THE ESSENTIALS OF STARTING AN ACCOUNTING FIRM: KEY CONSIDERATIONS AND REQUIREMENTS
Accounting may not be the most exciting subject when starting a business. It’s reminiscent of complicated spreadsheets and hours of invoice retrieval. But your business depends on good accounting. You start a business to make money — or at least to run a sustainable business — and you would never have gotten there without tools like balance sheets, tax records, and banks. Books or forecasts.
For many entrepreneurs, Accounting Finance can seem daunting. You may have started with a great idea for a product or service but not for the day-to-day needs of running a business, such as accounting. To help you overcome this hurdle, we’ve reached out to Ashley Christenson, tax manager at Tanner LLC, a local accounting firm, to understand better how to start accounting for your business. Here are seven things she says you need to know.
The most basic starting point is simply knowing the definition of accounting. Christenson stated this definition:
“Accounting is the process of recording financial transactions related to a business.“
The accounting process includes consolidating, analyzing, and reporting these transactions to supervisory authorities, regulatory authorities, and tax collectors.
According to Christenson, accountants record all of your company’s financial information. Without an accountant, you won’t be able to track the progress of your business, you won’t know if it’s successful, and you could end up in trouble with taxes. You will also find it difficult to get loans from banks and investors, as they often require detailed financial information.
With that, let’s dive into seven things you need to know about accounting when starting a business.
- TRACKING YOUR INCOME AND EXPENSE (INCOME REPORT)
Christenson says: “If you are starting a business, you may want to make money, and it is very important that you have a system for recording your income and expenses. The first decision you must make is how you want to save these. You can choose between Excel documents, Google sheets, QuickBooks, or another tool, depending on the complexity of your business transactions. You also have to choose if you want to do it yourself, outsource the work, or if you want to hire someone else.
You will want to keep records as soon as you start your business. But don’t wait, Christenson says, because you’ll regret it when you eventually need them, and you’re bound to find documents and information that aren’t easily available anymore. You can then consider hiring an accountant to handle your accounting needs or periodically check your records to see if anything is wrong. “We all make mistakes, we’re human,” Christenson said. His company has four levels of review of tax documents before they are sent to the IRS to ensure that multiple people have reviewed everything.
When keeping records, be sure to keep your original receipt. Yes, you will need it. If the IRS audits you, they want to see your receipt, not your Excel file. Christenson recommends that businesses keep their receipts until the statute of limitations on their tax return expires. Then it’s safe to throw them away for tax purposes.
- KEEP TRACK OF YOUR ASSETS, LIABILITIES, AND ALL EQUITY (BALANCE SHEET)
A balance sheet is known as a statement of your assets, liabilities, and business capital. Accountants use this standard-defined formula to create a balance sheet:
Assets = Liabilities + Equity.
Christenson said that an asset is anything of value that your business has, such as cash, product inventory, computers, and more. Your business owes liabilities, such as a loan or credit card debt. Equity is the rights that the owner has over the assets of the business, or in other words. It is the capital invested by the owner in the business and its accumulated profits.
You may only use the balance sheet a little at first, but it will become very important over time as banks and investors often need it when looking at your business. You may also find them useful as they always provide an overview of your business. “It will give you a good idea of where your entire business is located,” says Christenson.
- HAVE A SEPARATE BANK ACCOUNT/CREDIT CARD IN THE NAME OF THE COMPANY
If you have a business, you’ll want to create separate accounts for your banking, credit card, and similar needs. For example, do not use your credit card to purchase supplies. Likewise, do not deposit earnings into your personal bank account. Keep these separate to keep your books organized and protect yourself.
Keeping the accounts separate will help you with tax or legal issues. In addition, they allow you to clearly define where your business ends and where your finances begin. If these are combined, the difference may not be known, and you may be personally liable for the business and other debts. If that’s not reason enough, keeping separate accounts is usually required for a bank loan.
- SAVE TAX
Yes, you will have to pay tax. You should Start planning for it. The tax laws that certainly apply to your business depend on the nature of your business, where you are located, and the items you sell. You must research and talk to an accountant to determine what rules apply. Whatever they are, you will have to file your taxes.
In the first few years, many startups will lose money. In this case, you won’t have to pay income tax, but you’ll still have to file a tax return for your business. Once you start earning, you will have to start paying income taxes. It can come as a surprise if you need more preparation for it. You want to know this in advance so you are prepared.
“When you start making money, save it for taxes,”
- THINK ABOUT YOUR SALES TAXES, FILE IF NECESSARY
Be prepared to collect sales tax. The rules are complex and vary by jurisdiction, state, county, and city. As an entrepreneur, it’s most important to know what rules apply to your business and plan for them as you prepare financial projections, set sales prices, and do other tasks. Your business may not be restricted to sales tax in certain jurisdictions, depending on your product and where it is sold.
Christenson says sales tax can be an expense you can pass on to your customers, so you won’t have to pay for it yourself if you’re prepared. For example, grocery stores typically charge everyone with the cash register sales tax, then they collect all the taxes paid and remit it to the government. But if you don’t plan and bill your customers when you need them, you can pay those taxes yourself when the state agency comes in to claim them.
- PAY YOUR INCOME TAX
Income tax is another tax you should expect. As with other categories, the rules and requirements may vary. You might need to consult an accountant to determine clearly which rules are relevant to your business. One of the factors is the type of business you have. Is it a single owner? Group C? S Corporation? LLC or partnership? Depending on the type, you will declare and pay income tax differently.
For example, if you are a sole holder, you will need to file Form 1040 Schedule C. If you have a limited liability company or multi-member partnership, you will file Form 1065; after that, income and expenses will be forwarded to each owner. The final Schedule K-1 form is reported on Form 1040 if it is an individual owner.
Depending on your business and situation, you may prefer one method of filing taxes over another. Consider taking this into account when deciding what type of entity to form. You’ll also want to consult an attorney to consider the legal implications of each type of entity, as tax implications aren’t the only thing to consider when choosing a business type. You will do yourself a favor if you think about all this before your business grows and becomes more complex.
“Getting off to a good start is super important,”
- BUDGET FORECAST ONLY
As you grow your business, you’ll want to create a budget for your income and expenses and plan how things will go in the Future. But don’t get carried away with your predictions. Instead of planning for ten years, when you hope to become a millionaire, start with next year and five years from now. Be as realistic as possible.
A carefully planned budget can be extremely helpful in growing your business and looking for a place to cut costs. Do you want to increase your income? Please review your budget and start editing things to see what type of difference it makes.