Steps for Setting Up Your Business Accounting
Starting a business requires a lot of planning and decision-making, and one important aspect to consider is how you will handle your accounting.
Proper accounting is essential for any business, as it helps you track your financial performance, make informed decisions, and meet legal requirements.
Here are some steps you should take when setting up a business accounting system:
1. Choose an accounting method:There are two main accounting methods – cash basis and accrual basis.
Under the cash basis, you record income when you receive payment and expenses when you pay them.
Under the accrual basis, you record income when it is earned and expenses when they are incurred, regardless of when payment is received or made.
Choose the method that best reflects your business and consult with an accountant or financial advisor to determine which method is right for you.
2. Set up a chart of accounts:A chart of accounts is a list of all the accounts in your general ledger, organized by type (e.g. assets, liabilities, etc.). It helps you classify and track your financial transactions.
3. Choose accounting software:There are many accounting software options available, ranging from simple spreadsheet templates to more sophisticated programs.
Consider your business needs and budget when selecting software.
4. Record your financial transactions:It's important to keep accurate and up-to-date records of all your financial transactions.
This includes income, expenses, and any other financial activity that affects your business.
5. Monitor your financial performance:Regularly reviewing your financial performance can help you identify areas for improvement and make informed decisions about the direction of your business.
6. Seek professional help:If you are new to business accounting or feel overwhelmed by the process, it may be helpful to seek the advice of a professional accountant or financial advisor.
They can provide guidance and ensure that your accounting is done correctly.
7. Determine your tax obligations:It's important to understand your tax obligations as a business owner.
This includes determining what taxes you need to pay (e.g. federal income tax, state and local taxes, sales tax) and how often you need to pay them.
Consult with a tax professional or visit the Internal Revenue Service (IRS) website for more information.
8. Set up a record-keeping system:In addition to tracking financial transactions, it's important to keep records of important documents such as receipts, invoices, contracts, and employee records.
This will help you stay organized and make it easier to access important information when needed.
9. Develop a budget:A budget is a financial plan that outlines your expected income and expenses for a given period.
It can help you make informed decisions about how to allocate your resources and ensure that you have enough money to meet your financial obligations.
10. Create financial statements:Financial statements provide a snapshot of your business's financial health.
They include the balance sheet, which shows your assets, liabilities, and equity; the income statement, which shows your revenues and expenses; and the statement of cash flows, which shows how cash is flowing in and out of your business.
Creating financial statements regularly (e.g. monthly, quarterly, annually) can help you track your financial performance and make informed decisions.
11. Monitor cash flow:Cash flow refers to the movement of money in and out of your business.
It's important to regularly monitor your cash flow to ensure that you have enough money to meet your financial obligations and continue operating your business.
12. Review your accounting system regularly:As your business grows and changes, it's important to regularly review and update your accounting system to ensure that it is still meeting your needs.
This may include adjusting your chart of accounts, updating your accounting software, or seeking additional support from a professional accountant or financial advisor.
13. Establish internal controls:Internal controls are the policies and procedures that a business puts in place to ensure the integrity of its financial information and protect against fraud or errors.
This can include things like separating financial duties among different employees, requiring dual approvals for certain transactions, and conducting regular audits.
14. Understand the difference between capital and revenue expenditures:Capital expenditures are investments in long-term assets, such as equipment or property, that are expected to provide benefits over more than one year.
Revenue expenditures, on the other hand, are expenses incurred in the course of running a business that is expected to benefit the business for one year or less.
It's important to understand the difference between these two types of expenditures because they are treated differently for tax purposes.
15. Consider hiring a bookkeeper or accountant:Depending on the size and complexity of your business, you may want to consider hiring a bookkeeper or accountant to help with your business accounting.
A bookkeeper can handle tasks such as recording transactions, reconciling bank statements, and preparing financial statements, while an accountant can provide more advanced services such as preparing tax returns and providing financial advice.
16. Learn about accounting principles:Understanding basic accounting principles, such as the matching principle and the principle of conservatism, can help you make informed decisions about your business accounting.
There are many resources available to learn about accounting principles, including online courses, textbooks, and professional associations.
17. Use financial ratios to assess your business's performance:Financial ratios are numerical values calculated using financial statements that can help you assess various aspects of your business's financial performance.
Some common financial ratios include the debt-to-equity ratio, which measures the balance between a company's debt and equity; the current ratio, which measures a company's ability to pay its short-term obligations; and the return on assets ratio, which measures the efficiency with which a company is using its assets to generate profits.
18. Understand the difference between cash and accrual basis accounting:As mentioned earlier, there are two main accounting methods – cash basis and accrual basis.
It's important to understand the difference between these two methods and how they affect financial statements.
Under the cash basis, income and expenses are recorded when cash is received or paid out.
Under the accrual basis, income and expenses are recorded when they are earned or incurred, regardless of when cash is received or paid out.
19. Consider using cloud-based accounting software:In recent years, cloud-based accounting software has become increasingly popular.
This type of software allows you to access your financial information from anywhere with an internet connection, and it often includes features such as automatic bank feeds, invoicing, and expense tracking.
Some popular cloud-based accounting software options include QuickBooks, Xero, and Zoho Books.
20. Understand the difference between profit and cash flow:Profit and cash flow are often confused, but they are actually two different things.
Profit is the amount of money a business makes after all its expenses have been paid, while cash flow refers to the movement of cash in and out of a business.
It's important to understand the difference between these two concepts because they can have a big impact on the financial health of your business.
21. Use a budget to plan for the future:A budget is a financial plan that outlines your expected income and expenses for a given period.
It can help you make informed decisions about how to allocate your resources and ensure that you have enough money to meet your financial obligations.
In addition to using a budget to manage your current financial situation, you can also use it to plan for the future.
For example, you can use a budget to set financial goals for your business, such as saving for a new piece of equipment or expanding your operations.
22. Understand the difference between direct and indirect costs:Direct costs are expenses that can be directly attributed to the production of a product or service, such as the cost of materials or labour.
Indirect costs, on the other hand, are expenses that are not directly related to the production of a product or service but are still necessary for the business to operate, such as rent or utilities.
It's important to understand the difference between direct and indirect costs because they are treated differently for tax purposes and can have a big impact on your business's profitability.
23. Use financial statements to make informed decisions:Financial statements provide a snapshot of your business's financial health.
They include the balance sheet, which shows your assets, liabilities, and equity; the income statement, which shows your revenues and expenses; and the statement of cash flows, which shows how cash is flowing in and out of your business.
By regularly reviewing your financial statements, you can identify trends and make informed decisions about the direction of your business.
By understanding these additional points and being proactive about your business accounting, you can set yourself up for even greater financial success.
Proper accounting is essential for any business, and taking the time to set up a solid foundation can pay off in the long run.