Intro

Now that we know how to set up our income statement and what the major moving pieces are, let’s take a look at how to manage the income statement every month.

This is where most people freak out and shout “Good God! It’s Accccounnttttinnnnng!”

Yes, friends, it is indeed the sneaky devil that we call accounting. But guess what? It’s actually not nearly as complicated as people make it out to be. That’s because startup accounting is like trying to manage our expenses when we’re a freshman in college – we don’t really have that many to manage!

Even if we do, and the business is a bit further along, don’t worry. We’ll walk through a step-by-step guide so that we can just fill in each box easily.

But before we get into the process, let’s just make sure we cover a few caveats and concerns:

“What Taxes do I need to be Concerned About?”

While we can’t cover the ins and outs of every tax issue, it’s worth making a note of which taxes we’re going to be liable for so we don’t make the cardinal mistake of not filing taxes. The IRS and other taxing authorities get upset if we mess up how much we paid them. But they go full Eliot Ness Untouchables if we don’t pay them at all!

Employer Payroll Taxes

Employers (in the U.S.) are subject to a separate tax on their payroll in addition to what employees pay and what is withheld. This is very important to note.

Employee Payroll Withholding Taxes

Employers withhold a certain amount of taxes on behalf of employees that are then paid directly to the Federal, State and Local taxing authorities. It’s our job to make sure we are properly withholding and paying these taxes at each level.

Corporate Taxes

Whether we made or lost money the IRS and local tax authorities want to know where the company stands. We need to file corporate tax returns annually, and if we made a profit (yay!) pay the requisite taxes (womp womp womp).

Sales Taxes

Depending on our business we may be required to collect and remit sales tax.


FOOD FOR THOUGHT



A word of caution – The IRS and other taxing authorities aren’t responsible for “sending us a bill”. The only bill they are likely to send us is one that reads “You forgot to pay your taxes for the last 3 years – here’s what you owed with a criminally-high set of penalties and interest as well.” We’d recommend at least making sure these 4 categories are considered if nothing else.

Cash or Accrual – That is the Question

When managing our finances we have to choose between two methods of recording transactions: Cash and Accrual accounting. This is just a decision as to when we determine a transaction should be recorded in a particular month. It’s a small nuance, but an important one.

Let’s assume we hired a designer to work on our company logo. She performed $500 worth of work in January then sent us a bill that we paid in February. Do we record the transaction in January when we incurred (accrued) the expense, or February when we paid it (in cash)?

For this we must make a choice – but it’s an important one because however we choose to record this transaction should work the same for all of our transactions. There’s no wrong or right here, it’s more a matter of how we would prefer to manage our finances.

Here are our two choices:

  1. Cash Accounting. We only record the transaction once we’ve paid for it in cash. In this example, we would have posted the transaction in February when the money left our account. The benefit to this is that we can focus exclusively on what transactions moved in and out of bank account. Whatever the time stamp is on those transactions, that’s the month it’s accounted for.
  2. Accrual Accounting. We record the transaction when we incur it, even if we pay for it in cash later. The benefit here is that we have a monthly statement that more accurately reflects the decisions we made in this specific month versus when those decisions happened to be paid for in cash. If Johnny makes $1,000 in salary for January but the withdrawal doesn’t post in our bank account until February 2nd, we can still show that his payment was for January.

If we’re totally lost on which one to pick – choose “Cash Accounting” simply because no matter what we can always defer to the timestamps of what posted to our bank account, even if they don’t directly reflect when and how we made those decisions.

3 Steps to Monthly Accounting

Much like the assembly line of dishes at Thanksgiving time – rinse, wash, dry – every month we will enjoy the ritual that is “monthly close”. Here we will tally up all of our activity, drop it into our Income Statement, and analyze the hell out of the results.

We’re about to walk through each step, but here’s a quick overview of what we’re about to do:

one

Step 1: Capture.

We will download and retrieve all of our income and expense activity for the month including credit card processing statements, bank statements, credit card bills and paper invoices.

two

Step 2: Process.

With all of our info in hand, we’ll begin recording these transactions in the appropriate spots of our income statement.

three

Step 3: Analyze.

We’ll double-check that our math is right and then do a little bit of analysis to figure out what worked, what didn’t, and how to revise our assumptions and forecasts for the future.

So long as we follow the steps in order, we shouldn’t have a very difficult time accounting just like the big kids. Therefore, without further ado, let’s get our accounting on!

Love what you’re seeing?

This is just a small sample! There are hundreds
of videos, in-depth playbooks, and content to
grow a startup fast. Let us show you!

Copyright © 2020 Startups.com LLC. All rights reserved.