Top 3 Accounting Questions for Startups
Startup companies are exciting places to be. Perhaps you’re pursuing a lifelong passion, or maybe you’ve stumbled upon the next great idea that’s going to change the world. Whatever the reason for moving to the world of startups, you’ve likely found yourself stuck with many accounting questions.
Whether accounting is your forte or not, it’s one of the most important areas to handle early and accurately. To help you kick off this new world of accounting for startups, Tobin & Collins is answering some of the most common accounting questions, so you’ll be well-positioned to avoid mistakes made by other startup companies.
1. What accounting concepts will I need to become familiar with?
As a startup, being aware of the particulars of your accounting will go a long way towards answering essential questions you’re asked. Some of the most crucial accounting concepts to keep in mind are:
Cost of goods sold (COGS)
This is a figure that indicates how much it costs you to create your products or offer your services (a pivotal function to understanding profitability).
This value represents the revenue you’re bringing in minus the operating expenses that come in regularly. It’s important to note that operating income does not subtract major one-time expenses, such as purchasing a major piece of equipment. As a result, operating income represents your month-to-month financial health.
The equity of your business is an evaluation of how much the company is worth once you account for the costs and liabilities associated with your assets, such as loans you still need to pay back.
2. What expense receipts do you need to have available in case of an audit?
Having a startup company means your relationship with the IRS will be taking a new form, and you’ll be paying business taxes more frequently. Failure to pay the right amount of taxes will become an even greater problem should you become subject to an audit. As you deduct expenses, it’s vital to make sure you have records, such as receipts, for all purchases used as deductions.
If an audit is triggered, it’s vital to have documentation and rationale for the most significant deductions. Still, it’s not uncommon for an auditor to ask for receipts for more minor expenses.
While this can seem like a burden, the digital age has made it easier to keep track of these receipts such as scanned files in your computer or digital invoices. Software tools even exist to record and categorize these receipts.
Be sure to keep a record of all your business expenses, and you won’t have anything to worry about.
3. Do I need a separate business bank account, or can I use my personal bank account?
To start a business, you’ll likely begin by pulling in your personal funds to get up and running. While there’s nothing inherently wrong with this, it’s essential you’re keeping detailed records of your business income and expenses and keeping those separate from your personal purchases and other income coming in.
As your business grows, it is a great idea to establish a bank account dedicated just to your startup. This will ensure that all the money coming in and out of that account is related to the business, and you won’t have to worry about accounting errors or using personal funds as business funds. As a result, when someone looks at your accounting figures, whether for tax purposes, evaluation, or otherwise, having dedicated financial statements for your business accounts will be way more impactful and effective.
Tobin & Collins Helps Startups Navigate Accounting & Finances
Accounting can be a daunting task for a startup company to deal with. If you have accounting questions for your startup, Tobin and Collins can help with all your accounting and financial needs. Our accounting professionals are ready and able to assist you, so get in touch with us to get started today.