As an entrepreneur, it can be exciting to open a new startup. Making sure that your accounting processes are established correctly can make a difference in the success of your business. It is rarely a good idea for new business owners to try to manage their accounting because of the potential for errors and the penalties they could face for mistakes. Here is what you need to know about establishing good accounting practices from TMD Accounting.
Bookkeeping vs. Accounting
Bookkeeping and accounting are not the same things. You must understand the differences between these essential functions so that your financial records can be kept properly.
Bookkeeping involves keeping track of daily transactions. Bookkeepers typically do not analyze a company’s finances but simply record transactions. The tasks of a bookkeeper include the following:
- Record and categorize daily transactions
- Create and send invoices
- Record when invoices are paid
- Follow up with clients who owe unpaid invoices
- Process payroll
- Reconcile bank statements
- Prepare financial statements
- Provide financial statements and tax documents and give them to the accountant
Bookkeeping doesn’t require any certificate or license and is relatively simple to do.
By contrast, accounting is much more analytical and subjective. Accountants must be certified. Some of the tasks that an accountant might do include the following:
- Adjust entries to balance books
- Analyze financial statements
- Assess a business’s financial health
- Advise business owners about financial decision-making
- Prepare and file business tax returns
- Complete audits
Accountants are generally required to hold Bachelor’s degrees in accounting and/or be certified public accountants (CPAs). They have more experience and education than bookkeepers.
Managing Accounting for Startups
To establish accounting practices for your small business, you should do the following things:
- Open separate business checking and savings accounts
- Avoid commingling business and personal funds
- Choose either the cash basis or accrual basis accounting method
- Establish your bookkeeping system
- Purchase accounting software
- Create your business’s chart of accounts
- Decide your business’s accepted payment terms
- Keep thorough transaction records
- Financial Records to Retain
You will need to create and retain the following important financial records as a startup business:
1. Balance sheet – A snapshot of your company’s finances and can be updated or prepared at any time
2. Profit/loss statement – Summary of your company’s expenditures and revenues over a set period to monitor your business’s growth
3. Cash flow statement – Report used to predict whether your business will meet its obligations and includes both variable and fixed expenses
4. Accounts payable/receivable reports – Provide detailed information about your outstanding invoices and how long they have not been paid as well as what you owe and to whom it is owed
5. Business tax returns – Prepared, filed, and retained for seven years
Other records to retain include the following:
- Forms 1099-MISC
- Invoices, gross receipts, receipt books, and bank deposit records
- Purchase records and receipts
- Expense records, including proof of payment, canceled checks, credit card receipts, account statements, and paid invoices
- Documentation of business assets, including acquisition dates, purchase prices, how they are used, when disposed of, selling prices, and improvements
- Employment tax records for at least four years
Why Good Accounting is Important
Startups need to have good accounting practices to help them understand their financial situations at all times. When you implement good accounting from the beginning, it can help you establish good business habits that can benefit your business and facilitate its growth.
Many startups fail because of a lack of cash flow. Proper accounting can help you monitor your business’s cash flow and the rate at which it spends money. Your accountant can identify trends in your business’s cash flow and cycles during which your cash flow might be heavier or lighter. They can also help you identify areas in which you are spending too much and offer advice for how you to reduce your business’s spending.
Good accounting also helps your business to comply with the tax law and avoid potential IRS audits. When you have small business accounting services in place for your startup, your accountant will prepare your business taxes for you and ensure they are correct. They can also help you understand the deductions and credits for which your business might be eligible and the types of documentation you will need to support them. If the IRS selects you for an audit, your accountant can guide you through the process and communicate with the IRS for you.
A good accountant can review all of your records and help to identify all potential deductions and credits. This can help to reduce your taxable income and the taxes you might have to pay.
Find an Accountant for My Small Business
If you are preparing to open a new business, establishing your accounting practices can help to keep your company on track. The professional accountants at TMD Accounting can help you implement a sound accounting and bookkeeping strategy to help your business grow. Call us today for more information at 1-856-228-2205.