Bookkeeping is essential for startup growth. Bookkeeping organizes and maintains a startup's financial records in the U.S. These financial records involve cash flow statements, monthly expenses, balance sheets, etc. Also, bookkeeping includes the management of the accurate amount of pay and receipts in books. It helps to manage the overall financial health of an organization. So, the companies can analyze their critical financial information at any time with proper bookkeeping. It will help startups in the U.S. make crucial financial decisions. Here, we are going to simplify the basic ideas of bookkeeping. It also breaks down the complex areas in it.
Bookkeeping & Terms Must Know
Bookkeeping is an essential thing in managing finances. A bookkeeper records the startup's financial transactions. It is for ensuring accurate reports of income and expenses. The important bookkeeping terms you must know are as follows:
1. Double-entry bookkeeping
Double-entry bookkeeping is a system. It is where each transaction is recorded in two accounts. They are debit accounts and credit accounts. This system gives a more accurate picture of a startup's financial health than single-entry bookkeeping. It also helps identify errors in recordkeeping.
2. Accrual accounting
Accrual accounting is a vital accounting method. This method records financial transactions when they occur. It gives an accurate picture of a startup's financial health than cash accounting. After all, it considers all transactions for a given period. This accounting method is helpful for companies with inventory or accounts payable and receivable.
3. Inventory
Inventory is the stock of goods a startup has on hand. They are waiting to be sold. The value of inventory can impact a company's financial statements. That's why accurate tracking and management are vital.
4. Accounting ledger
An accounting ledger is a book or is considered a system. It is used for recording financial transactions. It's the hard base of any startup's financial record keeping. Your accounting ledger is the hub for all your financial information, notably your accounts and financial transactions.
5. Accounts receivable
Accounts receivable (A.R.) are the money your customers owe you for services they bought but still need to pay for. Tracking your A.R. is essential to ensuring you receive payment from your customers on time. Tracking your A.R., usually with an ageing report. It can help you avoid issues with collecting payments. Understanding your A.R. can also help you set efficient customer credit terms.
6. Accounting equation
The accounting equation relates equity, the startup's assets and liabilities. This formula ensures that the balance sheet stays accurate and well-managed. The equation is written as follows:
Equity = Total assets - total liabilities
A startup is financially stable if its assets are more significant than its liabilities. However, certain companies, such as those in service-based industries, may not have much equity or negative equity.
7. Accounts payable
A.P., called A.P. Accounts Payable, is the amount you owe creditors for services received. However, it still needs to be paid for. Managing your A.P. helps you to pay your bills on time. It also avoids late fees or damage to your credit score.
The first Seven steps of a bookkeeping process
There are some critical steps in the bookkeeping process. It will also explain the basics of bookkeeping. Here are the essential seven steps to get your bookkeeping process.
Step 1: Separation in startup & personal expenditures
The primary part of grasping your finances is simple. You must get a bank account and separate your startup and personal expenses.
Liability is one reason. There must be more distance between your personal and startup finances while you run a corporation or an LLC. Thus, you could be held personally liable for any company debts.
Mixing personal and startup expenditures in the same account takes a lot of work. It can even result in unnecessary stress. It will also confuse you and require clarification when you file taxes. It could mean a startup expense gets lost in your account. After all, you miss out on a critical deduction.
Step 2: Bookkeeping system to be chosen
There are two main bookkeeping methods. They are single-entry and double-entry bookkeeping.
Journal entries are recorded once as either expenses or income under single-entry. Here, assets and liabilities are tracked separately. A single-entry option is probably right for you if you're starting to do your books independently.
Double-entry is considered complex. But, it is more robust and suitable for established startups. All transactions are entered into a journal under double-entry bookkeeping. After, each item is entered into the general ledger twice.
Most accounting software is based on double-entry accounting. If you ever hire an accountant to help you with your books. There, they'll use double-entry.
Step 3: Make sure your transactions are specified
Every transaction you make needs to be specified and entered into your books. It helps your bookkeeper catch more deductions. It will make your life easier if you get audited. It's worth talking to a pro when you set up your system to ensure that the accounts you create align with your industry expectations. It may also align with CPA expectations.
Step 4: Choose the right tools
Every transaction you make must be categorized when entered into your books. It helps your bookkeeper catch more deductions. It will make your life easier if you get audited. The way you specify transactions will depend on your startup and industry. Your transactions fall into five account types. These involve assets, revenue equity, expenses, and liabilities. Individual line items are then broken down into subcategories that are considered accounts.
These days, you have three options when it comes to bookkeeping tools. These tools can be powerful if you know what you're doing. However, if you don't have a lot of bookkeeping experience (or don't have time to learn), they could stress you out and help you, especially if your accountant tells you you've been misusing them for the past year.
Step 5: Organize your deductions
If an expense is ordinary and necessary, you may still need help deducting it from your taxes. But you have to organize where to deduct or not.
Step 6: Choose a system for document storing
The burden is on you to show the validity of your expenses. S you have to keep supporting documents for your financial data. It includes receipts and records. Thus, choosing a system for storing your documents is essential.
Step 7: Make bookkeeping a habit
Startup owners have a million things to do. Here, it's easy to let bookkeeping fall by the wayside. One way to evade that is to make it a habit. Thus, if you're months or years behind, you should get a bookkeeper to do catch-up bookkeeping.
Things Need to Know Before Set up Bookkeeping for Startup
Preparing bookkeeping for your startup is an essential step. It will help to attain financial success. It helps to track your finances, monitor your cash flow, etc. Here, we can keep an eye on the bookkeeping ideas.
1. Open a bank account for startup
The first step is to open a bank account for startup. It allows you to keep a separation between personal and startup expenses. Bank accounts also enable companies to store their money safely and make transactions easily. There are different startup bank accounts. Each of them has its purpose and advantages. One of the joint bank accounts is a checking account. This type of account is used in everyday life. It helps startups to make unlimited deposits and withdrawals.
2. Choosing a Method of Accounting
There are two critical accounting systems: cash accounting and accrual accounting. If your startup is still tiny, you may opt for cash-basis accounting. You'll likely use accrual accounting if you have payable and receivable accounts. A cash accounting system tracks cash flow. It enters and leaves your startup in real time. You don't record accounts receivable and accounts payable under this. It is because they stood for future transactions only.
3. Financial transactions
Financial transactions are startup actions that concern money. These are sales, costs, and charges. Recording and organizing these dealings is essential for effective bookkeeping. One of the most critical aspects of financial transactions is recording them accurately. It involves keeping track of all the money.
4. Software for Accounting
Picking an accounting software is essential. It is the next step after you have a bookkeeping system in mind. Microsoft Excel is a place where simple bookkeeping can be done.
End Note
Bookkeeping is a crucial action that can help you compare your profit this year to last year. It is because you now have accurate financial data to make smarter decisions. Sometimes, you need more time to do your bookkeeping. So, consider hiring an expert to help you with bookkeeping basics for startups in the U.S. That gives you the financial statements to make intelligent, profitable decisions. Fino Partners is here to support you. You can explore bookkeeping services today and set your startup on the path to financial excellence.