Startup Accounting Practices

Startup Business Best Accounting Practices

When developing a startup business it is critical to consider the bookkeeping procedures and practices you will set in place at the very beginning of things.

Deciding upon a Software Package

When beginning your company you may use a simple spreadsheet to monitor your business income and expenses. At some point, though, you might wish to think about adopting a small-business accounting software package like QuckBooks or Sage Peachtree to manage your company’s financial transactions. As a new start-up grows, the paperwork involved in paying expenses and collecting income can prove too overwhelming without the help of a accurate and reliable financial database. A good small business accounting software will also streamline tax preparation, inventory recordkeeping, and payroll records.

Consider your future accounting needs. There are accounting software packages that focus on project accounting, and there is bookkeeping software that caters to real estate/real property (like fixed income accounting). Specialized bookkeeping software is as a rule more costly than the more generalized software packages which are perfect for sales of goods, but if you can anticipate where your business is headed, you might select the appropriate accounting software at the very beginning can save time and money in time.

How to Choose a financial record keeping Method

As a small business owner, you have some leeway in just how you document your financial comings and goings. If you are no big corporation, it isn’t necessary for you to produce statements in accordance with Generally Accepted Accounting Principles, or GAAP. For instance, you might prefer recording your income whenever you make a deposit into your banking account and document the expenses at the time when you write a check to cover an expense. Accountants refer to this accounting method the cash method of accounting. While this means of bookkeeping does not follow GAAP, it is more than adequate for a smaller start-up.

As your business grows, then, you may decide to adopt a more advanced financial recordkeeping process. At this point, you may want to adopt the accrual method of accounting. Under this model, you record your income when you have the invoice, rather than waiting to get paid for that service. You recognize a business expense when you receive a bill from a supplier, rather than waiting until you pay the supplies. This method of accounting is preferable because it allows you to more closely match the income your business generates to the expenses you incurred to earn it. For example, you may have received an advanced cash payment before you provided services to a customer. You may want to wait and record that amount as revenue during the year you actually provided the services, rather than the year in which you received the cash.

As for income taxes, the IRS is flexible in allowing you to choose an accounting method. According to its rules, you may use any method as long as it clearly reflects income and expenses and you treat all items of income and expenses in the same manner from year to year. Though, if you purchase, sell, or produce product, special rules apply on when to use the accrual method. If your business handles inventory in whatever way, you should likely consult your accountants to find out when to use the accrual method.

A Budget that Works for You

You’ll also want to make certain that the accounting software package you choose will enable you to determine a budget plan.

Measuring Your Performance

Most accounting software packages will enable you to draw comparisons between your small business’s current-year financial statements to those from prior years. This process will help you to see trends in your business. It also provides insight on how you can add to its success.

It is critical to get to the bottom of trends so that you can have an accurate picture of your business’s performance and to make important financial decisions. For example, if your revenue increased by 30-percent for 2011 over that from 2010, but your expenses only increased by 10 percent, this suggests that your business model could be hyper-efficient. Were some revenue items duplicated? Or, if your revenue increased by 10-percent in 2011 over that from 2010, but, to do so, your expenses increased by 30-percent, this suggests some inefficiency in your model. Are you investing in assets with the greatest return on investment? Or, did you forget to record invoices for some of the services provided during the year?

You can visit the Self Employed Tax Guide in the Huddleston Tax Library at:

Self Employed Tax Guide Bothell
or
Self Employed Tax Guide Seattle