By Fernando Berrocal
Accounting for startups involves keeping precise records of financial transactions as well as analyzing your finances to spot areas for development.
To keep organized, enhance productivity, acquire funding, control costs, and identify potential dangers and possibilities for the business, startups must have a proper accounting foundation. You must know the fundamentals of startup accounting, whether you hire an accountant or use accounting software.
Why is accounting important for a startup?
Budget management, bookkeeping, and financial strategies are all critical to the success of your company. Effective accounting procedures and positive cash flow produce a return on investment in the form of dividends for stakeholders and profit for the business. Here are a few of the most important advantages of accounting for startups:
- Accounting helps business owners know where their company is and how it is functioning financially at a glance.
- It enables organizations to have a better understanding of their previous activity and present position in order to plan for the future.
- Accounting enables new firms to keep track of their obligations and receivables for products and services provided.
- Financial accounting is used by small-business and startup owners to communicate information externally to people and organizations who use a company's financial information, such as banks, prospective investors, etc.
- Accounting is also used to communicate with workers about the company's strengths and problems.
- Financial accounting data may be used by small business owners to study competitors and evaluate investment opportunities.
The basics of bookkeeping
When you start a new business, you must select how you will handle your financial records. Every organization needs a well-organized technique of accounting, which includes keeping track of the money that comes in and goes out. This will allow you to keep track of revenue and spending, and also budgets and take action if conflict arises. The following are the fundamentals of bookkeeping that every startup owner should be aware of:
Analyzing Business Transactions: Bookkeeping is keeping track of business transactions and registering them in specialized accounts. A chart of accounts in the accounting system lists the accounts and account categories. For example, all sales should be documented in income accounts, and all cash withdrawals should be recorded in expense accounts.
Writing Journal Entries: A journal is used to keep record of all transactions chronologically. The journal entries are created using source documents such as sales receipts, purchase orders, and invoices, which provide information about the transactions. Journal entries are used to allocate each transaction to a specific account, and debits and credits are used to record changes in the accounts.
Posting to Ledger Accounts: A ledger is a collection of related accounts. Accounts payable, accounts receivable, and the general ledger are all included. When a journal entry indicates an account change, the account balances in the corresponding ledger accounts are updated. On an account-by-account basis, the information in the journal that appears chronologically is summarized in the ledger.
Trial Balances: The business may conduct trial balances on occasion to check that journal entries have been accurately entered and uploaded. The debit and credit balances in the ledger accounts should match, according to a trial balance. If not, one or more errors have been committed, and they must be identified.
Reconciling Bank Statements: It's a process that involves putting two or more bank statements together. Reconciling the statements on a monthly basis to guarantee the accuracy of your financial accounts is one of the most essential duties a bookkeeper does. Adjusting entries are made to change account balances to more accurately represent the real situation at the end of an accounting period when the amounts in the bank statement and internal records do not match.
Closing Accounts: Most organizations have temporary revenue and expense accounts which are used to populate the income statement. These accounts are closed at the end of the accounting cycle, reducing the balance of the temporary accounts to zero. Profit and Loss is a type of account that is used to represent the net income or loss for a given accounting period.
How do you start accounting for a new startup?
This accounting checklist should be followed by business owners when starting a new accounting system.
- To keep your business finances distinct from your personal affairs, open a separate bank account.
- Receipts, bills, invoices, proof of payments, financial statements, and tax returns should all be kept up to date.
- Establish a bookkeeping system for your business based on your business structure and accounting needs, whether you handle it yourself, outsource it, or employ an in-house bookkeeper.
- Recognize your tax duties.
- Continuously update your company's financial health using the balance sheet and other documentation.
Your recordkeeping system will become more complex and essential to manage as your startup grows and generates more revenue. This is why it's -critical to start your business with a well-organized structure. You can automate the accounting process and obtain an up-to-date view of your cash flow by using simple and intuitive accounting software for startups.
Do you have an idea for a tech startup but have no technical experience? If that's the case, MassLight can help. We build software for early-stage startups in exchange for equity. Not only do we take care of the software, but we provide capital and mentors to help you scale. Apply here if you're interested. Have questions about the program? Check out our FAQ page.