Chart of Accounts and Bookkeeping for a Startup

Startups are corporations that aim to revolutionize markets. Its founders want to build a product that the community desires but hasn’t yet developed. So, they generate sky-high speculations that result in an exorbitant return on investment. A startup can be explained as a small new business to play a revolutionary role in society. But for that, we need to keep a bird’s eye on our earning rates, account, taxes, reporting, spending, and all other financial details. So we need to maintain a well-detailed chart of accounts for a startup. This article will discuss all the details of a startup’s chart of accounts and bookkeeping.

Bookkeeping is an essential part of the making of a chart of accounts. Startups can do bookkeeping to organize, store, and analyze financial data. Using this financial data, you may judge your company’s financial security properly. The chart of accounts will enable you to categorize and simplify the complicated financial data of your startup. They help to categorize data into understandable, logical account categories. It also establishes the framework for all crucial accounting results for your company. 

Importance of Chart of Accounts for a Startup

A chart of accounts lists all the financial accounts in your business’s general ledger. It enables you to categorize all of your startup’s transactions during a given period. In addition, it allows you to obtain insight into the success of different sections of your organization by separating your revenue, liabilities, assets, and business expenses. 

The chart of accounts is essential for several reasons. Most importantly, it gives you a comprehensive view of your startup’s financial health. In addition, it is beneficial to business owners, investors, and shareholders who may not be familiar with your company’s day-to-day activities. Finally, it also simplifies compliance with financial reporting regulations, making a chart of accounts particularly advantageous for firms of all sizes.

What Is a Startup?

A startup is a business started by its owners around a concept or issue that has the potential to have a substantial economic impact. A worthwhile idea or problem to solve and to form an enthusiastic team involves founding a team with a common goal. The actual development process begins even before hunting for a product. 

Before expanding it up to a big firm and self-sustaining business, the initial creator’s goal is to create a dedicated co-founder team with the essential skills and competencies to evaluate the initial dilemma fit and manufacturer fit.

Many startups fail during the first few years of operation. That is why the beginning stage is critical. Then, entrepreneurs must raise capital, develop a company strategy and plan, employ key staff, iron out specifics such as stock holdings for partners and investors, and prepare for the long term.

Understanding Startups

Startups are young businesses created to develop a unique good or service and bring it to society. Startups aim to solve a society’s needs profitably.

A startup, which is rooted in creativity, strives to address flaws in current products. Therefore, they develop completely new classifications of goods and services. As a result, they are upending long-established methods of conducting business. Because of this, many companies are referred to as “disruptors” in their respective industries.

You might be most acquainted with startups in big tech. Such as Facebook, Amazon, Apple, Netflix, and Google. Startups provide employees with access to high-value stock, but large corporations give their employees a steady wage and excellent perks. In addition, corporations provide employees with a sense of security, but startups are frequently high-risk, high-reward situations.

A startup wants to develop a completely original financial budgeting framework. In the case of the food business, that would entail providing meal kits, such as Blue Apron or Deanery. Just like the same service as restaurants. A chef-prepared meal—but with convenience and variety that sit-down establishments can’t match. Because of this, restaurants now have access to tens of large numbers of potential clients instead of just a few hundred.

Types of Startup

A brilliant idea alone won’t be enough to start a new business in the modern world when everyone seeks to provide innovation. Financial model of the startup must be made before piloting the project. Therefore, you should explore the following six types to comprehend the characteristics of various startups better.

Scalable Startups

Frequently, businesses in a tech specialization fall under this category. Technology businesses can readily access the world economy because they frequently have significant potential. Investors may provide financial support to IT businesses as they expand internationally. Examples are Google, Uber, Facebook, and Twitter. These businesses recruit the best employees and look for investors to advance the growth of their concepts and scale. 

Small Startups

Small startups are self-funded and founded by average individuals. They develop at their rate, typically have a solid website, but lack an app. The ideal examples include grocery stores, hair salons, bakeries, and travel agencies. Unfortunately, first-time entrepreneurs frequently struggle to obtain investment without any traction and a plan for possible success.

Lifestyle Startups 

A lifestyle startup is similar to a hobby, and a person who starts is keen to pursue their passion. They can support themselves by doing what they enjoy. Multiple cases of lifestyle startups are readily available. Take dancers as an example. They actively start online dance studios to instruct kids and adults in dancing and make money doing it.

Buyable Startups

Some individuals in the software and technology sector create a startup from scratch to subsequently sell it to a larger organization. Corporations like Amazon and Uber purchase startups to grow and profit from them over time.

Big Startups

Large firm startups begin small with a groundbreaking product and grow to become famous worldwide. These businesses are nearing the conclusion of their life cycle. These businesses are nearing the conclusion of their life cycle. As a result, to continue developing as a firm, companies require ongoing sustaining innovation (variations of the main product) and disruptive innovation (new products for new markets).

Social Startups

Social startups, also known as social entrepreneurship, are firms whose primary objective is to accomplish a social mission or goal. Because it is a social startup, many people mistake it for NGOs and believe these enterprises are not for profit. However, this is not always the case. Social startups are occasionally for-profit organizations, but their primary goal is not to make money.

Startups Strive for Growth and Speed

Their rapid growth is an important characteristic that sets startups apart from other businesses. Startups want to develop concepts swiftly. They frequently use an iterative process called performance appraisal and usage data. Startups continuously enhance products. It will often start with a minimally viable product (MVP), the bare bones of a product that it will test and refine until it is prepared to go to market.

Startups often want to increase their consumer bases while improving their offerings quickly, which assists them in gaining a steadily bigger market share. In turn, this enables them to raise more money. That means it allows them to expand their product offerings and customer base.

Startups proliferate by raising funding in different rounds and offering Initial Public Offering (IPO). Both strategies allow the startup to grow extensively as more investment inject into the business. 

Chart of Accounts for a Startup

Spreadsheets assist you in making a chart of accounts. Although accounting softwares are also available, that can assist you in an efficient bookkeeping process. 

We’ll go over the fundamental procedures for creating a chart of accounts.

Title your Business Account

Three essential columns are typically present in a chart of accounts. Begin by giving the accounts in your company names, such as “Equipment,” “Accounts Payable,” and “Utilities.” 

Coordinate Account Numbers

You must then assign account numbers to each of your five major groups. Typically, these appear in the first column. 

• Asset Accounts: 101-199
• Liability Accounts: 201-299
• Equity Accounts: 301-399
• Revenue Accounts: 401-499
• Expense Accounts: 501-599

Identify Category Types in Chart of Accounts for a Startup

Any one of the business accounts you provided in the second column should have a category type assigned to it in the last column of your chart of accounts. As an illustration, your company’s “Equipment” account is an asset account, and the “Utilities” account is an expense account.

Standard Account Types and Components Of COA for a Startup

The balance sheet, often known as a statement of financial position, comprises assets, liabilities, and equity under the five broad categories of accounts. The income statement, also known as a statement of financial activity, comprises the other two components, revenues, and costs. 

Balance Sheet of Startup

A startup balance sheet, also known as a projected balance sheet, is a financial statement that highlights the assets, liabilities, and owner’s equity of a new firm. In other words, a balance sheet reveals what a company owns, how much it owes, and how much the owner may claim.

Asset Accounts

Startup assets include cash, equipment, and other resources owned by the firm prior to or during the startup phase. Cash, equipment, a building, raw materials, a brand, or copyright are examples of assets. Depending on the sort of business, the startup assets will differ. First, list your assets, starting with current assets. Make sure to list the items in descending order with respect to liquidity. Second, you can move on to long-term and intangible assets. 

Current Assets 

• Checking
• Savings
• Accounts Receivable 
• Inventory

Other Current Assets

• Prepaid Expenses
• Employee Loans

Non-Current Assets or Fixed Assets

• Furniture & Equipment
• Leasehold Improvements

Intangible Assets

• Patents & Trademarks

• Organizational Costs
• Goodwill
• Accumulated Amortization
• Long-term Notes Receivable

Liability Accounts

Liabilities encompass all your company owes now and in the future. For example, the liabilities of a startup include loans, legal debts, and other responsibilities incurred during business activities. To ensure you have enough liquidity, or the capacity to fulfill immediate and short-term commitments, for your existing debts, you will normally want to monitor current liabilities, also known as short-term liabilities carefully.

Current Liabilities

• Credit Card Payable
• Accounts Payable
• Payroll Taxes Payable

Long-term Liabilities

• Mortgage Payable
• Auto Loan Payable

Equity Accounts 

Startup cash flow is sometimes limited, so entrepreneurs utilize equity to supplement their below-market pay. Owning equity entails having a stake in the company you are assisting in establishing. It is essentially deferred remuneration with the expectation that you would eventually own a stake in a startup firm. Equity is the amount after deducting liabilities from assets. 

• Retained earnings
• Common, preferred, and treasury stock
• Owner’s capital
• Cash dividends

Income Statement of Startup

The income statement of a startup lists the company’s sales, costs, profits, losses, and net income for a certain time frame. An income statement, which provides further data on the money coming in and leaving out, outlines the business’s expenses to generate revenue and create a profit.

Revenue Accounts

Revenue is a business’s entire amount of money during a specific period. For example, revenue for a startup is its gross income before deducting any costs. It is the financial gain from sales and/or provided services.

• Commissions
• Revenue from dividends or interest
• Sales
• Investment earnings
• Consulting Income

Cost of Goods Sold- COGS

The cost of goods sold in a startup is the sum of the expenditures incurred by a business for labor, supplies, and a few overhead expenses. It is the cost directly tied to the production of a product. COGS helps startups in pricing the product and understanding the business profit.  

• Purchases
• Materials & Supplies
• Freight

Expense Accounts

Startup expenditures are the costs involved while starting a new firm. A company strategy, research charges, loan costs, and technological fees are all part of the pre-opening startup expenses. Promotional fees, hiring costs, and advertising are post-opening startup expenses.

• Rent
• Salaries
• Supplies
• Depreciation expenses
• Advertising & Marketing
• Office Supplies
• Rent Expense
• Interest Expense
• Professional Fees
• Depreciation
• Amortization

Other Income and Expenses Account 

Other income generates through activities unrelated to a company’s primary emphasis. For example, a startup may receive rental income by subleasing vacant office space to a third party. It is an other-income for a startup. The specific sort of transaction classified as other income varies per firm. Other expenses are those that are unrelated to a company’s primary operation. These are a component of the income statement that displays spending from auxiliary operations and losses unrelated to the startup’s operations.

Other Incomes

• Interest Income
• Gain on Sale of Equipment

Other Expenses

• Loss on Sale of Equipment
• Interest Expense

Accounting Rules to Record Expenses

In your income statement, you will separate the costs and incomes of your company—however, some acceptable accounting rules to follow while recording expenses. Sometimes startups grow so large that their expenses become complex to record. Therefore they must comply with accounting rules while recording expenses. 

For instance, if you bought an asset for less than your company’s allowed capitalization limit, you must report it as an expense all at once. However, if your asset’s cost upon purchase exceeds your company’s capitalization limit, it must be recognized as an asset and charged to expense when the asset starts to use.

Your bookkeeper or accountant will therefore track your expenses by whether you are using the accrual accounting method or the cash method of accounting. Accounting rules are very important while incorporating expenses and a chart of accounts for a startup.

Accrual Accounting- Startup

Accrual accounting records revenues and expenses as they happen rather than always when money is received or paid out. Cash accounting systems, in contrast, wait until the cash happens to change hands before reporting any income or expenses. In general, accrual accounting is used by most corporations, whereas individuals and small businesses use cash accounting. According to the IRS, eligible small business customers may select either approach, but they must persist with it. The method of choice must also truly represent business processes.

The accrual concept will help startups in performance management, accuracy, and future planning. In addition, it helps growing businesses in tax calculations and keeping an accurate record of taxes.

The foundation of accrual accounting is the concept of correlating revenues and expenses. In business, things frequently happen simultaneously, but the monetary transaction does not necessarily finish immediately. Businesses with inventory are an excellent example of how the accrual accounting technique works as they utilize it. First, the business incurs the cost of stocking inventory and making sales to cover the cost.

However, if the company sells on credit, the payment might not come in the same fiscal quarter. Credit purchases are one of the numerous aspects contributing to complicated commercial operations. The accrual concept helps in catering the credit transactions. 

Final Thoughts

A chart of accounts is significant because it allows a corporation to see its total financial health by separating expenses, revenue, assets, and liabilities. Therefore, adhering to your chart of accounts is the most crucial part of your business, regardless of whether you operate as a single owner, freelancer, or have been in business for decades.

Chart of accounts has immense importance for the startup. Your chart of accounts records every transaction you carry out, from keeping track of your running costs to handling your balances payable. But remember that inaccurate financial statements result from an improper chart of accounts setup. Therefore, including all financial reporting regulations also aids in meeting the needs of management reporting.