Starting a business comes with many headaches, and most have nothing to do with selling products and services. A huge responsibility of a business owner is managing a business's situation—building a culture, training employees, and, most of all, keeping the company's financial situation in good standing.
Since startup companies have little to no assets, they tend to go the simpler route with their financial records. Many startup owners prefer dealing with cash-basis accounting, better known as single-entry bookkeeping (which we'll discuss more later).
While this is a good way to manage accounting for your startup, you can't depend on it forever.
If your business grows, you might have to expand your accounting to cover the new areas of your financial business structure, like assets, liabilities, and equity. The IRS even mandates that companies with annual gross sales of over $5 million cannot use single-entry accounting.
Eventually (with enough hard work and luck), your business will grow, and along with it must grow your financial statements, financial transactions, and financial records—basically your whole accounting system. You'll need to make a choice: go big or go home.
In general terms, bookkeeping is the process of accounting for a company's business transactions. Bookkeeping organizes business transactions and turns them into records that reflect the company's financial situation, which completes the accounting process.
Financial records are vital in keeping businesses afloat. Without bookkeeping, businesses would be in financial darkness. With no written or recorded financial information, any financial decision or transaction would have to be closer to a guess than a concrete decision. Simply put, a business without proper bookkeeping in place will not thrive, let alone survive.
That said, not all forms of financial management are made equal. For example, startup accounting and bookkeeping differ from that of large businesses—it all falls on what is necessary and what your business prohibits you from excluding in a financial statement.
Essentially, there are two types of bookkeeping, both with their own advantages and disadvantages.
Single-entry bookkeeping is the simplest form of accounting and bookkeeping. With single-entry bookkeeping, you simply state income and business expenses—usually accompanied by a brief description of the financial transaction and its date—against each other on a table and calculate the difference as your business's cash balance. This is also called cash accounting.
Accounting for startups and small businesses usually starts with single-entry bookkeeping for several reasons. One is because single-entry bookkeeping is much cheaper. You can do it on cheap accounting software or, if you're frugal, you can even do it on a piece of paper with a pen or a pencil.
While single-entry bookkeeping falls under generally accepted accounting principles, it isn't ideal, especially for growing businesses. This is due to single-entry bookkeeping having entries lacking detail. In addition, since single-entry bookkeeping does not specify the nature of income and business expenses, it cannot produce a balance sheet—an essential part of your company's financial health. It is also more prone to error and is unacceptable for taxes.
If you're counting on your business growing, you will have to consider double-entry bookkeeping for your company's financial data.
Single-entry to double-entry bookkeeping is like Little League to the NBL. While single entry bookkeeping can get you an idea of your company's financial data, double-entry bookkeeping gives you the whole picture.
With double-entry bookkeeping, you include debit and credit or the increase and decrease of accounts in different situations. For example, debit can increase assets and decrease liabilities, while credit can increase liabilities and then decrease assets.
Single-entry bookkeeping does not have debit and credit and thus cannot specify the nature of accounts. A classic example of this is loans. In single-entry bookkeeping, the money produced from loans is inserted directly into income; in double-entry bookkeeping, the loan is tagged as a liability—a debit—adding context to your financial report and leaving you with much more accurate accounting.
Double-entry bookkeeping takes notes of assets, liabilities, and equities, in addition to everything a single-entry system records. This can be used to produce a balance sheet. Large businesses prefer double-entry bookkeeping because it is more contextual, and it becomes easier to account for vast assets and put them into financial records.
Eventually, large businesses will move to accrual accounting, something double-entry bookkeeping makes easier. By then, their finances will operate more on a schedule instead of relying solely on the income entering the company.
Now that you know the two types, it's time we dive into the tasks which make up bookkeeping, some of which you might probably be doing already. Here are some bookkeeping tasks to do on a weekly and monthly basis.
Weekly bookkeeping tasks are mostly about records. Every week, you must input the week's transactions and prepare them for evaluation at the end of the month. Here are some of them.
One of the first bookkeeping tasks you must do weekly is to record any type of financial transaction made in the company's name: mainly income and expenses.
Most startup businesses do this in a journal, but it's ideal to do it on a spreadsheet or bookkeeping software since it's safer to store it digitally than have it out in the open.
Of course, it's not enough that you'll simply jot how much money is going in and out; you'll also have to mark transactions differently to ensure an accurate accounting of your finances.
For example, while sales and loans both bring in money for the company, only sales can be labeled as assets in double-entry bookkeeping because loans have to be paid back in the future and are thus liabilities.
After jotting your transactions in a journal or typing them into bookkeeping software, you'll want to file them for later reference. Physical copies of receipts should be shelved and digitized to avoid losing them.
Digitization is important, especially in today's ecommerce world, where most transactions are done electronically.
Monthly bookkeeping tasks are important for your company's financial health and stability. The tasks you'll have to be doing on a monthly basis are about maintaining your company's financial standing and, more importantly, looking into its future.
Reconciling your accounts is, basically, double-checking. This helps maintain the integrity of your records and spot any inconsistencies that could be signs of fraud or theft within a company.
Accounting is not only recording finances but also predicting how much your company has in the future. By readying your invoices, you can come up with a realistic income you can expect for the following month.
Sometimes, we let unpaid invoices slide. While it is normal to have to follow up on outstanding invoices, this should be an urgent priority. Letting unpaid invoices go robs your company of the money you were expecting from a sale and disrupts the harmony of your finances.
Following up on outstanding invoices can lead to them being paid which procures additional income for your company.
While income adds assets to your business, expenses add liabilities, and paying them or leaving them unpaid could determine your net profit margin ratio for the next month as well as the overall health of your business.
Clearing your monthly bills leaves you with less debt going into the next month, and less debt means more profit for your business. It can also help monitor how much you owe in business taxes before you submit your next tax returns.
Once all monthly tasks have been settled, you are left with your company's financial status, which you will then evaluate (ideally, with the help of an accountant). You will see how much your business has profited, how the cash flow is doing, how much there is to spend, or worse, how much you have lost and how much you still owe.
Regardless, it is important to evaluate your finances because this is how you can decide on your company's future, and the steps to take to help it grow.
Bookkeeping can be difficult, especially for startups, so if you want to go big with your business, it's time for you to upgrade your company's bookkeeping and accounting processes.
Unloop is one of the best accounting services on the market, and, luckily for you, we offer bookkeeping services, too. At Unloop, we can ensure you save money by having accurate records. We also handle accounts payable, forecasting, payroll, and tax services.
Book a call with us, and see what Unloop can do for your business!
Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.