Introduction
When you start a business and begin your entrepreneurship, adequate accounting is needed, because it helps you measure your business's financial health, prepares you for future growth, and eases the stress that comes with tax season.
Therefore, as an entrepreneur, you need to understand the essentials of accounting, the benefits of accounting, and the fundamentals you need to stick to. To ease your task, we discuss accounting for entrepreneurs, a complete guide on accounting for entrepreneurs.
Let’s Learn!
8 Essential Steps of Accounting for Entrepreneurs
If you're in the process of starting your business or have just launched it, it's completely normal to feel a bit confused about your business accounting. You might have questions about how to manage your business's finances effectively.
You don't have to be an expert accountant to get started. Instead, check out these 8 key accounting essentials for entrepreneurs and make sure to follow them, to get started:
Step 1: Set Up Your Business
Starting a business means the first thing you need to do is register it to handle your money well. You also need to get the right licenses, which can change depending on your industry and state. Here are business models to choose from:
1. Sole Proprietorship
A sole proprietorship is a simple and cost-effective option for entrepreneurs since it has no formal registration process.
In this type of business, you and your business are the same, allowing you to report business income on your tax return. However, a downside is that you may be personally liable for any business debts.
2. Limited Liability Company
An LLC, or limited liability company, mixes the features of a sole proprietorship and a corporation. It offers protection from company debts, and you can decide whether to file your taxes separately or as part of your income tax.
3. Partnership
Partnership is a good option in which business partners come with unique skills, appropriate money, or property in your business. You should have a formal partnership agreement to outline the roles and responsibilities of each partner in the business.
4. Corporation
Corporations are complex structures that can be expensive and time-consuming to establish.
A corporation is a legal entity that can operate independently and is treated as a single taxpayer. You get the benefits of lower tax rates and better legal protections for starting a corporation.
Step 2: Create a Business Bank Account
Entrepreneurs need to keep their personal and business finances separate. If you mix your money, you might overlook important expenses, complicate your accounting, and even face legal issues.
A business bank account is the easiest way to keep your company's money separate. When you begin as an entrepreneur, you may only need a checking account but having a savings account can also be helpful.
Before selecting a bank for your business, ensure that it fulfills all your requirements:
- Look into the small business banking fees of different banks.
- Check for ATMs near your office or home for convenience.
- Review the transaction limits of various banking options to ensure they suit your business.
Step 3: Select Accounting Method
You have a couple of options to consider when selecting an accounting method for entrepreneurs. Once you finalize your accounting method, all you need to do is stick with it to simplify your tax filing process. Here, are two main types of accounting methods:
1. Cash-Basis Accounting
Cash accounting is the simplest of the two methods. It focuses on recording expenses when they are paid and income when they come in. Because it's easy to understand, many new business entrepreneurs prefer this method.
2. Accrual-Basis Accounting
With the accrual accounting method, you recognize income when it is earned and expenses when they are incurred, rather than waiting for cash to change hands.
This method offers a clearer picture of your business's overall income compared to expenses than the cash accounting method does.
Step 4: Choose a Bookkeeping Method
Next, make sure all your financial records are organized by using a consistent bookkeeping method for your business. This procedure should track all your transactions, including the money you earn and the expenses you incur.
You need to develop an accounting approach that you can maintain to keep track of all the cash flowing in and out of your business. Here are some bookkeeping methods:
1. DIY Bookkeeping
As an entrepreneur, you might manage all your transactions using a spreadsheet. This is called DIY (Do-it-Yourself) Bookkeeping. However, as your business grows, you may find it hard to handle all your accounting by yourself and need accounting services.
2. Cloud-based Bookkeeping
You can connect to a cloud-based accounting service for a low fee. It helps you manage your bookkeeping online and can link to your business bank account to track transactions automatically.
3. Part-Time Bookkeeper
If you want to avoid worrying about your accounting and prefer to hand the task over to someone else, you can hire a part-time clerk to take care of it for you.
4. In-House Bookkeeper
If your business expands enough that bookkeeping needs a full-time focus, you can bring on a full-time bookkeeper to work in-house.
Step 5: Track Your Expenses
As an entrepreneur, you need to keep track of all your operating expenses to prepare for tax season. You should create a system to organize your receipts and documents, either by keeping physical copies or setting up a digital filing system.
Here are some data you need to monitor:
- Bank and credit card statements
- Receipts for meals, parking, travel, supplies, equipment etc.
- Office bills like utilities, internet, phone etc.
- Financial reports
- Tax returns
Visit the IRS website for a complete list of the records you should file as an entrepreneur.
Step 6: Decide Your Payment Methods
Once your business is established, it's time to start earning for your hard work. To do this, you should choose the payment methods you will accept from your customers. If you're just starting out, you can stick to simpler payment options like cash and checks.
However, if you offer more flexible payment choices, you may notice that your customers pay you faster. Here are some other options to think about:
1. Card Payments
Set up a point-of-sale (POS) system to take credit and debit card payments in your physical store. Remember, you'll incur transaction fees in card payments.
2. Mobile Payments
Mobile payments are a great option for entrepreneurs who run their business outside an office. You receive a mobile card reader that connects to a smartphone and works with an app to accept payments from anywhere with internet access.
3. Online Payments
A lot of your customers know about the easy way to pay online. You can set up online payments on your website using a third-party service, or you can accept payments directly through your cloud-based accounting software.
Step 7: Know Your Tax Obligations
If you have never filed taxes before, being an entrepreneur can be a little intimidating. Your tax responsibilities will depend on how your business is set up, as the rules for sole proprietorships are quite different from those for corporations.
Get ready for some key tax responsibilities as an entrepreneur:
1. Self-Employed tax
Every self-employed person needs to pay the self-employed tax to cover their Medical and Social Security obligations.
2. Employment Tax
If your business has employees, you need to pay employment tax according to the Federal Insurance Contributions Act (FICA) to support your employees' Medicare and Social Security benefits.
3. Income Tax
The structure of your business plays a significant role in determining your income tax obligations.
If you operate as a sole proprietor, you can combine your business taxes with your personal income taxes. However, if you own a corporation, you'll need to file separate tax returns for your business.
4. Sales Tax
The state sets the sales tax rate you'll need to apply to your customers' purchases and collect on behalf of the state. Make sure to do your homework to determine the exact amount of tax you should be charging and the deadlines for submitting it to the authorities.
Step 8: Learn Financial Reporting
You need to keep an eye on your financial reports to assess the performance of your business. These reports can highlight areas for improvement and guide you in making smart decisions for your company's future.
Here are the key financial statements every entrepreneur should be familiar with:
1. Income Statement
An income statement provides a detailed overview of a company's earnings and expenses, ultimately revealing the profit or loss generated during a specific reporting period.
2. Balance Sheet
A business’s balance sheet provides a snapshot of its assets, liabilities, and equity at a particular moment. In simpler terms, it reveals what the company owns and what it is obligated to pay for a specific day.
3. Cash Flow Statement
You get the summary of the cash and cash equivalents that come in and out of your business on your cash flow statement.
What are the benefits of Accounting for Entrepreneurs?
For an entrepreneur, concrete accounting practices provide important information about your company's financial health, helping you make smart financial choices. Using good accounting practices offers many advantages to you, including the following:
Top 4 Benefits of Accounting for Entrepreneurs
1. Expenses Forecasting
Accounting assists entrepreneurs in creating and managing detailed budgets for their businesses. By understanding the money coming in and going out, you can better prepare for your expenses.
2. Efficiency Enhancement
Entrepreneurs can create precise revenue forecasts if they have a good accounting system in place. You can understand how well your business income covers costs. You can prepare strategies, focus on campaigns as per the results.
3. Hassle-free Tax Season
Accounting helps entrepreneurs prepare for taxes, reducing the stress of filing income taxes. With proper bookkeeping and accounting, you will have all your business income and expenses organized, making it easier and quicker to file your annual taxes.
4. Growth Tracking
Accounting helps you monitor your company's growth by tracking its assets and debts and how they evolve over time. You can identify which services generate the most revenue, allowing you to adjust your business model to increase profits./p>
5 Accounting Fundamentals for Entrepreneurs
1. Managing Cash Flow
Cash is a crucial asset for many businesses, especially for startups with limited credit and financing options. It drives your business forward. Without cash, you can't pay suppliers, manage inventory, reach customers, or expand.
By understanding cash flow, businesses can plan and ensure they have enough funds to operate and grow. Cash inflows and outflows help you plan effectively, avoid unnecessary cash shortages, and use extra cash to grow the business.
2. Maintaining Balance Sheet
The balance sheet shows the financial health of a company at a specific time. It lists what the company owns and what it owes, giving stakeholders a clear view of its resources and how they were funded.
Investors care about the balance between the company's equity and its debt, in addition to its growth potential. The balance sheet provides investors and potential buyers with a clear picture of the company's current situation.
Therefore, you need to monitor your business performance such as if sales are rising quickly, it's important to keep an eye on liabilities for long-term success.
3. Finding Profit Pathways
Profitability means the amount of money left from each dollar of sales after all expenses are paid. While this may seem obvious if you want to start a business, it can be overlooked in the early days of a company.
It's common to take a loss at first to reach a target market, gain customers, boost visibility, or launch successfully, but this cannot be a long-term plan. Entrepreneurs need a path to profit to attract investors and succeed in the long run.
4. Speaking Business Finances
As an entrepreneur, you need to be friendly and willing to discuss the financial details of your company with employees, suppliers, investors, and other stakeholders.
Clear communication about payment terms and the scope of work helps ensure everyone is on the same page, protecting you and your business from misunderstandings.
Additionally, improving your organizational skills and setting clear payment procedures can help prevent these issues. This is particularly important when managing multiple invoices, purchase orders, vendors, and tax accounts.
5. Estimating Your Business’s Future
For many entrepreneurs, growth is a major goal. Some prefer to run their business alone but want to increase their income. Others may want to expand their team by hiring more staff. Some might aim for significant scaling.
To grow wisely and successfully, an entrepreneur needs to make predictions about their business's future, regardless of their specific growth goals.
Accurate forecasts about future revenue, operating costs, resource needs, and profit levels are crucial for attracting investors, securing funding, hiring employees, and gaining more customers.
Without precise predictions, it’s easy to either grow too quickly or too slowly, which can negatively impact the business's success.
Conclusion
Thus, if you're considering starting a business or have already done so, having your accounts in order is crucial for your business to maintain its financial health.
Here comes Virtue CPAs - One of the most reliable accounting services firm for entrepreneurs in Atlanta, USA. Contact Us today and get the full-suite accounting services for your business.
Get in Touch with us now!
