Bookkeeping, by definition, is the process of recording a company’s financial transactions and history.
It is the first step in the broader accounting process which involves reporting and analyzing data to make business decisions.
Many entrepreneurs find that they are wearing too many hats as it is and they just
don’t have time to dedicate towards proper bookkeeping.
However, bookkeeping is crucial for any startup for several reasons:
First and foremost, it helps companies make better financial and management decisions. Proper bookkeeping can help you understanding the key financial benchmarks that determine whether your company is operating successfully or not. Bookkeeping also helps with managing cash flow and answering questions such as: who owes you money, who do you owe money to, when should you send an invoice, when are your bills due, etc.
Second, consistent bookkeeping will help minimize the headaches when it comes to preparing your annual taxes. If you can provide your accountant with a well maintained balance sheet, cash flow statement, and profit and loss statement he/she will be able to dedicate their time towards making sound tax decisions rather than fixing problems with the financial statements.
Third, sound books will help you with planning your business’ next steps. By understanding key benchmarks such as cost to acquire a new customer and cost of goods sold you can begin to make educated decision about the best way to grow your business.
Fourth, investors require solid books. The frequency of which you report financial records will be determined by you and your investors. In any case, the more automated and uniform your financial reporting systems are for reporting crucial financial information the happier your investors will be. It will show to them that you understand your cash flow needs and the business key performing indicators that will allow the business to scale.
Furthermore, when raising capital, sound records will instill confidence in your investor and significantly increase your likelihood of receiving a check.
Now that you are on-board with the important of bookkeeping for a startup, let’s look at 10 of the most common types of bookkeeping accounts for a startup or any business for that matter:
Cash:
This is your most basic account and it tells you exactly how much cash you have in your
bank. Many businesses will monitor their cash account by separating cash receipts and cash
disbursements.
Accounts Receivable:
Not all companies will have accounts receivables. Receivables represent
money that is due from customers and is therefore only applicable to companies that sell
products or services prior to collecting payment or a portion of the payment upon the time of
sale. Tracking receivables will help you understand cash flow and keeping a detailed list of your various receivable accounts will help you stay on top of billing and invoices.
Sales:
The sales account is closely tied to cash and accounts payable but provides slightly
different insight. Sales is where you track anticipated incoming revenues from what you sell.
Tracking sales accurately will help you understand whether your business is on track to meet
predetermined metrics and benchmarks.
Accounts Payable:
Similar to accounts receivable, accounts payable represent money that you
owe to your suppliers and vendors for products and services that you did not pay for entirely
upfront. Tracking your payables will help you with managing cash flow, ensuring that you don’t
pay your bills twice, and may even make you eligible for discounts if you are able to pay early.
Inventory:
While inventory is not equivalent to cash or accounts payable it is certainly an asset on your balance sheet that needs to be carefully accounted for and tracked. Properly managing your inventory will help with understanding cash flow and anticipated production runs.
Loans Payable:
You loans payable account tracks the amount of capital that you’ve borrowed, how much you still owe, and how much is due in the next billing cycle.
Purchases or Cost of Goods Sold:
This account helps you understand the cost of delivering your product and service and when subtracted from your Sales account you end up with gross profit.
Payroll:
Payroll is the biggest expense for most businesses and should be monitored closely. Maintaining an accurate payroll account will pay dividends when it comes to tax and
government reporting requirements not to mention understanding your personnel expenses.
Retained Earnings:
Retained earnings are simply profits that are not paid out to owners or shareholders. Retained earnings are cumulative, or a running total, and demonstrate the profits that are reinvested back into the business.
Owner’s Equity:
This account simply tracks the capital investment that the owners’ have put into the business. This account is particularly pertinent if there are multiple owners who have put in disparate amounts of capital.
