Starting a company requires passion and perseverance, but also business acumen and accounting knowledge. There are excellent online resources available, such as the Small Business Administration’s (SBA) guide to managing business finances. Below introduces a step-by-step list of the accounting requirements that must be completed before you open your doors.
Open a Bank Account
After your business is legally registered, the first step should be to create a separate bank account to separate financial records and help with managing taxes. Sole proprietors are not legally mandated to open a separate account, but it’s highly recommended. LLCs, partnerships and corporations are legally required to use separate bank accounts for business purposes. Be sure to open up business checking, savings and credit card accounts. LLCs and corporations are required to use separate credit cards for personal expenses and business assets.
Establish an Expense Tracking System
The foundation of solid accounting record keeping is an effective system to manage expenses. This will help you prepare tax returns, monitor business growth, keep track of deductibles and build financial competency. The IRS actually only requires business owners to retain receipts over $75. There are certain types of receipts that you should carefully track. First, meals and entertainment receipts need to record who attended and the purpose. Vehicle-related expenses should record why, when and where. Out-of-town business travel must be fully justified. Gift receipts only count if the gift giver goes to the event with the recipient.
Bookkeeping vs. Accounting
Bookkeeping is the daily process of recording, categorizing and reconciling statements and transactions. Accounting is a highly technical science that analyzes business data, processes and outcomes to create actionable financial statements. Sole proprietor business owners may follow the DIY route and use popular programs like Quicken, QuickBooks or even Excel spreadsheet templates. Small- to medium-sized business owners have the option of outsourcing either some or all bookkeeping duties to a qualified service provider. When a company becomes complex and big enough, it makes sense to hire at least one full-time, in-house bookkeeper or accountant.
Business owners must also decide whether they’ll use the cash or accrual accounting method. The cash method recognizes revenues and expenses at the time they are actually paid or received. The accrual method recognizes transactions, so it requires a financial professional to track receivables and payables.