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Accounting Practices for Startups

When developing a start-up business it is essential to begin thinking of the bookkeeping groundwork you will put into place at the very beginning of things.

Choosing an Accounting Software Package

In the beginning you might use a simple spreadsheet to track your business income and expenses. At some point, though, you might want to think about adopting a small-business accounting software package like Sage Peachtree or QuickBooks to keep track of your business's financial transactions. As a new business grows, the paperwork involved in paying expenses and collecting income can prove too overwhelming without the help of a reliable and accurate financial database. A good small business accounting software will also make tax prep easier, inventory recordkeeping, and payroll records.

Certain bookkeeping packages work great for real estate/real property, and there is other accounting software that works well for project accounting. While generalized bookkeeping software is commonly less expensive, and the niche-specific bookkeeping software is ordinarily more expensive, but industry-focused bookkeeping software may well end up saving you time and money in the end.

Which Accounting Method Will Work Best for You

Large corporations are required to follow GAAP, or the Generally Accepted Accounting Principles. Startups and small businesses, though, can exercise more freedom in how they keep financial records. When you are a small business owner, you might prefer the cash method of bookkeeping.

As your business grows, however, you might choose to adopt a more sophisticated financial recordkeeping method. Now at this point, you may have to shift to the accrual method of accounting. With this method, you record income when you have the invoice, rather than waiting to get paid for that service. You recognize a business expense when you receive a bill from a supplier, rather than waiting until you pay the supplies. This method of accounting is preferable because it allows you to more closely match the income your business generates to the expenses you incurred to earn it. For example, you may have received an advanced cash payment before you provided services to a customer. You may want to wait and record that amount as revenue during the year you actually provided the services, rather than the year in which you received the cash.

As for taxes, the Internal Revenue Service is very flexible in allowing you to choose an accounting method. According to its rules, you may use any method as long as it clearly reflects income and expenses and you treat all items of income and expenses in the same manner from one year to the next. However, when you purchase, produce, sell merchandise, special rules apply on when you'll have to use the accrual method. If your business handles inventory in any way, you should likely consult your accountants to decide when to use the accrual method and when not to.

Creating a Budget

A lot of the small business accounting software packages allow you to design a budget, either based on the past year’s records or completely from scratch. Creating a budget is necessary considering that it will set the bar for your standards of performance. In time, you should compare your businesses' performance versus the budgeted amount. This analysis will inform you if you can anticipate meeting your year's goals. This can help keep businesses profitable.

Rating Your Performance

And you should choose an accounting software that allows you to compare the current year financial statement with those of the previous year. This can help you set goals, discern trends, gain insight.

By way of example, if your revenue increased by 10-percent in in the present year over the prior, but, to do so, your expenses increased by 30-percent, this suggests some inefficiency in your business model. Are you investing in assets with the greatest return on investment? Or, did you forget to provide certain invoices? On the other hand, if your revenue increased by 30-percent for 2011 over that from 2010, but your expenses only increased by 10 percent, this suggests that your business model could be super efficient. Be sure all expenses recorded? Were some revenue items duplicated? Or did you absolutely manage to increase your return on investment? It is important to get to the bottom of these trends in order to determine an accurate picture of your business’s performance and to make crucial financial decisions.

Consult with a Certified Public Accountant to discuss the specifics of your industry and there are more resources at
 Self Employed Tax Guide.



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