You’ve decided to start a new business – how exciting! There are many important things to consider when getting everything set up, such as your human resources policies (your employees matter!) and software and solutions (you want everything organized and running smoothly). Another important component you need to consider is your accounting – after all, these numbers lay the foundation for your business and essentially tell your story.
Accounting is an important part of your business, and getting it right the first time is crucial. So where do you even begin?
First, it’s important to understand your business and industry. This understanding can help you answer some important questions for designing your accounting system. Some of the questions that may come up include:
- “What basis of accounting should I be using?”
- “What information should I be tracking in order to make informed decisions?”
- “I know what I want to track, but how do I track it?”
Let’s start with the first question: selecting your basis of accounting. Your basis of accounting is essentially a framework used to record your transactions. There are a few different types to choose from, with the following being the most common.
- U.S. GAAP (United States Generally Accepted Accounting Principles) – Try saying that one ten times fast. This is an accrual based framework in which revenues and expenses are recorded when they are earned and incurred, respectively. This is the most commonly recommended type.
- Cash Basis – In this framework, revenues and expenses are recorded when cash is received or paid, respectively. Cash basis presents two different methods of accounting: pure and modified. The difference comes in that under modified cash bases, some transactions follow U.S. GAAP. Check out this blog to learn more about cash versus accrual methods.
- Income Tax Basis – This is a framework in which revenue and expense recording depends on tax regulations. This helps eliminate the need for converting from one basis of accounting to another for tax return purposes.
- Regulatory – In this framework, a regulatory agency prescribes the best method.
Now that we’ve looked at the different basis types available, it’s time to determine what information you should be tracking. The key here is to capture all of your business transactions in the simplest, and most efficient, way possible. This includes both cash and noncash transactions.
Depending on your specific business or industry, you might need to consider tracking your transactions in greater detail. Here are some areas to consider tracking:
- Should you be tracking direct and indirect costs related to construction or manufacturing contracts so you can see the profitability?
- What sales tax jurisdictions do you need to track for sales tax reporting?
- Do you need to track certain items for tax return purposes?
- If you do business in multiple states, should you be tracking transactions by state for tax purposes?
- Do you have different departments or divisions that you need to track in order to view profitability?
Once you decide what information you should be tracking, you can select an accounting solution, and start designing your accounting system.
Stay tuned for the second part of this blog, where we go in depth about how you track your information. Although we’ve shared similar posts about these topics in the past, we think a refresh and reminder is important. If you need help in the meantime, just ask!