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Accounting for Startups and Small Businesses: A Quick Crash Course

Accounting For Startups and Small Businesses - Countick

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Few small business owners are accounting gurus, yet knowing how to perform accounting for a small business might help you succeed.

Accounting is essential to running a business. It helps the company keep track of its income and expenses, get tax breaks, follow many rules and loan covenants, and give investors, managers, and other stakeholders the information they need to make better business decisions.

The tips in this article can help you understand the basics of accounting for small businesses.

A Brief Summary Of Small Business Accounting

Accounting for your small business is generally comprised of three components:

  1. Bookkeeping

Bookkeeping is the process of recording and tracking your company’s financial transactions.

  1. Statements of financial position

Financial statements are reports that summarize transactions and demonstrate how the business is doing.

  1. Submitting tax returns

On the profits your firm produces each year, you may owe the federal, state, and other sorts of taxes.

Now let’s dive deep to take a closer look at each component.

How to Manage Accounting in a Small Business?

Here are some simple procedures to get you started tracking financial information for your small business, creating financial statements, and filing taxes.

Step 1: Decide your accounting method

The method you’ll employ to record financial transactions is one of the first accounting decisions you’ll need to make in your small business. There are two fundamental accounting methods:

  • On a cash basis. Using the cash accounting method, you record income and expenses when money changes hands. For example, you record revenue from a sale only when the customer pays you.
  • On an accrual basis. The accrual accounting approach requires you to record income when you sell something and expenses when you incur them, regardless of when the money changes hands. For example, when you sell to a customer on credit, you record revenue even if the consumer does not pay the invoice for 30 days or more.

The cash basis is easier to understand, but the accrual method of keeping track of transactions gives a more accurate picture of actual income and expenses during a given period. The cash basis is preferred by most small enterprises that do not keep inventory. The accrual technique may be required for large and inventory-heavy businesses.

You may be interested in: Accounting 101 Guide

Some firms want to keep things simple throughout the year but must file on an accrual basis, so they shift from cash basis accounting to an accrual basis once tax preparation begins.

Further reading: The Importance of Accurate Bookkeeping for Tax Filing


Step 2: Establish a business bank account and credit card

Establish a business bank account and a business credit card, and direct all of your company’s income and expenses through these accounts rather than your personal checking account or credit card. 

A separate bank account makes keeping a clean record of company activities much more manageable. It makes it much easier to have a clean record of business transactions.

Helpful resources: Cost Effective Accounting Solutions for Startups

Step 3: Make use of accounting software

Once you’ve established a business bank account, it’s time to link it to accounting software. The most reliable accounting software can automate the accounting process by linking to your bank account and ensuring that all transactions are shown in your financial statements.

The objective is to guarantee that every transaction is appropriately documented and credited to the correct account. You must review your transactions frequently to accomplish this. For example, the software could have classified a transaction as “office costs” when it should have been “software subscriptions.” Categorizing transactions into the appropriate accounts ensures that your accounting software generates meaningful results.

Accounting software may help you keep track of your business’s financial health, including how much cash you have available, how much clients owe you, and how long it takes them to pay invoices.

Step 4: Keep track of your accounts payable and receivable

Monitor all vendor bills (accounts payable) and ensure you have enough cash to pay suppliers on time. This can help you avoid late fees and keep your vendors satisfied. If merchants provide discounts for early payment, you should take advantage of them to save money.

Keep a watch out for any outstanding client payments (a.k.a. accounts receivable). Customers that are slow to pay their bills can influence your capacity to pay your expenses, and the sooner you detect problems with collecting payments, the sooner you can remedy them. Consider sending an invoice reminder the day before it is due or when it is past due.

If you do not receive a response, call to follow up. It’s much easier to ignore written letters and emails than to ignore phone calls. Calling them allows you to immediately determine whether there is a problem and work with your customer to remedy it.

Step 5: Maintain accurate financial records

You may wonder whether you need to preserve copies of invoices, receipts, and other accounting records now that you have a business checking account and an accounting system to capture your financial transactions. Indeed, the answer is yes.

If the IRS or another taxing body decides to audit your company, the auditor will want more than just bank records and accounting system reports. They will also look at supporting evidence that shows:

  • the date of the transaction
  • the amount paid 
  • who you paid 
  • a description confirming that the purchase was a business expense

The good news is that you don’t have to save paper receipts. Most respectable accounting software lets you scan or snap a picture of receipts and other documents with your phone and connect them to a transaction.

Read more on: Achieving Financial Success in 2023 The Most Effective Accounting Solutions for Your Business

Step 6: Make adjustments to your journal entries

You (or your accountant or CPA) must record adjusting journal entries at the end of the accounting period to record any transactions that do not affect your bank account. Adjusting journal entries are classified into three types:

  • Accruals. Accruals are only required when using the accrual accounting technique. They make sure that your financial statements accurately reflect all income and expenses incurred throughout the time.  For example, even if you don’t write payroll checks until after the end of the year, you would record accrued earnings and payroll taxes for hours worked by your employees during the last week of the year.
  • Deferrals. Deferrals are also required if you employ the accrual technique. They account for cash received or paid in advance that should have been recorded in the preceding accounting period. For example, if a client pre-pays for services you haven’t yet performed, the payment would be recorded as deferred revenue until the service is completed.
  • Additional modifications. Other purchases that did not go via your business checking account or credit card statement may need to be accounted for, such as:
  • Using your personal credit card to buy business materials
  • Error correction, such as acquiring a piece of equipment that was mistakenly reported as a supply expense rather than a fixed asset.
  • Depreciation expenditure recording
  • Calculating reserves, such as a provision for dubious accounts
Further Reading: How To Avoid Making Financial Mistakes as a Startup?

Step 7: Create financial reports

You can generate financial reports from your accounting software at the end of the month, quarter, or year (or at any time).

Depending on your industry, you may need to use a variety of financial reports. The following are the most commonly used financial reports in small business accounting:

  • The balance sheet. At a given point in time, a balance sheet summarises your company’s assets (what you own), liabilities (what you owe), and owner’s equity. This gives you a picture of your company’s present state and if you have the resources to expand or need to cut costs.
  • The income statement. An income statement, a profit and loss statement, or a P&L statement summarises your company’s sales, expenditures, and expenses during a specific period. It can help you compare your sales and expenses to your budget.
  • Statement of cash flows. The cash flow statement shows how much money entered your business during a specific period, how much money was spent during that period, and how much money you have. This assists you in making cash flow estimates and ensures you have enough cash to pay bills.

Step 8: Submit tax returns

Your small business’s tax-filing duties vary based on your company’s establishment, the products and services you provide, whether you have workers, and where you are located.

Your company may be required to pay the following:

  • Federal Income Taxes
  • Self-employment taxes
  • State and municipal taxes
  • Payroll taxes 
  • Sales tax 
  • Excise taxes 
  • Property taxes

If you’ve done an excellent job tracking your small business revenues and spending and have accurate and up-to-date financial records, filing Tax Returns may be as simple as selecting the appropriate tax forms and entering your numbers into the appropriate boxes.

How Countick Can Assist

Learning how to handle accounting for a small business isn’t exactly a passion project for most entrepreneurs, but it is crucial for acquiring the financial information you need to run a successful business.

Of course, if the rigors of operating a business mean you don’t have the time to learn QuickBooks, or if you’d prefer to leave your bookkeeping to a professional, Countick (that’s us) is here to help. We provide a team of bookkeepers to handle your bookkeeping and simple software to keep track of your company’s finances.

Read more on:

2023 Tax Filing What You Need to Know

How to Find a Competent Tax Advisor


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