What to Know About Accounting When Starting a New Business
Accounting is the process of recording, maintaining, and communicating financial transactions pertaining to a business. Your small business depends on good accounting. Without accounting, you won’t be able to keep track of your business, you won’t know whether it is successful or not, and you will likely have difficulty when it’s time to file income taxes. You will also have a difficult time attaining bank loans and investors, because they often require detailed financial information.
Without a clear financial picture, it can be nearly impossible to move your business forward. Here is what you must know about accounting when starting a new business.
Managing your Money
Always keep business and personal finances separate. Separating business and personal banking saves you time from having to sort business transactions from personal ones. It also creates a clear audit trail for your business.
Bookkeeping
It is essential that you establish a bookkeeping system for your business to record and categorize financial transactions for your small business. In order to maximize profitability, it is important that you understand where money is coming from and how it is spent; this allows for effective decision-making for your business.
Keep receipts and paid invoices as you may need them if you are audited by the IRS. Plenty of small business expenses are tax deductible. But, in order to claim an expense as a deduction on your tax return, you’ll need to keep a record of the expense.
Without a proper record keeping system, you may lose sight of important business details, leading to problems with serving your clients.
Financial Statements
Financial statements are important documents that show the financial status of your company. Monitoring the financial health of your business can make the difference between failure and success. Financial statements are decision-making tools.
There are three primary financial statements: the balance sheet, the income statement and the cash flow statement.
The Balance Sheet: summarizes assets, liabilities, and equity. It reflects how much you own, how much you owe others, and how much is left for the owners.
The Income Statement: also known as the profit and loss statement, shows the profitability, or lack thereof, of a business over a set period
The Cash Flow Statement: how much cash you have to pay bills and debts. It also shows how and where you’re receiving and spending money.
When requesting a business loan, potential lenders will request your financial statements. A balance sheet will show a creditor how much debt you are carrying and how much money is flowing in and out of your business. In addition, investors are more likely to look at your financial statements to decide whether your business is a worthwhile investment.
Prepare for Tax Season
First-year small business owners may feel overwhelmed by tax season or tax guidelines. Track everything. It’s important to make sure you have all the information you, or your tax preparer, will need when tax season arrives. When the deadline for filing annual taxes approaches, you do not want to be scrambling to get all of your financial data together or filing with inaccurate information which could end in potential fines, penalties, or prosecution. At the very minimum, make sure you have the following documentation:
Records of all income, including 1099s received from clients
Receipts for business-related expenses
Past tax information, including your quarterly filing paperwork
While these tips are a good starting point, it's not a substitution for working with an experienced tax professional. Being prepared will save you time and money.
Bookkeeping, financial statements, and tax filing sound too overwhelming? CPA by Choice is here to help. We’ll manage your books, prepare your financial statements, and even handle tax filing. We are available to answer your questions, feel free to call us or send us a message.