Are you starting a new company and are trying to wrap your head around what you need to do in order to set up accounting for it? Here is a quick high-level guide for first time founders. We won’t go too deeply into the details here.

Goals

There is more than just one thing you might want from your accounting system. The obvious things are:

• Know how much you can spend
• Showing your numbers to investors and team members
• Plan ahead
• Being tax compliant
• Monitor financial health

Summary

The really brief version of what you have to do in order to keep track of your finances in a startup could look like this:

Track your revenues and spend. Keep track of assets. Use an accounting system that aligns with the nature and size of the business. For startups, sign up to Subledger (it's free) or use Xero / Quickbooks. Choosing the right system is essential for streamlined and accurate financial management.

Break down your spend into meaningful categories. Set-up a chart of accounts that makes sense for your company.

Prepare a financial model. Compare it to your actual numbers which you know because you tracked them well. Do this at least monthly.

Work with an advisor to pay your taxes.

Below I will go into detail into what is needed to do each of these things well.

Chart of Accounts

On the accounting side, one of the first things to do is to plan and think through the chart of accounts. The chart of accounts is a list of accounts in your accounting system. Each account helps you to categorize transactions. Think of them as buckets. A well designed chart of accounts makes it easy to record transactions and to read financial reports. So how do you create a well defined chart of accounts? First, there are 5 different types of accounts.

Balance Sheet:

• Assets
• Liabilities
• Equity

Profit & Loss Statement:

• Revenues
• Expenses

A basic chart of accounts for a services business could look like this. You would want to adjust the accounts to reflect the different revenue streams and expenses your business expects. You might also have to adjust the types of assets and liabilities you will likely hold. Perhaps you will need to create an account to track liabilities to banks, keep track of equity for more than one shareholder and liabilities to your staff.

Note: this is a simplified example. You would want it to account for the specifics of your business and probably want a more detailed account structure.

A good chart of accounts is well adjusted to your business model and it shows the numbers that drive your business.

Balance Sheet

A Balance Sheet provides a snapshot of a company’s financial health at a specific point in time. Think of it as a financial photo, capturing what the company owns (its assets) and what the company owes (its liabilities). The difference between these assets and liabilities is the company’s equity, representing the owner’s stake in the business. It’s a foundational document that offers a clear view of the company’s financial position on a given date.

Profit & Loss Statement (often called an Income Statement)

The Profit & Loss Statement, or P&L for short, is like a movie of your company’s financial performance over a specific period, be it a month, quarter, or year. It records all revenues earned and expenses incurred during that time, showing whether the business made a profit or took a loss. In essence, while the Balance Sheet takes a picture, the P&L tells a story about how well the business did over time.

Monthly Activities

Ideally you set up a regular process for certain things to ensure that your numbers are up to date on a regular basis. You should adjust the frequency based on your needs and resources. Usually closing your books on a monthly basis works well because companies often provide monthly reports to their team or investors.

Reconciliations

Reconciliation is the process of ensuring that financial records (e.g., balances in your accounting system) match up with the actual transactions as reflected in, for example, bank statements.. This verification is important to ensure completeness and accuracy of financial data. Essentially, it’s like double-checking your work, making sure that what you believe happened (financially speaking) indeed did. Through reconciliation, discrepancies can be spotted and rectified, whether they stem from errors, or unrecorded transactions. Modern accounting software will allow you to import all of your bank statements and go through them one by one. This is a time consuming process and requires a lot of detailed consideration in some cases to ensure the transactions will show on your reports in the correct way. Most accounting software allows you to partially automate this process through rules. This process can be done by an external or internal bookkeeper.

Depending on how rigorous you want to do your accounting you might want to keep track of documents that confirm the transactions such as invoices, orders, receipts (printed or digital). This will be important during an audit and can help save a lot of time.

Journal entries

Your business may require regular journal entries for things such as depreciation, recording liabilities to employees, taxes among others. These are often made at a regular cadence, -often monthly or yearly. In addition to the regular journal entries, there may be entries required in an ad-hoc fashion for example when the company finishes a fundraise or undergoes an audit. You might need help from an external accountant in order to get these right.

Closing the books

After reconciliations and journal entries are complete companies often “close their books” which means they lock the past time period, usually the past month and don’t allow changes to the accounts in this time period anymore. This is done to prevent errors and after the fact adjustments.

Optionally: Updating the financial model

We will have an entire section on this and everyone has a different approach here. Our opinion is that you one of the best ways to run your business is to regularly review your numbers and compare the actuals with your plan. This of course means you have to make a plan. As part of this series we will go into how to create a financial model you can plan with.

If you are interested, here is how Subledger can help you with that by keeping your financial model updated with actuals automatically.

What about taxes?

Most businesses need to pay taxes. Usually companies employ experts to help them file their taxes. It’s possible to do this yourself but it’s likely to be time consuming and very probable that you will make a mistake and end up paying more than you need to or incur penalties. Normally it is enough to hire a CPA and provide him or her with access to your books and have them file taxes on your behalf.

You should be aware of your tax deadlines and keep a calendar with the important dates.

This is the high level summary of what you need to do to track your finances correctly in an early stage startup. Each of these items can be done more or less rigorously. The most important thing at this stage is building your business and ensuring you have enough cash to do the things you need to do.

Next we will talk about how tracking your finances allows you to plan ahead using a financial model.