How To Setup Accounting For A New Business

how to setup accounting for a new business

At the outset, startups and new businesses have to operate with limited resources, sometimes making difficult choices between operational outlays and administrative needs. However, no matter how strapped you are for time and money, getting your accounting and bookkeeping affairs in order when starting a new business will help you avoid any potential pitfalls. So prior to making your first business purchase, hiring your first employee or, even better, signing your first client, make sure the following steps are complete.

1. Business Banking

Even if your business is registered as a sole proprietorship, it is prudent practice to separate business funds from your personal funds. After you obtain a tax identification number for the business, open a checking account in the name of the company. Incoming funds and expenses should go through this account to establish a paper trail automatically. Bank statements would also provide a record of transactions in the absence of a formal bookkeeping system, which may be the case in the early days of startups.

Typically, banks will offer a slew of financial products for businesses that maintain accounts with them. Business credit cards will help to keep track of expenses provided it is used for business purposes only. If you plan on accepting credit card payments, ask your bank whether they have a credit card processing service with favorable rates for customers.

2. Basic Recordkeeping

Establish a method for keeping track of your expenses even if it means using a basic Excel file at first (though we really have to advocate for utilizing any one of today’s accounting software platforms even when you are just starting out).

  Managing expenses is one way to monitor your business performance over a specific period. You want to see how your expenses stack up against your budget. Aside from recording information on paper or digital ledgers, it is also important to establish a filing system for the paperwork related to income and expenses.

Whether you choose to maintain paper files or prefer to digitize and keep electronic files of receipts, purchase contracts and financial documents, your business must have a system of keeping the paperwork in order.

3. Accounting Method

You will have to decide which type of accounting method to use for your business and then apply this method consistently. Cash basis accounting means that income is recorded when funds are received instead of when the income is earned. Likewise, expenses area recorded when they are paid out instead of when they are incurred.

Using the accrual basis means reporting income and expenses as they are earned even without the actual exchange of cash for goods and services. Expenses are recorded at the time they are made instead of when they are paid off. The accrual basis is the required method for businesses that handle inventory and bigger businesses generating at least $1 million in annual revenue. Professionals in business for themselves such as lawyers, doctors, accountants and others are exempt from this requirement regardless of their annual income.

4. Document Templates

Create a professional impression by making sure that you have the requisite forms needed to process and complete transactions.

Depending on the type of operation, you may need templates or actual documents for purchase orders, receipts, invoices and similar paperwork. Make sure that your forms include your contact information such as physical address, email and phone numbers.

Many templates are available online, allowing you to customize the forms as needed. You can also take the traditional route, which is ordering customized forms from a printer.

5. Hiring an Accountant

Your accounting needs will change as your business grows, but as a startup, it may be helpful to have an accountant to guide your set-up process. You may prefer to do the bookkeeping yourself to save costs, but at least, have a professional assist you with setting up and defining accounts for easier recording, tracking and data analysis.

Accounting services for new businesses may also include assistance for filing incorporation papers, obtaining the necessary business licenses, establishing policies, procedures and guidelines for record keeping and system implementations. Your accountant may also help you choose the accounting software that is most suitable for your company. As the business grows, the accountant’s role may change to include payroll and tax preparation, analyzing data and preparing financial and management reports. Once you start to see recurring revenue

6. Tax Obligations

It is important to comply with applicable tax laws at all times. Your company’s tax obligations will depend on whether your business was set up as a sole proprietorship, partnership, limited liability or traditional corporation. You may have to set aside a certain amount for withholding taxes or make quarterly estimated tax payments.

If your business revolves around inventory, you may have to collect point-of-purchase sales tax from customers. Apply for a sales tax permit for your area, and prepare to remit amounts collected to the taxing authority for your area. These taxes should be remitted monthly or quarterly within the given time frame or risk facing penalties.

Starting a business is stressful, but having your accounting processes in place will minimize record keeping headaches and ensure more efficient management of your business.