeping?
Every business needs to have a structured method of bookkeeping and accounting. This will help in monitoring revenue and expenses, tracking budgets, performing analyses, and making business decisions.
Here are the basics of bookkeeping that every startup owner should know about:
Analyzing Business Transactions
The bookkeeping process involves tracking business transactions and making entries to specific accounts. The accounting system has a chart of accounts that lists the accounts and the account categories.
Journal Entries
A journal is used to keep a chronological record of all transactions. The journal entries are made from source documents that contain information about the transactions, such as receipts, bills, invoices, etc.
Each transaction is assigned to a specific account using journal entries, and the changes in the accounts are recorded using debits and credits.
Posting to Ledger Accounts
A collection of related accounts is known as a ledger. The accounts are categorized more generally into the 5 main account types: assets, liabilities, equity, revenues, and expenses. When a journal entry indicates a change in the accounts, the account balances are changed in the appropriate ledger accounts.
The information in the journal that appears chronologically is summarized in the ledger on an account-by-account basis.
Trial Balances
To ensure that journal entries have been recorded and posted correctly, the business uses the trial balance to double-check its account balances for a given time period.
A trial balance ensures that the debit balances and credit balances in the ledger accounts match. If not, then one or more errors have been made and must be found.
Reconciling Bank Statements
One of the important tasks of a bookkeeper or accountant is reconciling the statements periodically (e.g., weekly, monthly, or sometimes quarterly) to ensure your financial statements are accurate.
For example, if the amounts in the bank statement and internal records do not match, more research will be needed to identify the errors or reasons for the discrepancies.
Adjusting entries may be needed and are made to modify account balances so that they more accurately reflect the actual situation at the end of an accounting period.
Closing Accounts
Most businesses have revenue and expense accounts (AKA temporary accounts) that provide information for the company’s income statement. At the end of the accounting cycle, these accounts are closed which means the balance of the temporary accounts is reduced to zero.
An account called Profit and Loss or Income Summary is created to show the net income or loss for a particular accounting period.
How Do You Start a New Business Accounting?
Good bookkeeping provides entrepreneurs and small business owners with detailed, accurate, and timely records that assist in decision-making, taxes, and audits. It is an essential part of good business management.
To start, business owners need to follow this summarized accounting checklist.
Open a separate bank account for the business to keep business finances separate from personal accounts.
Track expenses regularly, including receipts, bills, invoices, and proof of payments, making sure they are reflected on financial statements and tax returns.
Based on your business structure and accounting needs, establish an accounting system for your business by either doing it on your own, outsourcing it, or hiring an in-house accountant.
Understand your tax obligations and consult with a professional. Make sure you adhere to filing requirements and deadlines.
Use the balance sheet, cash flow statement, and other documents to evaluate the financial health of your business regularly.
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