Startup Bookkeeping: How to Set Up Your Books From Day One

Start with a separate business bank account

Open a business checking account before your first transaction and run every business payment through it. Mixed accounts are the biggest bookkeeping problem for new owners.

A separate account makes bookkeeping far easier because every line on the statement belongs to the business. It also protects the liability shield if you formed an LLC or corporation, since mixing funds can weaken it.

You will usually need your EIN or, for sole proprietors, your Social Security number, formation documents and a government ID. Add a business credit card if you qualify, and use it only for business.

If you have already mixed funds, stop now, mark which past transactions were business, and move forward cleanly. Read how to separate business and personal finances.

Choose accounting software and a method

Pick cloud accounting software that connects to your bank, and decide between cash and accrual accounting with your accountant. Most small startups use cash basis.

Cloud tools import bank transactions, so you categorize rather than type. Compare options on price, bank feeds, invoicing, payroll integration, reports and your accountant's preference. Many accountants already use a specific platform, and matching it saves time.

Accounting method:

• Cash basis. You record income when received and expenses when paid. Simple, and common for small startups.
• Accrual basis. You record income when earned and expenses when incurred. More accurate for businesses with inventory or long payment terms.

Ask your accountant which method the tax rules allow and which fits your situation. For basics, see bookkeeping tips.

Build a simple chart of accounts

A chart of accounts is the list of categories you use to sort money. Keep it short and specific so reports are readable.

Start with the standard groups: assets, liabilities, equity, income and expenses. Within expenses, create categories that match how you run the business, such as advertising, software, supplies, contract labor, insurance, professional fees, rent, utilities, vehicle and travel.

Tips:

• Fewer than 30 expense categories is enough for most startups.
• Use separate income accounts for each major product or service line.
• Create accounts for owner draws or distributions so personal money does not hide in expenses.
• Track loans in liability accounts, with interest recorded separately.

Learn how liabilities work in bookkeeping 101: liabilities.

Capture receipts and invoices as they happen

Photograph or save every receipt the day you get it, and invoice customers right away. Records created later are less accurate and often incomplete.

Create a routine. Use a receipt-capture app or a shared folder named by month. For any expense, note what it was for, especially meals, travel and large purchases. Keep invoices you send and bills you receive in one place.

Keep records for as long as the law requires. See how long to keep business records, and use how to track business expenses for a simple system. If you are paid by customers on terms, the difference between an invoice and a receipt matters for your books.

Reconcile and close the month

Each month, match your books to bank and card statements, review reports and fix errors. Reconciliation catches missing entries and duplicate charges.

A simple monthly close:

1. Categorize all bank and card transactions.
2. Reconcile each account to the statement ending balance.
3. Review unpaid invoices and bills.
4. Run a profit and loss and balance sheet.
5. Compare to last month and to your budget.
6. Set aside money for taxes.

This takes one to two hours for a small startup if done monthly, and many more if left for a year. Our guide on financial reports to run each month lists what to review, and necessary reports explains each.

Taxes, payroll and when to hire help

Set aside tax money from each payment, use a payroll service for employees and hire a bookkeeper or CPA when the books take more than a few hours a week or the rules get complex.

Startups often get tripped up by taxes. Sole proprietors and partners typically owe estimated tax payments. Corporations and S corporation owners have different rules. Collecting sales tax adds another layer. Ask an accountant what applies to your entity and state.

Run payroll through a service so withholding and filings are correct. Misclassifying workers and missing deposits can bring penalties.

Hire help when your time is better spent selling. Costs are discussed in how much a CPA costs. Even if you outsource, you should still review the reports monthly.

Clean books and your ability to get funded

Funders compare your bank statements with your stated revenue. Clean, reconciled books speed reviews and help you understand what you can afford to repay.

Good records let you answer a funder's questions quickly: how much do you deposit each month, what are your existing debt payments, how profitable are you? They also let you test affordability before borrowing.

ROI Funder considers businesses with 6+ months in business, $20,000+ monthly revenue and 500+ FICO. A complete file is the application plus three months of business bank statements, so a separate business account matters from day one. Learn how bookkeeping helps in bookkeeping habits that help financing, and compare working capital options when you are ready.