There are various guides on setting up a business and we felt that we should share for aspiring startups, one such guide on setting up basic accounting function in a startup. We found an excellent guide by Jeremy Slaughter providing a step by step process for setting it up.
Reproduced below is the main points from the article:
Step 1 : Choose the specific software you will use to set up your accounting system.
In India, Tally is a popular software used for accounting and can be used by small and big firms alike. Tally along with MS Excel (For analysis) is a good combination to maintain your startup’s accounting.
Step 2 : Review your business model and financial statement reporting needs to assist in finding the best-suited chart of accounts. The chart of accounts is a list of the assets, liabilities, equity, income and expenses.
Start learning on basic accounting concepts and handling business reports as early as you can. Having a tab on the expenses and revenue is critical. Also start tagging your expenses into cyclic, non-recurring and avoidable.
Step 3: Create your purchase order and invoice templates.
Also start maintaining a record of all your purchase orders and invoices. Managing paperwork is a very critical activity and, unfortunately, many Indian startups neglect it either completely or pay lip-service to it.
Step 4: Choose an accounting method–typically either cash or accrual. Cash method accounting requires users to record income received and expenses when paid. Accrual method accounting records income when earned and expenses when incurred.
It is preferable for a startup to choose cash method as it is easier to grasp and manage. However accrual method has to be used when the business reaches some scale of operations. Hiring a professional is necessary to manage accounts by this method.
Step 5: Record your transactions in the accounting system using bank statements and invoices.
As we mentioned earlier, businesses that fail to maintain proper paperwork are the most difficult to manage. In the earlier stages, a startup can have a handle on their accounts by checking their bank statements with their expenses and accruals.
Every transaction has a left (debit) and right (credit) side to balance. Using accounting specific software reduces time and eliminates a lot of the guesswork involved in determining which part of the transaction is a debit and which part is a credit.
Updating your accounting books every few days helps you enter the transactions before you lose any details from your memory.
Start with the bare minimum number of accounts to make your accounting system function; add accounts as you determine the need for them.
You can read the complete article at http://smallbusiness.chron.com/set-up-accounting-small-business-3860.html