The Basics of Accounting for Startups

You are ready to move from having an idea to owning a business. You identified suppliers, a steady market niche for your products; perhaps you’ve even locked down the location you’ll operate from. As everything clicks into place, you will quickly realize the need for proper financial, tax, management, and cost accounting. 

These different forms of accounting are essential to help you keep track of your enterprise’s performance and stay compliant with your tax obligations. 

The Basic Statements

There are some essential financial statements you’ll need to know how to prepare, according to generally accepted accounting principles, to standardize the recording of business transactions.

1. Income Statement

This is a financial report that indicates how profitable your business is over a given period. It ensures that any revenue you receive, even before it is paid, is recorded. 

This is also where you will note any expense necessary to running the business incurred during that period. Such expenses include salaries and wages, the cost of inventory, rent and utilities. You should also note down any interest paid on money the business borrowed during that time as a business expense.

2. Balance Sheet

The mention of this term tends to strike fear into the hearts of business owners with no educational background in accounting. It is where you will record your assets and liabilities to determine the shareholder or business owner’s equity at a given point in time. When recording assets and liabilities, you will be required to apply principles such as cost, depreciation, and conservatism.                                                                                                                                  

3. Cash Flow Statement 

As the name suggests, this document tracks the movement of the business’ cash, mainly from sales and business expenses. You will get the information required for this from the company balance sheet and income statement.

4. Cost-Benefit Analysis

While the above statements are concerned with past business transactions, cost-benefit analysis tries to gauge future viability. If you’re considering expanding into a new location or increasing your backroom staff, a cost-benefit analysis will help you see if it’s a good or bad idea. 

It takes the emotion out of the decision and instead justifies or shoots down an idea based on cold, hard numbers. If you’re only expecting a monthly income of $5,000 from a new branch which will cost you $3,000 in rent and $2,000 in wages, it may not be worth the trouble of launching it.

Accounting Options

1. Hire a Professional

If neither you nor the people you intend to run the business with have any accounting experience or expertise, bringing in a professional accountant is a good idea – like the accountant folks at EFS. Any startup can benefit from a qualified CPA’s guidance in setting up an organized, standardized way of recording transactions.  

Bringing in a pro is essential in ensuring your outfit is fully compliant with all its tax obligations. Your CPA will help you know how to file your income tax returns and employment taxes for your staff. They will ensure that you keep up with social security and medicare taxes. They also help you file these returns in good time to avoid penalties. 

In light of the stringent requirements the Internal Revenue Service put in place, you will want to find options for startup tax accountants as a matter of priority. It will save you the cost of having an in-house bookkeeper while giving you peace of mind knowing all your tax obligations are up to date.

2. Use Software

Organizations may want to keep up with finances more thoroughly during their daily transactions. They can opt for accounting software that does the heavy lifting as they concentrate on their core business. 

With the option to use cloud-based online accounting systems, companies don’t have to worry about setting up a server or making a hefty investment. You can simply subscribe to one of the accounting SaaS systems. However, you’ll have to have an employee managing the software.

3. Do it Yourself

This option is risky, especially if you have no accounting background. Even if you do have accounting chops, you can easily miss a detail here or there. Your familiarity with your operations may induce such laxity. 

Lay the Right Foundation

Getting your startup to the right start doesn’t just mean having adequate stock or creating awareness among potential customers. It also means putting a system of recording transactions and measuring financial performance in place. If you don’t have the expertise to do so, don’t hesitate to get help. 

This will ensure you have the proper foundation for financial accounting to keep monitoring your company’s financial health even when you expand your operations.