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Accounting Basics for Startups
- 1. Thank you Presenter: Tiffany Wetzel-Sturtz, CPA Introduction to Financials Startup Alleghenies Finance Boot Camp September 6, 2022
- 3. 3 What is Accounting? Accounting is…. The Language of Business The timely and accurate recording of financial data and transactions providing useful information to the users of the financial statements
- 5. 5 Why is accounting important… – to business owners? – to other users? – to bookkeepers?
- 6. 6 Accounting Jargon • GAAP – Generally Accepted Accounting Principles • Basis of Accounting – how financial statements are prepared and presented. – Accrual • Revenue/Expense recognized when Earned/Incurred – Cash • Revenues/Expense recognized when received/paid – Modified (not GAAP) • Combination of Cash & Accrual
- 7. 7 More Accounting Jargon • Chart of Accounts – Listing of all the accounts – Custom to each business • Trial Balance – All active accounts with balances – Typically prepared at the end of a fiscal period – Trial balance must balance debits and credits
- 8. 8 More Accounting Jargon • General Journal – Accounting record of transactions – Recorded in chronological order – Other more specific journals exists i.e. payroll, cash receipts, cash disbursements, etc and only include those types of transactions
- 9. 9 More Accounting Jargon • General Ledger – Compilation of ALL accounts that show detailed transactions by account – Accounts are listed in account number order – Includes beginning balance, detail of changes (each transaction), and ending balance of each account
- 11. 11 Documentation and Recordkeeping • Source documents – Provide the basic evidence needed to support an accounting transactions – Describe the basic facts of a transaction (date, purpose, amount, approval) – Examples include: cancelled checks, paid invoices, timesheets, contracts, purchase orders • Record retention – Write policies and procedures on records management and retention.
- 12. 12 The Accounting Equation Assets = Liabilities + Owners Equity
- 13. 13 The Accounting Equation • Assets (What I Own) • Liabilities (What I Owe) • Equity (What's in it for me!)
- 14. 14 This Photo by Unknown Author is licened under CC BY-NC-ND Why does this matter? Debit vs. Credit? Cheat Sheet: Assets = Liabilities + Owners Equity (d) = (c) + (c) left = right
- 15. 15
- 16. Journal Entry Example Account Debit Credit Cash or Receivables $ xxx Sales $ xxx
- 18. 18 Financial Statements • What are financial statements? • Why do you need financial statements? • When do you need to prepare financial statements? • How can you obtain financial statements?
- 19. 19 Importance of Having Reliable Financial Statements Success starts when you take charge of your books • Provides accurate financial data to make informed financial decisions • Gives users a clear picture of the financial position of the business • Typically required for business borrowing and for grant reporting
- 20. 20 Basic Financial Statements • Balance Sheet (aka Statement of Financial Position) – Remember the accounting equation? • Income Statement (aka Profit & Loss, Statement Activity) – Revenues – Expenses = Income • Statement of Cash Flows – Where did the cash go and where did it come from?
- 21. 21 Basic Financial Statements, continued • Balance Sheet – A summary of the financial position of the business at a specific date – Snapshot of a company’s financial health – Assets = Liabilities + Equity
- 22. 22
- 23. 23 Basic Financial Statements, continued • Income Statement – Summary of revenues and expenses for a specific period – Reports income and expenses – The “bottom line” of the statement typically shows the company’s net earnings or losses during the time period
- 24. 24
- 25. 25 Basic Financial Statements, continued • Statement of Cash Flows – Summarizes the business’s cash inflows and outflows during the period • Cash flows from – Operating activities – Investing activities – Financing activities
- 26. 26
- 27. 27 Basic Financial Statements, continued • Statement of Retained Earnings – Outlines the changes in retained earnings during the year. – Changes may include: • Net income or loss for period • Distributions to shareholders • Contributions to business
- 28. 28 Analyzing Financial Statements • Year to year comparisons • Trends • Industry comparisons • Budget vs. actual • Ratios
- 29. 29 Tips for Maintaining Accurate Financial Data • Keep accounting records up to date • Separate business and personal transactions • Obtain an accounting software and receive appropriate training • Perform monthly reconciliations of accounts to ensure all transactions are captured. • Hire an accountant or outsource these services to an accounting firm • Have written policies and procedures
- 30. 30 • Policy is a rule or goal set by an organization. • Procedure refers to the actions taken to conform to a rule, a prescribed series of steps taken to achieve the goal, or the way in which policy goals are achieved. • Process refers to a formal set of operational tasks performed or procedural steps taken, such as regular duties performed the same way each time. Policies, Procedures, Processes
- 31. 31 Examples of Internal Controls • Sign offs, date and initial stamps • Required vacations • Independent audits • Training and cross training • Management oversight • Approval/authorization • Expense reports • Copies of invoices and receipts • Monthly reconciliation of records • Inventory • Tagging of equipment • Regular meetings • Checks and balances • Monthly review of general ledger and reconciliations • Using an electronic accounting system
- 32. 32 Tips to Detect and Prevent Fraud • Dual check signers • Credit cards • Invoice approval • Bank statements • Internal controls • Physical access to accounting system • Regular review of financial statements
- 33. 33 This Photo by Unknown Author is licensed under CC BY-SA Services Provided by Accounting Firms • Audit – Provides the highest level of assurance – Free from material misstatements • Review – Provides limited assurance – Ratios and analytics • Compilation – No assurance is given – Information is compiled into financial statements
- 34. 34 Services Provided by Accounting Firms • Payroll Processing • CFO Outsourcing • Tax Return Preparation • Sales Tax Filing
- 35. 35 What is a budget? • A budget is an outline of expectations for what a company wants to achieve for a particular period, usually one year. • Characteristics of budgeting include: – Estimates of revenues and expenses – Expected cash flows – A budget is compared to actual results to calculate the variances between the two figures. • A company's budget is usually re-evaluated periodically depending on how management wants to update the information.
- 36. 36 Do you need a budget? More specifically, a business budget can benefit your business by: Making it more efficient. Pointing out funds leftover that you can reinvest. Predicting slow months and keeping you out of debt. Estimating what it will take to become profitable. Providing a window into the future. Helping you keep control of the business.
- 37. 37 Creating a Budget • Step 1: Examine your revenue • Step 2: Subtract fixed costs • Step 3: Determine variable expenses • Step 4: Set aside a contingency fund for unexpected costs • Step 5: Put it all together and create a budget
- 38. 38 Startup Costs • Startup activities are those activities required to organize a new business or introduce a new product. Examples include: – Accounting and legal startup costs – Employee training & recruiting costs – Consulting fees – Feasibility studies – Logo design – Travel costs – Organizational costs – Costs of opening a new facility
- 39. 39 Startup Costs • For financial accounting purposes, a business must expense startup costs as incurred. Startup expense $65,000 Cash $65,000
- 40. 40 Startup Costs for Tax Purposes • For tax purposes, Sec. 195 defines startup costs as costs incurred to investigate the potential of creating or acquiring an active business and to create an active business. • To qualify as startup costs, the costs must be ones that could be deducted as business expenses if incurred by an existing active business and must be incurred before the active business begins. • Startup costs include consulting fees and amounts to analyze the potential for a new business, expenditures to advertise the new business, and payments to employees before the business opens. • For tax purposes, startup costs are deducted over 180 months (15 years)
- 41. 41 Startup Costs for Tax Purposes • A taxpayer that elects to deduct and amortize startup costs may deduct up to $5,000 of startup costs in the year the active conduct of the business begins (Sec. 195(b)(1)(A)). The taxpayer amortizes any startup costs over the deduction limit for 180 months beginning in the month the active conduct of the business to which the costs relate begins • In addition, if the startup costs related to the business exceed $50,000, the taxpayer must reduce the $5,000 limit on the deduction (but not below zero) by the startup costs over $50,000. • If the startup costs are $55,000 or more, the taxpayer cannot deduct any of the startup costs except as an amortization deduction.