8 Basics of Accounting for Entrepreneurs
As your business launches, there are certain elements that you need to put into consideration such as accounting. The financial aspect is very important. Understanding why it is vital to have it in order to benefit your venture greatly.
Adopting proper accounting practices when you launch your business is key to succeeding as an entrepreneur. You don’t need to be an accounting expert to oversee your business finances. Aligning with the next steps will help you:
1. REGISTER YOUR BUSINESS
The first step in getting a hold of your finances as an entrepreneur is to register your business. You’ll need to make sure you have all the necessary business licenses, which vary by industry and state. This business license guide can help you find out what you need. You can choose from a few different business models to register your business, including:
- Sole Proprietorship: An unincorporated company with only one owner. Sole proprietorships are a good option for entrepreneurs because the registration process is easy and affordable. As a sole proprietorship, there’s no separation between you and your business. You can file your business taxes as part of your personal income tax return. A potential downside, however, is that you can be held personally liable for business debts.
- Limited Liability Company: A LLC combines features of a sole proprietorship and a corporation. This is where you’re protected in the case of company debts, but you have flexibility with filing your taxes. This is done either through your personal income tax or a separate business filing.
- Partnership: If you have a business partner and want to share ownership of the company, this is a good option. Each partner is required to bring something to the business, whether it’s skills, money, or property. You’ll want to have a formal partnership agreement in place to outline your roles and expectations.
- Corporations: Corporations are the most complex business structure and they’re expensive and time-consuming to set up. A corporation is a company that is legally allowed to act as a single entity. It is considered a single taxpayer. Some of the benefits of launching a corporation include lower tax rates and greater legal protections.
2. OPEN A BUSINESS BANK ACCOUNT
As an entrepreneur, you need to separate your personal, and business finances. If you don’t keep your finances separate, you can easily lose track of business expenses. This possibly complicates your accounting system and you could even run into legal trouble. The easiest way to keep your business finances apart is to open a business bank account. A business checking account may be all you need to start out as an entrepreneur.
3. CHOOSE AN ACCOUNTING METHOD
When it comes to accounting methods for entrepreneurs, you have two options to choose from. Once you choose your accounting approach, you’ll want to stay consistent with that method. This makes things easier when you file your taxes. The two types of accounting methods are:
- Cash-Basis Accounting: Cash accounting is the more straightforward of the two methods. It involves recording revenue when you receive it and recognizing expenses when you pay them. It’s the most popular option among new entrepreneurs because of its relative simplicity.
- Accrual-Basis Accounting: Under the accrual accounting method you record revenue when it’s confirmed. Expenses are recorded when they’re incurred rather than when money is actually exchanged. It gives a better reflection of your business’s overall income versus expenses than the cash accounting method gives.
4. DEVELOP A BOOKKEEPING METHOD
You’ll need to make sure your books are in order by adopting a consistent bookkeeping method for your business. The bookkeeping process involves tracking all your business transactions, from the revenue you earn to the expenses you incur. You’ll need to develop a bookkeeping method that you can stick with. This will help you to track all the money coming into and going out of your business. Here are some options for bookkeeping methods:
- DIY Bookkeeping: When starting out as an entrepreneur, you can get away with tracking all the business transactions using a spreadsheet. However, as your business grows, you might not have the time to manage all your bookkeeping manually.
- Cloud-Based Solution: For a small fee, you can subscribe to a cloud-based accounting solution. This can help you manage your bookkeeping online, and can even connect to your business bank account to track transactions automatically.
- Part-Time Bookkeeper: If you don’t want to worry about your bookkeeping and prefer to outsource the job to someone else, you can hire a part-time bookkeeper to manage the workload for you.
- In-House Bookkeeper: If your business grows to the point where bookkeeping becomes a full-time obligation, you can opt to bring on a full-time bookkeeper in house.
5. TRACK YOUR EXPENSES
As an entrepreneur, you’ll need to track all your business expenses to create an organized record for tax season. It’s important that you develop a filing system for all your receipts and other paperwork, either by storing physical copies or developing a digital filing system. Some of the paperwork you’ll want to track includes:
- Bank and credit card statements
- Receipts from business meals, parking, travel, supplies, equipment, etc.
- Office bills, including utilities, internet, phone, etc.
- Financial statements
- Tax returns
6. PICK YOUR PAYMENT METHODS
Once your business is off the ground, it’s time to get paid for your hard work. To do so, you’ll need to decide which payment methods you’ll accept from your clients. If you’re just starting out you can stick to simpler payment methods, like checks and cash. But if you offer more flexible payment options, you may find that your clients pay you faster. Here are some other options to consider:
- Credit Card Payments: If you have a brick and mortar shop, you may wish to set up a point-of-sale (POS) system and accept credit and debit payments in person. You’ll have to pay transaction fees every time a customer pays with a credit card.
- Mobile Payments: Mobile payment providers like Square are a great option for entrepreneurs who conduct their business outside of an office. You’ll get a mobile card reader that attaches to a smartphone and pairs with an app to accept payment from anywhere with an internet connection.
- Online Payments: Online payments are a convenient payment option that many of your clients will be familiar with. You can either set up online payments through your website using a third-party provider like Stripe, or you can accept online payments directly through your cloud-based accounting software.
7. LEARN YOUR TAX OBLIGATIONS
As an entrepreneur, filing your taxes can be a bit daunting, especially if you’ve never done it before. Your tax obligations will depend on how your business is registered, since the requirements for a sole proprietorship are quite different from those of a corporation. Here are a few key tax obligations you’ll want to prepare for as an entrepreneur:
- Self-Employment Tax: All self-employed workers need to pay the self-employment tax to cover your Medicare and Social Security obligations.
- Employment Tax: If your business has employees, you’ll need to pay employment tax according to the Federal Insurance Contributions Act (FICA), to contribute to your employees’ Medicare and Social Security coverage.
- Income Tax: The filed income tax depends on the business set up. If you run a sole proprietorship, you can file your business taxes as part of your personal income taxes. If you own a corporation, you’ll need to file separate tax returns for your company.
- Sales Tax: The sales tax needed to charge clients and collect for the government is determined at the state level. Do your research to find out how much sales tax you need to collect and when you need to submit it to the government.
8. MASTER FINANCIAL REPORTING
Financial reports are crucial for entrepreneurs because they track how your business is performing. They can help you make informed decisions about the future of your company and show you how to become more efficient. The major financial statements entrepreneurs should be familiar with are:
- Income Statement: An income statement shows the revenue, expenses, and ultimately the amount of profit or loss generated by a business s, for a specific reporting period.
- Balance Sheet: The balance sheet reports a business’s assets, liabilities, and equity at a specific point in time. In other words, it shows what a company owns and what it owes on a single day.
- Cash Flow Statement: Your cash flow statement offers a summary of the cash and cash equivalents coming into and going out of your business.
Insourcing an accounting team not only saves you time and money, but it also gives you standardized work. With SupportCPA you get a dedicated team that works effortlessly in making your systems work for you.