What Type of Accounting Is Involved in Starting a New Business?
The most important thing to remember about accounting when starting a new business is to keep accurate and complete records right from the start. A good way to accomplish this is to use accounting software. Pay attention to whether you expense or capitalize your costs of start-up.
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Types
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Select accounting software that can grow with your business. Entry level software is appropriate for a start-up, but it is important to purchase software that can be expanded as needed. Peachtree and QuickBooks are two popular choices among entrepreneurs.
Benefits
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If you seek venture funding or if you build the business to a point where it can be taken public, your books will be audited and the process will be much easier and less costly if they have been kept in order.
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Considerations
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Start-up costs can be immediately expensed, which gives you a break on your taxes during your first year. The cost of inventory is a start-up cost but machinery needed to produce the inventory may need to be capitalized.
Significance
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During your first year in business, deduct your start-up expenses from your taxes, but as the company grows, it will need to purchase expensive items, such as plant and equipment, which should be capitalized rather than expensed.
Warning
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Expensing large costs could wipe out any earnings, which would harm a company's ability to get financing because it would negatively affect the appearance of financial health. Capitalizing those costs allows them to be recognized over specified periods of time from three to 30 years, so the company can show profits, while paying off the major expenses.
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