Start-Up Accounting: Where to Begin?

        You’ve started your own business, and you’re probably wondering questions like “Should I be tracking my finances?” and “How do I track the cash flow coming in and out of my business?”. Let’s begin with the concept of accounting, which is the process of recording, organizing, summarizing, and analyzing a business’s financial transactions. It helps people understand how much money a company is making, spending, profiting, owning, and what is owed.

Therefore, you will need to determine what information to gather from your business to begin incorporating accounting. We will continue to provide this information on our blog.

What information is needed to begin the accounting of a business?

        Begin by knowing the basic information about your business structure (such as an LLC, sole proprietorship, C-Corp, etc.), the EIN if your structure isn’t a sole proprietorship, the number of bank accounts associated with it, and the type, state, and local tax IDs. Now that’s just the beginning, and to prepare for the upcoming tax season, the rest might be more tedious depending on the size of your company. Next, start by pulling an Excel sheet to record assets, liabilities, sales and revenue, equity, and expenses.

Here’s a breakdown of each:

Balance Sheet:

• Assets: What the business owns (cash, equipment, inventory)
• Liabilities: What the business owes (loans, bills)
• Equity: The owner’s share of the business

Income Statement

• Revenue: Money earned from selling products or services
• Expenses: Money spent to run the business

An example of recording cash flow is a small plumbing company that sells $100 worth of products. You need to record $100 as revenue. If you bought those products for $60, that amount is COGS (cost of goods sold), which is also an expense that can be traced to this specific sale. You then record $40 as profit and track it with accounting.

If you need help calculating the equity, follow this formula: assets = liabilities + equity. Follow this example below:

Here’s an example if you start with assets, but no loans or liabilities, and you make a profit:

Let’s say you own $2,000 in equipment, have no liabilities, and after a month, you make $3,000 in sales. However, you spend $1,000 on supplies, and you profit $2,000. You started with $2,000 in equity due to the equipment plus no liabilities. After your sale, it would look like this: New Equity = $2,000 (initial from asset) + $2,000 (net income) = $4,000.

Something to know about classifying equipment as assets, you generally should have a depreciation schedule to track the value of the object and claim it as a tax-deductible expense if you are filing under an Accrual basis.

Bear in mind that any fixed assets would be depreciated according to the depreciation schedule on the annual tax return; a tax accountant will typically handle this. Vehicles and any equipment are generally depreciated over 5 years, while office furniture is normally depreciated over 7 years.

After gathering this information and getting this far, you’ll also want to read our other blog What are Journal Entries and how to use them correctly? to provide more insight on Accounting and understand why it’s crucial to not work on your company’s accounting at the last minute before tax filing is due.

Other information you will gather from the blog regarding journal entries is that, before creating journal entries and the next step to collecting your assets, liabilities, sales/revenue, equity, and expenses, you must create a Chart of Accounts (COA). You can do this on a separate Excel sheet, and this is where you will keep it organized. For your company, your COA should be simple but organized enough to track income, expenses, assets, and liabilities. Here’s a simple chart listing the accounts for the start-up of your company:

What are some tips in case of struggling?

           As you can see, accounting can be a time-consuming task, and it’s best to do it correctly for task purposes, but also to understand and make healthy decisions for your business. However, be sure to take the time to read more and utilize free resources, such as YouTube videos. Waterford Business frequently shares videos on topics applicable to readers like you. We also share blogs on various other issues, providing helpful information on our website.

Aside from free resources, if you find that tracking your company’s accounting is too large a task for you to do, we recommend platforms such as QuickBooks, Xero, and others like these. However, we recommend QuickBooks as it is more user-friendly. It allows you to connect your bank accounts and avoid the manual entry to transfer that data.

The software also allows you to create your COA without the hassle of creating Excel templates to keep up with them. In QuickBooks, it will be stored, and you also have the option to inactivate unused accounts. Once you have your COA and your banks synced, you will be able to categorize your transactions with less effort than manually entering them into an Excel sheet.

Nevertheless, keep in mind that this software is only designed to track your finances. You can now create invoices and send them to your customers, but that’s as far as this software allows interaction with customers, scheduling, or dispatching.

You will need to use platforms such as Housecall Pro, Jobber, ServiceMate, API, BuilderTrend, and ServiceTitan (however, the latter is the least recommended, as it is not as user-friendly as the others). There are many other platforms like these, so take the time to do your due diligence to determine what works best for you and your company.

In other words, you must begin at least your first year of owning a business to start the accounting. You must set a plan and have an idea of what your 3-year and 5-year plans are for your business. The most significant focus is on where your expenses are, managing, and tracking your return. This practice will ensure a smoother tax season and help you make informed decisions, both small and large, that will benefit the company.

Moreover, make sure to check out our free YouTube channel and website for more information on how to help you and your business. The team at Waterford Business Solutions looks forward to your reaching out to us for accounting assistance and to help with your next tax season.