Chapter 2.  Getting your accounting system set up

Once you incorporate your business, you’re ready to start running the business. There’s no getting around the accounting piece. It’s required by the government and investors so they can see your business activities and profitability. Here’s where to start:

1)     Pick an accounting software

Most U.S. startups use QuickBooks, so we’ll use QuickBooks Online as an example to show how an accounting software can make a difference for your business. QuickBooks is the standard for most small businesses who are starting out. 

2)     Choose your accounting method

There are two common accounting methods to record financial data:

Cash accounting – records the revenue and expenses when cash and credits have been received and/or paid. This happens when you record revenue at the point of completing a service or transaction. 

Accrual accounting – records the revenue and expenses when they are earned but not when the cash and credits are being exchanged. This happens when you perform the service over time, and record the revenue to match with the process. 

The accrual basis accounting is more complex, however most companies prefer to use it because it’s an accurate way to record what’s happening in a given period of time.

3)     Set up the accounting software

Setting up accounting software is not many people’s idea of a good time, but your startup depends on it. Once you’re all set up and organized, you’ll learn to love it. Plus, it pays to knock this part of the process out early.  

First you’ll need to customize the Chart of Accounts, and then add financial data like invoices, bills or bank transactions. You’ll also adjust the settings on the date you want to close the book, the accounting method you use. Follow the instructions of your accounting software and complete all the settings. You’ll see the benefits of the effort down the road, when there is less work for you. 

4)     Customize the Chart of Accounts

A Chart of Accounts (COA) lists all the categories (or labels) as a record of all a company’s transactions. It uses a unique set of codes that keep files consistent. A COA is essential to organize your financials in a way that makes it easy for internal and external parties to reference. As your business grows, you can create a new Chart of Accounts that best suit your accounting needs.

Set up Chart of Accounts

Here’s how to set up your Chart of Accounts:

Step 1. Pick accounts and account numbers

Depending on your industry and the way you prefer to see financial statements, you’ll add different accounts into your Chart of Accounts (E.g. Accounts Receivable, Inventory, etc.). Once all the accounts are there, arrange your chart of accounts by adding account numbers for each of them. Here’s an example of how you can use account numbers for COA:

Account Number                             Account Name (Description)

Balance Sheet

10000 to 29999

Asset and valuation accounts

30000 to 39999

Liability accounts

40000 to 49999

Capital accounts

Account Number                             Account Name (Description)

Profit and Loss Statement

50000 to 59999

Income/Gain accounts

60000 to 99999

Expense/Loss accounts

 

Account Numbers let you reorganize your COA easily. It also helps you more accurately record your company’s financial data. You can also add a location, division or product info into your COA. For example, if you have two warehouses in California, you can title the first location “Inventory 20001” and the second location “Inventory 20002.” The same thinking applies to divisions and products. It’s good practice to leave space between account numbers because as a company grows more related accounts may need to be created. Leaving space allows you to have room to grow.

Step 2. Set up sub-accounts

For each account, you can set up sub-accounts. That gives you the flexibility of calling out smaller details from accounts and collapsing them into one big account. It’s easier that way to get a bird’s eye view of your finances. 

To give you an example, Fixed Assets as a main account can be broken down into several sub-accounts: 

  • Office Equipment

  • Delivery Vehicles

  • Buildings

  • Land

Step 3. Define expenses by accounts and communicate it to the team

It’s important to use accounts consistently. For example, equipment used for a photoshoot could be a marketing expense or office supplies, either way is totally correct. Just as long as the expense has been recorded in the same account in a consistent way. Keep in mind that any changes to your COA will impact how the numbers will look like on your financial statements.

Import data into the accounting software

Think of the accounting software as a single spot for you to store, organize and visualize financial data. You’ll most likely use apps outside of the accounting software to do things like sell products (Amazon, Shopify), charge customers (Paypal, Stripe), record receipts (Expensify), pay bills (Bill.com), etc. You’ll need to gather financial data like this and bring it together to see a full picture of your company’s performance. Like many accounting softwares, QuickBooks lets you connect to third-party applications. That’s important because it’ll retrieve or sync your data in real time—automating most of the manual accounting work. 

What can be imported into QuickBooks:

  1. Bank and credit card transactions (banks, credit card companies)

  2. Sale transactions (Amazon, Shopify)

  3. Receipts (Expensify)

  4. Bills (Bill.com)

A CPA’s 2 Cents 

It’s also worth your while to explore different apps that can help save you time with manual entries. There are many third party apps that can help you retrieve, organize and import your data into your accounting software. Take a look which financial apps can be connected to your accounting software. 

Next Section:
3. Monthly Bookkeeping