How to Set Up an Accounting System at Your Startup Business

Let’s paint a picture—a familiar image for startups. You have an innovative idea for a business like a product, service, or retail store. After months of planning, fretting, blood, sweat, and tears, you’re ready to launch. However, there’s one mundane task that can make or break your dream—accounting.

Many new businesses ignore or fail to properly establish an accounting system causing headaches, or even disaster, down the road.

Accounting Basics for Business Owners

In a nutshell, an accounting system is a method, process, or technique used to manage expenses, income, and other business finances. Accounting helps track and monitor every financial event or transaction. In a way, it’s the “heart” of your business.

An accounting system offers full financial tracking. It helps you monitor your cash flow, allowing you to assess profits and liabilities. Additionally, a reliable financial monitoring system generates a profit and loss statement and balance sheet every month for financial reviews and analysis.

Five Steps for Setup

When you’re ready to design your system, there are several steps you should take to set up accounting operations for your startup business.

#1. Choose an Accounting Method (Accrual Versus Cash)

First, pick an accounting method: the cash method or the accrual method. For small businesses, the cash method makes a lot of sense—it allows you to recognize your expenses as you pay bills. This process enables you to monitor profitability easily.

On the other hand, the accrual method is ideal for large or small businesses that use invoicing. This method records revenue or expenses when a transaction occurs. For startups, this strategy can render profit monitoring more challenging.

#2. Open a Bank Account for the Business

You’ll then need to open a bank account for making and receiving payments. Even if you use online payment systems, such as PayPal, Square, and Stripe, a bank account is still necessary. A business account is essential when paying employees or handling large transactions.

#3. Set up a Bookkeeping System

Your accounting system must also have a bookkeeping component for recording financial transactions and information. This database involves managing and maintaining your accounts receivable and payable, bank reconciliations, and a general ledger.

You can record this information manually using spreadsheets or record it digitally using a software product. Your system should have a chart of accounts (COA) unique to your business.

#4. Set up a Payroll System

A payroll system is essential in managing employee salary and tax operations. It allows you to calculate wages, withhold taxes, track work hours, pay duties, and print checks.

You’ll need to get an Employer Identification Number (EIN) from the IRS by filing Form SS-4. Some states require state or local ID, so be sure to find out if yours does. Ensure all your employees and independent contractors fill out W-4 and W-9 forms, respectively. Lastly, a proper payroll system integrates clear employee compensation terms.

Your business can use an in-house or outsourced payroll system. Whatever your choice, know you’re responsible for reporting and paying payroll taxes.

#5. Determine Your Tax Obligations

Your startup business must meet federal, state, and local tax obligations to avoid legal issues. You need to pay taxes and keep yearly accounting records. Start by choosing a reportable year—most businesses opt for the calendar year. You can always change your tax year later.

You can opt for the calendar, fiscal, or short tax year. The calendar year is great if you don’t have unique accounting needs, while the fiscal year is ideal for preventing the accounting cycle from ending in December.

Different taxes are required as a business, including income, employer, excise, estimated, and self-employment tariffs. Each category has specific qualifications, rules, and IRS forms.

Simplifying Startup Accounting 

While you can do the accounting yourself, hiring an accountant, outsourcing financial reporting to an outside service, or using a software tool like Quickbooks can make things easier. As a startup, these options allow you to focus on growing your business, leaving finances to a trusted service provider.

For example, if you hire startup accounting services, they can help develop foundational business habits. Specialists also advise on different financial matters, including taxes, employee salaries, and investment capital.

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Start Strong: Streamline Your Accounting

Proper business accounting is essential for any startup. Bear in mind that many startups don’t last beyond five years due to several reasons, but particularly finances. As you start your business, it’s vital to invest in a sound accounting system that provides a clear view of your business’s financial health.