Accounting and First Steps in Starting a Business
Starting a business involves a long sequence of steps that must be completed before you can open your doors. Aside from legal considerations, marketing strategies and hiring, new businesses have to address a number of accounting issues. Understanding the accounting needs of a startup can help you to cover all the bases of your financial-management systems.
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Business Planning
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Craft the financial section of the company's business plan. Financial sections should include projected income statements for at least the first three years of doing business, outlining the expected income, expenses and owners' equity contributions during the initial growth phase. Financial plans should also discuss exactly how much outside financing the company needs to get off the ground, as well as where the money is likely to come from and how it will be used to effectively get the business off the ground.
Revenue Recognition
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Once you are ready to set up your accounting system, decide whether to use the cash or accrual method of revenue recognition. Cash-basis accounting systems recognize income when it is received, and expenses when they are paid. The cash method is ideal for smaller businesses with less complex income and expenses. Accrual-basis accounting recognizes income when it is earned, and expenses when they are incurred, regardless of the actual flow of money. The accrual method is required for all publicly-traded corporations, and is a part of the United States Generally Accepted Accounting Principles guidelines.
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Accounting System
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Decide whether to use a single- or double-entry accounting system. Single-entry systems require only one posting per transaction; these systems are generally easier to use on a regular basis, since accountants do not have to worry about matching each post with an identical post in the right account.
Creating financial statements and other reports for stakeholders is less time consuming with double-entry systems, however, since all accounts are kept up to date on a regular basis. Consider sales transactions, for example. With a double-entry system, each sale is recorded in the revenue account and either the cash or accounts-receivable account. When it is time to create a balance sheet for potential lenders or a report for management to analyze the ratio of cash-to-credit sales, the revenue, cash and accounts-receivable accounts will already reflect accurate amounts without needing adjustment.
Accounts
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Setting up your actual accounts involves creating a range of new entries within your chosen accounting system. Small-business accounting software simplifies the process of creating accounts with user-friendly setup utilities. Common accounts for a new business include revenue, materials expense, tax expense, salaries expense, depreciation, assets and liabilities.
Accounting Information
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Once your accounting system is in place, create systems to aggregate all financial documentation in the accounting department, or to make sure that the individual in charge of accounting receives all of the documents he needs on a regular basis. All financial documentation -- including sales receipts, purchase receipts, invoices, payroll records and tax information -- must make it into the hands of company accountants to keep your accounting system current and accurate.
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References
- Photo Credit Money bar. Money and Financial series. image by Kristina Afanasyeva from Fotolia.com
