Accounting for Startups: What You Need to Know

Accounting for your startup promotes tax compliance and helps manage expenses and revenue during this crucial period. It provides the insights you need to better understand your business's financial health in real time and empowers you to plan for your next business phase. This financial work focuses on classifying, recording, and summarizing your startup’s transactions. It’s a way of keeping track of money and helping organize data about your business's financial position in the market.

Good accounting also enables you to communicate financial information to investors, lenders, and other stakeholders by providing them with easy-to-understand reporting that illustrates the amount of money you have made or lost over the lifetime of your business, among other metrics.

Accurate and well-organized financial accounting will:

• Ensure all your business taxes are paid on time and calculated accurately 

• Generate accurate financial reporting, which helps promote business growth and financial management

• Help you plan for the future and make informed decisions about budgeting, cash flow, and planning

What is Accounting for Startups?

The accounting process for your startup involves organizing data to determine your business's financial projection and stability.

Accounting can help you avoid serious mistakes from inaccurate records and review your financial health before finalizing your business expansion plans. 

Why is Accounting Important for Startups?

Accounting helps you operate your business as you navigate the startup phase, which is crucial in the following ways:

• It helps keep your accounting methods organized. Some startups may use the cash basis accounting method and, due to sustained growth, may switch to the accrual accounting method later.

• You can use accounting to plan for your financial needs. As your startup develops, the need for a business plan and accurate financial estimates based on your transactions will be helpful as you seek investments and lending. 

• You can rely on accounting services to determine profitability. You’ll learn how to use assets and budget for changes and growth.

• Accounting supports financial forecasting, which is important for predicting future business performance. There are two types of financial forecasting, and startups will likely use qualitative forecasts due to a lack of historical data.

Importance of Bookkeeping for Startups

Bookkeeping is the backbone of accurate financial records. Your accountant will use the financial information compiled by your bookkeeper to produce financial reports for your startup.

Bookkeeping ensures that all financial data is properly recorded by creating a general ledger, which records information such as debits and credits. Maintaining the ledger is detailed work, but its thorough information provides the best tools for interpreting financial data, decision-making, and forecasting.

The role of your bookkeeper doesn’t typically involve advisory or tax preparation. Bookkeepers maintain the records, handle payroll, and create invoices. They also handle the important task of financial reconciliation, which ensures your bank account and bank statement match the records in the general ledger.

Tasks your bookkeeper may perform for your startup include:

• Creation and maintenance of the general ledger and balance sheets

• Tracking of sales and expenses

• Financial reconciliation 

• Running payroll

• Creating and tracking invoices

• Tracking financial transactions and business transactions

How To Manage Startup Accounting

It's essential that you track your startup's business finances. There are pros and cons to whichever method you choose to embrace for your startup, with the most common being:

• Do it yourself (DIY)

• In-house accounting

• Outsourcing accounting

Do It Yourself

The DIY method allows you to manage your accounting needs individually with accounting software, which can save money in the short term. DIY accounting is especially common among sole proprietors and entrepreneurs who haven’t yet made their first hire.

Although this seems like an attractive option, there are some issues to consider, some of which may erase the cost savings from doing it yourself or open you up to IRS penalties, including: 

• Time-consuming record management that may overwhelm you.

• There may be errors that go unnoticed. 

• You may end up paying more in taxes than you should.

In-House Accounting

In-house accounting involves hiring an employee for your team to handle accounting and bookkeeping tasks. The most advantageous aspect of in-house accounting is that you can hire someone directly who has the experience and knowledge needed to manage your books.

The downside of in-house accounting includes:

• You need to invest time and resources into interviewing, hiring, and managing a new hire. 

• Hiring a full-time employee is usually more expensive than outsourcing or doing it yourself.

Outsourced Accounting

Your startup can outsource its accounting needs to a qualified virtual accounting firm for a tax-deductible fee. 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.

Setting up Startup Accounting Guide: Essentials Startups Must Follow

While most startups are unique, there is commonality in terms of their essential business accounting needs. You must take the early steps to set your startup's budget, identify and retain pertinent records, and understand the rules you must adhere to, such as GAAP. 

Set Budget

Creating your startup's budget allows you to set how your capital will support your business plan and cover associated costs. While relatively few startups have ample investment to work with early on, most will operate with limited resources, highlighting the importance of pre- and post-launch budgeting.

While pre-launch budgeting isn't based on historical data, you can account for that data in your financial modeling and make necessary budgetary adjustments post-launch. Your financial modeling will focus on your startup's key performance indicators (KPIs), including revenue and expenses, which ensures you're on track to meet your goals or next business milestone.  

Keep Records

It's imperative that your startup practices regular and thorough recordkeeping. Your records will help you monitor each phase of your startup's progress and prepare financial materials and statements.

Records your startup should retain include:

• Credit card statements

• Bank statements

• Bills and invoices

• Receipts

• Tax forms

• Tax returns and related documentation

Understand GAAP

Generally Accepted Accounting Principles (GAAP) are a set of ten standards for all accounting and financial reports in the United States. If you're handling your startup's financial work, it's important to understand the GAAP principles.

These principles encourage uniformity in accounting practice and include the following:

1. Regularity

2. Consistency

3. Sincerity

4. Permanence of Methods

5. Non-Compensation

6. Prudence

7. Continuity

8. Principle of Periodicity

9. Materiality (or Good Faith)

10. Utmost Good Faith

Learn more about GAAP and other accounting principles in this essential blog, and schedule time to speak to 1-800Accountant about our tax advisory solution for startups. 

Generate and Keep Financial Statements

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 business owners grow.

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: 

• Balance sheet

• General ledger

• Income statement

What is a balance sheet?

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

• Assets 

• Liabilities 

• Shareholder equity

What is a general ledger?

Startups using the general ledger typically use the double-entry bookkeeping method. The general ledger tracks assets, liabilities, equity, expenses, and revenue.

What 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: 

• Revenue 

• Gains 

• Expenses 

• Losses

To calculate net income for your startup, 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.

What is a chart of accounts?

Your startup's chart of accounts allows you to view multiple financial transactions and a description, identification number, and name of each. You're able to view the main chart of accounts components within your general ledger, which includes: 

• Assets

• Liabilities

• Shareholder’s equity

• Revenue

• Expenses

Tax Planning

These materials contribute to your overall tax planning strategy and aid in low-stress tax seasons. Being well-versed in business tax planning, income tax, and business income strategies can help you avoid missing cost savings opportunities and overpaying your tax obligations during the startup phase.

Ensuring your business taxes are accurately prepared and filed on time and that you have an optimal business structure will aid your tax planning strategy. To learn more, speak to the experts at 1-800Accountant. 

3 Accounting Essentials Every Startup Needs to Know

These useful accounting essentials will guide your business. Startups can use these essentials, as can accountants and investors, who can help startup founders grow their businesses and achieve their goals.

The most helpful accounting essentials for your startup involve tracking transactions in your: 

• Balance sheet

• General ledger

• Income statement

What is a balance sheet?

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

• Assets 

• Liabilities 

• Shareholder equity

What is a general ledger?

Your general ledger is another essential thing worth knowing about and embracing for your startup. 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?

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

• Revenue 

• Gains 

• Expenses 

• Losses

Startup Accounting FAQs

How do small businesses handle accounting?

Small business and startup owners handle accounting responsibilities in one of three ways: DIY, in-house hire, or outsourcing for a tax-deductible fee. While many owners and entrepreneurs will attempt to handle their tax responsibilities independently to save money in the short term, other ways are superior, particularly outsourced accounting services. 

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

On average, a small business takes two to three years to become profitable. During the early-stage startup phase, you might need to take a low salary, among other cost-cutting measures, to ensure your business is established and surpasses financial targets and milestones. 

What is the best online accounting service for startups?

1-800Accountant's suite of professional accounting solutions provides the services your startup needs to support long-term business operations. We save our clients over $12,000 annually on average and guarantee the largest refund possible. Schedule time to speak with one of our experts to learn what we can do for your startup. 

What is the best bookkeeping service?

Bookkeeping is a time-consuming, detail-oriented task that can distract you from focusing on other aspects of your startup. While DIY bookkeeping software exists, there is no substitute for 1-800Accountant's full-service bookkeeping solution. With our service, bookkeeping is done for you with easy-to-understand reporting by an expert bookkeeper, giving you the insights you need to make critical business decisions.

Use an Expert CPA for Your Startup Accounting

Startup businesses have unique accounting needs and requirements that demand professional attention and experience. Whether your goal is to grow your startup or enter a different industry by establishing a new one, the experts at 1-800Accountant, America's leading virtual accounting firm, are ready to support your vision.

We support your startup with a suite of affordable, tax-deductible accounting services that scale with your business as it grows. Schedule a quick consultation–usually 30 minutes or less—to learn how we can help your startup no matter the stage.