If you plan to start a business, you need to understand bookkeeping to build a solid accounting foundation. Bookkeeping for startups is as crucial as for any established business.
It helps understand your business’s financial aspects and see how good or bad you are doing. It also enables you to manage your money more efficiently. Knowledge of financial health helps you make critical business decisions.
Bookkeeping for startups involves few basic steps. So, let’s look at them in detail below.
Understanding Business Transactions
Numerous transactions take place in a business on a day-to-day basis. You need to have a basic understanding of the business accounts to track and record your transactions.
Cash, the amount receivable, inventory, accounts payable, loans payable, sales, purchases, expenses, payroll, and equity are basic accounts that most businesses have. Each transaction needs to be recorded in a specific category depending upon its nature.
Setting Up Business Accounts
Earlier, all the business accounts were a part of a physical book, known as the general ledger. But now, the physical book is replaced by a virtual general ledger. You can maintain a general ledger through a desktop or Cloud-based bookkeeping software or spreadsheets. Spreadsheets are the cheapest option, but it’s better to use bookkeeping software as they are easy to work with.
Unlike spreadsheets, you don’t have to craft a general ledger in the bookkeeping software. Desktop software requires a high upfront fee as you have to purchase it. If you don’t want to spend much, you can get cloud-based bookkeeping software by paying a monthly fee or you may outsource it to companies that offer bookkeeping for startups.
Deciding The Suitable Bookkeeping Method
Bookkeeping can either be single-entry or double-entry. In a single-entry system, you need to enter the transaction only once. So, if your customer has paid you an amount, you need to enter it in your cash receipt journal. This is a simple method for very small businesses that do not have an inventory or equipment. But in this method, you can’t track your assets and liabilities that are prone to errors.
Most businesses these days use the double-entry bookkeeping system. In this system, you have to make an equal and opposite entry for every transaction in an account. It includes two entries for every transaction; a debit (Dr) and a credit (Cr). For example, if your business borrows a capital of $5000, the liability will be debited with $5000, and assets will be credited with $5000.
Balancing The Books
To ensure that the business transactions are entered correctly, you will need to balance the books at the end of the quarter/year. You can do this by tallying the debit and credits of an account. Reconciling your bank statements is a crucial step to ensure your transactions match your bank accounts.
If the total matches, your books are balanced. But if the two sides don’t match, you’ll have to check the journal entries to find errors. After this, you’ll need to adjust the account balance and post them in the general ledger entry to close the book.
Closing The Books and Prepare Financial Statements
All temporary accounts like revenue and expense accounts should be closed at the end of the accounting cycle. Then, you will need to make financial charts. Make an income statement to analyze the expenses, costs, and revenue of the business over time.
The balance sheet should contain a summary of your assets, liability, and equity to analyze your business’s health. A cash flow statement similar to an income statement should show your business spending and earn, excluding the non-cash items.
Good bookkeeping assists you in decision-making and helps you make future predictions. You can get real-time analysis through financial reports. Therefore, you should invest in good bookkeeping software or service to organize and get an up-to-date view of your finances.