Accounting & Bookkeeping for Startups: Tips for New Business Owners

Advice on accounting and bookkeeping for startups.

Starting a business is hard, and that’s an understatement. When you decide to take the plunge into self-employment, it’s usually because you have a passion for something. Maybe you want to start a restaurant or perform a needed service. Your business is focused on skills and what you like to do, not bookkeeping and accounting.

Accounting and bookkeeping responsibilities are part of every startup business. Without managing them properly, you won’t be able to grow. Consider this your guide to accounting and bookkeeping for startups.

Accounting vs. Bookkeeping

“Accounting” and “bookkeeping” are words often used together and sometimes synonymously. However, there are some differences.

Bookkeeping is simply tracking financial records. How much money comes in, and how much money goes out? Not much bookkeeping is done in actual ledger books these days.

Accounting is where the brains come in. Accounting is taking bookkeeping information and interpreting it to make strategic business decisions. Accounting doesn’t work without bookkeeping, and bookkeeping is rather pointless unless it’s followed by accounting.

The Basics

The very first thing you want to do as a startup is decide what type of business entity you want to be. There are five main options:

  • C corporation
  • Limited liability company (LLC)
  • Partnership
  • S corporation
  • Sole proprietorship

The type of business entity you are will affect how your startup is taxed and determine your bookkeeping requirements. It’s also usually a good idea to separate your personal finances from your business.

Methods of Accounting

There are two accounting methods you can choose: cash or accrual. Deciding which accounting method is right for you depends on your preference, business entity, and goals.

The cash method is the simplest form of accounting for startups. When money comes in, add it to the bookkeeping ledger. When money leaves, subtract it. Always make notes when money moves.

Accrual accounting provides a more detailed record of your company’s financial well being. Income and expenses are recorded as they’re generated, not when the money actually changes hands.

For this method, you’ll need to keep a record of accounts payable and accounts receivable. While this is the more complicated method, it’s the only method that adheres to Generally Accepted Accounting Principles (GAAP) and is required for larger businesses. If you plan to grow, using an accrual accounting method could better prepare you for the future.

Record keeping

Keep any document that shows income, expenses, deductions and/or tax credits. This includes:

  • Bank statements
  • Bills
  • Canceled checks
  • Credit card statements
  • Invoices
  • Proof of payments
  • Receipts
  • Tax forms and returns

File any document that shows money movement. It’s required that businesses retain financial documents for at least three years, but it’s a good idea to hold onto them even longer.

Stick to a Schedule

When you’re swept up in the high-octane action of starting a new business, it’s hard to find time for bookkeeping. Set aside a few hours every week to review the books and ensure everything is in order. In every bookkeeping session, make sure to:

  • Pay bills and vendors
  • Prepare and send invoices
  • Reconcile bank accounts
  • Review outstanding invoices
  • Review overall financial health

Preparing Financial Statements

Now that the books have been set up, it’s time to start accounting! Financial reports are a helpful way to see your business from different perspectives so you can make educated decisions.

How much income did you earn last month? Is more money coming in than going out? How long can your business survive on its current savings? Using this information, you could decide whether it’s time to expand or increase marketing efforts.

Some important financial reports to run regularly are:

  • Balance sheets – a financial snapshot of your business including all assets and liabilities at a specific point in time
  • Profit and loss statements (P&L) – used to calculate revenue
  • Runway – the amount of time your business can survive without actively working
  • Statement of cash flows – shows the movement of money over a period of time

Consult a Professional

If you’re ever not completely sure how to do something, consult with someone who does. Talking to a professional accountant can ensure you’re on the right path for your unique business. Many startups opt to outsource their bookkeeping and accounting.

If your focus is more on managing and growing your company than accounting and bookkeeping, this could be the right choice for you.

Get more advice on establishing solid accounting and bookkeeping practices to better your business with our free guide below.

The Small Business Owner’s Guide to Growing Your Bottom Line with QuickBooks