Getting accounting right from the moment you start a business is essential to its success. Discover what you need to do to get your small business accounting sorted and running smoothly right from the word go.

Read on to learn about:

  • The difference between accounting and bookkeeping 
  • Accounting methods: accrual and cash
  • Understanding a balance sheet, profit and loss statement and cash flow statement
  • Using online accounting software
  • Regular accounting tasks

What is the difference between accounting and bookkeeping? 

Although you may hear these two terms used interchangeably, they actually refer to two different processes. Bookkeeping is used to describe the day-to-day recording of your business’s financial transactions. Think bank transactions, sales, expenses, cash and sales. Accounting is actually measuring and processing the company’s financial records to assess the financial health of the business and to provide insights into resources and results. 

What accounting method should I use?

There are two basic accounting methods which affect the way sales and debts are recorded — the accrual method and the cash method.

  1. The accrual method

The accrual method means recording transactions when they occur, even if the funds haven’t yet been paid or received. For example, this happens if you let a customer buy goods or services on credit (this is known as Accounts Receivable, ie. money owed to you) or if you buy materials from a supplier on account (also called Accounts Ppayable, ie. money that you owe to a creditor or supplier). In these instances, the tax-point to consider are the dates of any invoices or bills, rather than payment issue or receipt dates. 

The benefit of the accrual method is that it reflects future cash flow and can be really useful as your business grows. Some companies are required by law to record accounts in this way, such as limited companies and partnerships.

  1. The cash method

For small business bookkeeping, the cash method canis often be favoured because it lets business owners record funds as they’re actually paid or received. If you’re just starting your own business,you have a lot to get to grips with and cash accounting is the easiest of the methods to understand.

Small businesses and sole traders with less than £150,000 turnover a year are able to use cash accounting, but if their business scales up, they often switch to the accrual method because it’s easier to track cash flow.

3 main financial statements you need to understand

Understanding how balance sheets, profit and loss statements and cash flow statements work is key to accounting for startups.

  1. Balance sheet

A balance sheet shows the financial position of your startup at any given point. It keeps track of your assets, your liabilities and any equity using this equation:

Assets = Liabilities + Equity

Assets are things the business owns like cash, raw materials and stock. Liabilities include debts, loans and taxes payable. Equity is what your business is worth and is the amount left over after all the liabilities are subtracted from the assets.

  1. Profit and loss/income statement

An income statement is an important snapshot for your business’s financial health and the equation used looks like this:

Net income = Revenue – Expenses

Revenue is the gross amount of money you earn from selling your products or services. Meanwhile, expenses cover other business costs such as marketing, admin costs and goods (direct costs like raw materials and labour) or cost of services (when you sell a product). The net income, also known as the bottom line, is whatever is left over after all expenses and costs of goods or services are subtracted. 

It’s simple: if the final figure is negative, the company has lost money. If it’s positive, it has made money. If you write a business plan, especially if you are applying for funding, you’ll need to include an income statement.

  1. Cash flow statement

A cash flow statement shows how much money is coming in and going out of your business over a given period. It can reveal how well you’re managing your money and is a good indicator of a business’s long-term financial health. It is divided into three sections:

Operating activities

Day-to-day activities that are essential for running the business. For example, the amount the business receives from selling products/services across a week or a month.

Investing activities
These are things you do to grow the business such as buying equipment or other assets. For startups, this figure is often high in the beginning. This is completely normal and creates a negative cash flow but will change as the business grows.

Financing activities

What your company does to get investor financing such as issuing debt, shares or bonds for investors to buy.

Using online accounting software

Accounting for startups should not be difficult and thankfully, the days of huge ledgers where every transaction was painstakingly recorded by hand are long gone. Digitisation has led to a whole raft of cost-effective, easy-to-use accounting software for small businesses. Apps like Countingup not only help you organise your business finances; they shave hours off weekly admin and give you the flexibility to check your accounts from anywhere.

Countingup provides a business account, online accounting software and simplified tax returns in one app, making it very easy to keep control. It automates many of the daily bookkeeping tasks which is an important consideration when starting a business and time is precious.

Online accounting software such as this can also be cost-effective, removing the need for a bookkeeper or accountant. Some businesses still prefer to have an accountant involved and online software will connect directly with them so they can have an overview of your business and file annual returns. 

Accounting tasks to keep on top of

Whether you decide to use accounting software or not, there are tasks you’ll need to do regularly.

  1. Reconciliation

Each week you should reconcile your activity with your business account which means matching transactions with bank statement lines. This is done automatically when using software because your transactions will appear in real-time in your dashboard. You just need to make sure you categorise income and expenses correctly for tax purposes.

  1. Checking net income quarterly

Every three months you should cast your eye over the business’s income statement and assess your net income. If it’s negative, consider ways to increase your income such as reducing cost of goods, cutting expenses or boosting marketing efforts to get more sales.

  1. Compare your income throughout the year

Use your accounting software to look at trends in net income over 12 months. Is it rising steadily? Has it gone down? Are there times of the year when it is particularly high? Checking trends can help you plan for low points in the year, maximise high points and spot problems.

  1. Sorting your tax returns

Filing tax returns with HMRC can be a stressful time though small business accounting software can simplify the process. By keeping track of the three main statements throughout the year you, or your accountant, should have a solid financial picture from which to calculate any tax due. 

Accounting for startups can feel complicated but you don’t need to be an expert to get it right. Having a good knowledge of the main concepts, using the right software and working with an accountant who understands your needs can ensure your business is successful in the long run. 

Countingup is designed for small businesses. With built-in accounting software, automated bookkeeping and simplified tax returns, you can focus on making your dream venture a success. Find out more here

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