Easy to Understand Accounting System for Start-ups

No matter what industry you are in, the lack of an accounting system can cause a lot of problems for start-ups, as it can for any size of organization. It may not be the exciting part of your endeavor but it is one of the most crucial. Accounting tells you which areas to focus on, where to apply your effort and how to best leverage your resources. As an entrepreneur, it is your responsibility to keep track of the money that comes into your business and how it is used.

You may wonder how you should keep up with these numbers, and what you should keep an eye on. It is not an easy task to oversee everything, especially when you are just getting started and there are many other things to worry about. But it is necessary to start somewhere. If you have no idea where to begin with, here is a simple explanation of an accounting system for start-ups.

What is an Accounting System?

Accounting system is a structured process to track and analyze business transactions that allows the entity to make sound financial decisions. As business transactions are performed, your accounting structure is responsible for converting the raw data into meaningful and useful financial information about the business. 

Past accounting practices were tedious and time consuming to put into place. Thankfully, now that we are living in an automated age, it allows organizations to store financial records digitally. Accounting systems have evolved enough to allow all the data to be easily inputted, analyzed, and interpreted from anywhere as long as you have access to a computer or mobile phone – saving start-ups from having to go to such great lengths for manual data gathering. In fact everything about accounting is available at your fingertips!

Debit and Credit Rules

The first thing that you need to understand is how the accounting equation works. It is written as follows:

Asset = Liability + Equity

Assets are valuable resources that your start-up owns, liabilities are unpaid financial obligations or debts, while equity represents an amount of money that would be returned to founders and investors when all assets have been liquidated and all liabilities were paid off in case of acquisition. The accounting equation makes sure that the books are balanced. In other words, all entries made on the debit side would have a corresponding entry on the credit side. 

• • • Debit gives a result of increase in assets and a decrease in liabilities on the financial records of your company.
    • Credit gives a result of decrease in assets and an increase in liabilities or equity on the financial records of your company.

In a personal bank account it is a given that balances are increased by credits and decreased by debits. But, in accounting principle this is actually reversed.

Types of Accounting Record

The first step in any accounting process is identifying transactions. Your start-up will have different kinds of transactions in one accounting cycle and record keeping can help you to track various business activities that occur throughout the year, for example if you travel for work. With that being said it is crucial to set up accounts to record all financial information. This includes the following:

The revenue of business is the total of the income it receives from customers in return for goods or services rendered. For instance, a shop that sells t-shirts might have monthly revenue of $10,000, which means that for every month it sells $10,000 worth of t-shirts. While expense refers to a cost that is incurred in order to continue your day-to-day operations. This would include office rent, office supplies, legal services, advertisements, subscriptions, employee salary, and etc.

Assets are not necessarily all physical objects. It includes a wide variety of things: the money that your start-up has, the materials you use, and any other item you currently have access to. Examples of assets include cash, cash equivalents, inventory, accounts receivable, land, buildings, machinery, patents, brands, trademarks and copyrights.

A liability is an ongoing obligation of a start-up to an outside party, such as a bank, a creditor or a customer that must be settled. Liabilities are generally classified into current liabilities and non-current liabilities. A usual current liability are accounts payable and examples of non-current liabilities include mortgages, bonds and loans. And lastly, an equity is the real value of a business. This refers to all the total assets minus debts or liabilities.  Equity can also be expressed as a company’s share capital and retained earnings. For example, say a start-up has a share capital of ₱10 million. Then, it operates and makes a profit of ₱2 million. At the end of the year, they decide to reinvest this profit into their company. Now, their share capital will be ₱12 million.

Major Accounting Reports

At the end of each accounting period, you have to prepare three types of documents that compile all your financial transactions. These are referred to as financial statements. It includes the balance sheet, a statement of the financial position of a business presenting a summary of its assets, liabilities and equity. The balance sheet is like a snapshot of a company’s financial health. Second is the income statement, which also known as a profit and loss statement. It is a financial statement that shows a company’s revenues, expenses and profits for a specific period of time. On the other hand, cash flow statement is a financial statement that summarizes a company’s inflow and outflow of all cash transactions. This statement shows whether your start-up is generating cash through its operations or not.

Key Takeaway

In simple terms, accounting is the practice of recording, organizing and analyzing financial information about your start-up. Keep in mind that it is only an aid to management, and is not a replacement for business judgement. The proper use of accounting information is to provide decision makers with clear, accurate and timely information. This is done so they can make good business decisions. Setting up an accounting system is time consuming and difficult. However, it is essential to keep your start-up on a firm financial footing.