June 06, 2020

Startup Bookkeeping: Basics and Tips

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Startup Bookkeeping: Basics and Tips

Your journey as a business owner starts with having access to reliable financial information. Most people probably think of bookkeeping and accounting as the same thing, but bookkeeping is really one function of accounting, while accounting encompasses many functions involved in managing business finances.

Bookkeeping is a function that keeps your records organized and the proper recording of your business’ financial transactions. Accountants prepare reports based, in part, on the work of bookkeepers. Thus, it is important that your books are done accurately and can be used to prepare reports, file taxes, and analyze finances and make business decisions.

Introduction to Debits and Credits

The first thing we need to do is define two key terms: debit – simply means left and credit – simply means right. Any preconceived notions about the meanings of these two words, which are usually connected to bank accounts and credit cards, should be forgotten. Next, you need to understand three key rules when working with debits and credits.

  1. The total amount of debits must equal the total amount of credits.
  2. Accounts that increase with debits:
    1. Dividend
    2. Expense
    3. Asset
  3. Accounts that increase with credits: 
    1. Liabilities 
    2. Equity 
    3. Revenue 

Journal and Ledger Basics

The journal is a chronological list of all economic events recorded in the accounting records. The Journal entries include the date of the transaction, the account names affected by the transaction, the amount debited to each account, and the amount credited to each account. In addition, it includes a description of the transaction. The accounts that are debited are written before the accounts that are credited.

Startup Bookkeeping: Basics and Tips

The ledger groups all the transactions affecting a particular account together. The ledger reports the account balances. A T-Account is a way to conveniently represent the ledger. A ledger differs from a journal in that only the part of the transaction affecting a specific account is written in the ledger.

Startup Bookkeeping: Basics and Tips

Common Bookkeeping Mistakes

We collected a list of common bookkeeping mistakes that every startup should avoid. Here are some mistakes that can affect the growth of your startup business if you do bookkeeping without professional help:

  1. Having no idea how bookkeeping works

Doing bookkeeping without much knowledge can directly affect the growth of your business. Having basic knowledge about it is not the same as having the ability to manage it all yourself. There are a lot of important concepts that you might miss without the help of someone professional. Therefore, it is better to have a professional help you set up your books and review them every month or quarter to make sure that you have accurate records. 

  1. Not setting up a bank account for business

One of the most common bookkeeping mistakes many startups make is mixing personal and professional finances together. You can be held personally liable for business liabilities in a legal dispute if they can prove you use your accounts interchangeably.

  1. Utilizing cash rather than accrual accounting 

Cash accounting can appear more straightforward, but it is difficult to attain a clear picture of the startup’s financial performance. Understanding the company’s true financial health is much easier when the accrual accounting method is used.

  1. Not setting up the Chart of Accounts properly

Many accounting software will ask you what industry you work in, and they will try to give you a set of accounts to use. Try not to use what the software gives you because the list will be long and confusing. You only need to make accounts that you need to track. A tax specialist or an accountant can help you set it up. 

  1. Not doing your books regularly

We all procrastinate – putting off the data entry side of your bookkeeping will lead to feeling overwhelmed and possibly making mistakes when trying to catch up with all the entries. Don’t keep your records in a shoebox until the tax time comes. Appropriate filing and record-keeping are important – not just for accuracy, but to save you money!

Startup Bookkeeping: Basics and Tips
  1. Not reconciling properly

Now that there is software that is supposedly doing the reconciling for you. Although it does reconcile, you still much check every single bank account to make sure that at the date that it is reconciled to is exactly what the bank statement says. Bank feeds do not always come through correctly, so taking the time to reconcile the business banking accounts with the books is a monthly task that business owners must schedule. This can reveal any errors or areas of concern that require a deeper look. 

  1. Not thinking about taxes

You should never let yourself think that bookkeeping is just for recordkeeping. This function is directly connected to your tax planning and preparation. Remember, the basis of your tax returns is your financial records and if you do not consider this, tax filing might get more stressful.

  1. Not backing up your data

Many startups fail to back up their data regularly. The computer can crash and all the records get lost. Thus, unless you are using cloud software, use the external hard drive and the cloud just to be sure everything is safe, even if your office is flooded or your hard drive is stolen.

  1. Failure to hire an experienced bookkeeper

Doing bookkeeping required a lot of time, especially as your business grows. If you do this independently, you will not only need to put in more time to these functions, but you will be sacrificing other important areas of your business and/or personal life. Hiring a bookkeeper will be more cost-efficient for your company in the long run. It will allow you to have more time to spend on operations and growing your business. Moreover, you will minimize the risk of committing mistakes that experienced bookkeepers know how to avoid.

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Author: Charles Lutwidge

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