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Accounting for startups is a crucial piece of starting a new business that entrepreneurs should pay extra attention to. Proper accounting allows your startup to stay compliant with taxes, manage expenses and revenue, better understand financial health, and plan for future expansion.

Startups have different accounting needs in comparison to established businesses. Continue reading this helpful guide to ensure accuracy and compliance in your startup's accounting.

Accounting Guide for Startups

Accounting for startups involves classifying, recording, and summarizing your startup’s financial transactions. It’s a way of keeping track of money, and it helps organize data about a company's financial position. 

Accounting can help startups because it helps startup owners manage their finances. It allows you to communicate financial information to investors, lenders, and other stakeholders by providing them with reports that show how much money you have made or lost over time. 

Accurate and well-organized accounting can help you:

  • Ensure all your taxes are paid on time and in full to avoid penalties or fines. 
  • Generate accurate financial reporting, which helps with business growth and financial management.
  • Help plan for the future and make more informed decisions about budgeting, cash flow, and planning.

What is Accounting for Startups?

Accounting for startups involves organizing data to determine your company's financial projection and stability. 

Startups can use accounting to communicate financial information to investors, lenders, and other stakeholders. This helps startup owners avoid mistakes that can arise from inaccurate records. Owners can also use accounting to review their financial health before business expansion occurs.

Why is Accounting Important for Startups?

During the startup phase of your business, accounting can help you operate your business properly. It’s crucial for startups in the following ways:

  • Accounting helps startups keep their accounting methods organized. Some startups may use the cash basis accounting method and, because of their sustained growth, may switch to the accrual accounting method.
  • Startups can use accounting to plan their potential financial needs. As startups develop, the need for a business plan and financial estimates based on your startup’s transactions will become helpful for investments and lending. 
  • Startup owners can rely on accounting services for startups to determine their profitability. You’ll learn how to use assets properly and create a budget to expect changes or growth for your startup.

Understanding the Importance of Bookkeeping for Startups

Bookkeeping is the backbone of accurate financial records. Therefore, it’s important to maintain records of every financial transaction, including sales, expenses, and payroll. By staying organized with small business bookkeeping, you'll have a clear picture of your cash flow and be better equipped to monitor your business's financial health.

How To Manage Startup Accounting

As a startup, you need to track your business finances. There are multiple ways your startup can manage its accounting, each with its pros and cons. Three of the most common ways to manage accounting are: 

Do it Yourself

The do-it-yourself method of startup accounting allows the startup owner to manage their accounting needs individually — and save money in the process. This is especially common for sole proprietors and entrepreneurs who haven’t yet made their first hire. 

Although this seems like an attractive option for many new small business owners, there are a few cons to this method of startup accounting: 

  • Record management may overwhelm you.
  • There may be errors that go unnoticed. 
  • You may end up paying more in taxes than you should. 

In House Accounting

Another option to manage a startup is in-house accounting. In-house accounting involves hiring someone for your team specifically to handle accounting and bookkeeping. The most notable pro to in-house accounting is that you can hire someone directly who has the experience and knowledge needed to manage the books. Furthermore, you can select and access the accounting software that works best for your business. 

The cons of in-house accounting may include: 

  • You need to invest time and resources into interviewing, hiring, and managing a new hire. 
  • It may be more expensive to hire a full-time employee rather than outsourcing. 

Outsourced Accounting

Finally, your startup can outsource its accounting needs to an accountant. An outsourced accounting system can be the best choice for your startup if: 

  • You plan for your startup to develop into a larger business. 
  • You will hire additional employees to work for your startup.
  • It’s possible that you may switch from the cash accounting method to the accrual accounting method.
  • Your business will need mid-year tax planning and year-end tax planning.

3 Accounting Essentials Every Startup Needs to Know

Whether your startup is brand new or rapidly growing, useful accounting essentials will serve as a guide. Startups can use these essentials, and so can accountants and investors, who can help startup owners grow their businesses.

There are three accounting essentials that every startup can benefit from tracking. The three most helpful accounting essentials for your startup involve tracking transactions in your: 

  1. Balance sheet
  2. General ledger
  3. Income statement

What is a balance sheet? 

A balance sheet helps you see how much money is coming in versus going out. You’ll arrange the balance sheet in sections, starting with your: 

  • Assets 
  • Liabilities 
  • Shareholder equity

What is a general ledger? 

The general ledger is another essential worth knowing. Startups using the general ledger also use the double-entry bookkeeping method, which notes one debit (on the left) and one credit (on the right) of your double-entry transaction.

The general ledger tracks the following transactions: 

  • Assets 
  • Liabilities 
  • Equity
  • Expenses 
  • Revenue

What is an income statement?

The last accounting essential for your startup is an income statement. Financial statements, including the income statement, cash flow statement, and balance sheet, provide valuable insights into your business's financial health and performance. An income statement calculates your net income, which you’ll get by listing: 

To calculate net income, you’ll first total your revenue and gains. Next, you’ll total your expenses and losses. Finally, you’ll subtract the total revenue and gains from your expenses and losses.

Startup Accounting FAQs 

How do small businesses handle accounting? 

Small businesses handle accounting in one of three ways: DIY, in-house hire, or outsourcing. 

How long does it take for a small business to be profitable?

On average, it takes a small business two to three years to become profitable. According to Chron, a good rule of thumb for new entrepreneurs is that they’ll take less money in their first year of running a business than their previous salary. 

What is the best online accounting service for startups?

At 1-800Accountant, we pride ourselves on offering the best-in-class suite of services for small businesses accounting needs. Whether you’re a new small business owner or have been well-established in your industry for years, we offer first-class services to meet your needs. Don’t just take our word for it. Find out why Investopedia rated us as one of the best online accounting firms for small businesses in 2022. 

What is the best bookkeeping service? 

The best bookkeeping service is easy to use, automatically connects bank accounts, and includes features such as sending invoices, uploading receipts, and tracking mileage. Furthermore, when you use bookkeeping software like the one offered by 1-800Accountant, you’ll have access to a dedicated bookkeeper who can answer any questions you may have and save you time and money. 

Use an Expert CPA for Your Startup Accounting

Startup businesses have unique accounting needs that deserve expert attention and experience. Whether your goal is to grow your startup or enter a new industry by establishing a startup, small business startup accountants are ready to help you.

When it’s time for you to work with an accountant for your startup accounting, work with the tax experts. Contact an expert small business tax accountant at 1-800Accountant for all of your startup accounting needs.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.