Accounting for Startups: Understanding the Basics (2025)

The moment has finally arrived and you’re ready to launch your business. It’s just you and a partner working from your basement for now, but you expect to rent office space and hire a few people soon. Yet even before you sell your first product or service, you need to grasp some accounting basics.

Accounting and bookkeeping are essential for a startup’s financial health and survival. By tracking all business transactions such as sales and expenses, you will know if you’re making or losing money. Accounting will help you make decisions about expansion and hiring, comply with tax regulations, and give you credibility with potential lenders and investors. Learn more about how accounting can help your startup thrive while reducing the risks of making costly mistakes.

Accounting for startups basics

Create a business plan
Choose a business type
Set up a business bank account and credit card
Set up a payment process
Choose an accounting method
Maintain a journal and ledger
Create financial statements
Set up a payroll system

It helps to do a few things first to ensure that your startup’s accounting and bookkeeping processes run smoothly. These include:

1. Create a business plan

Your business plan is a document outlining your business goals and your strategy for achieving them. A plan typically includes market research for your product or service, a review of the competition, and projections for revenue, growth, and profitability. Lenders and investors typically want to review a business plan before they decide on funding.

2. Choose a business type

Your business entity could range from a simple sole proprietorship to a complex C corporation (C corp) based on the scale of your operation, number of employees, need for outside capital, and desired tax status. A certified public accountant (CPA) can advise on the most appropriate entity type for your business. You should also obtain an employer identification number (EIN) from the Internal Revenue Service, as you’ll need this to open a business bank account and set up payroll.

3. Set up a business bank account and credit card

Open a business bank account and dedicated business credit card to keep your personal and business finances separate. This is critical for maintaining the personal liability protection certain business structures—like LLCs—offer to owners. You can lose this protection if you commingle funds—for example, by accepting customer payments through your personal account.

4. Set up a payment process

You will need to decide how customers can pay: cash, check, credit or debit card, or via third-party services such as Shopify Payments. This may require setting up a merchant services account in conjunction with your business bank account.

5. Choose an accounting method

You have two choices: cash accounting or accrual accounting. Cash accounting means a transaction is recorded only when payment is made or received. Small businesses with simple operations and relatively few transactions may find this method adequate.

Accrual accounting means a transaction is recorded at the time of a sale or purchase, even if payment is made later. This is more complex, but many companies use the accrual method because it provides a broader and more accurate picture of the business’s financial condition. The accrual method is required under generally accepted accounting principles (GAAP) for businesses filing financial statements with regulators.

6. Maintain a journal and ledger

An accounting journal is a chronological list of the business’s transactions, and a ledger records each transaction twice—once as a debit and again as a credit—in a system called double-entry bookkeeping. This is an essential part of accrual accounting and necessary for preparing financial reports.

Record all financial transactions in your journal and ledger, and regularly run trial balances of your ledger. Trial balances ensure your business’s books are balanced—that the sum of debits matches the sum of credits—and help you spot and correct any mistakes. Remember: onsistent and accurate record keeping is essential for a startup’s bookkeeping and accounting.

7. Create financial statements

To accurately track your business’s financial health you will need three financial statements: balance sheet, income statement, and cash flow statement. Each of these financial reports gives a picture of your company as follows:

Balance sheet. Also known as a statement of financial position, the balance sheet lists all your business’s assets (what it owns) on the left side, and liabilities (what it owes) and equity (what remains for owners) on the right side. Assets must be equal to, or balance, liabilities and equity.
Income statement. All sales and all expenses are recorded in the income statement for a given period, such as a quarter or year. Income minus expenses equals profit, or net income.
Cash flow statements. The cash flow statement tracks the movement of cash coming in and going out. You can check these flows against the income statement to see if credit transactions, such as sales to customers and purchases from suppliers, are followed up with payments. Lagging cash flow can serve as a warning for a business to boost customer payment collection efforts.

8. Set up a payroll system

Even if you have only a few employees or use independent contractors, you will need a payroll system to track employee wages, make payments to contractors, and withhold and remit federal, local, and payroll taxes. Payroll also includes issuing tax forms such as W2s and 1099s for employees and contractors. Having a payroll system is essential for tax compliance and avoiding penalties for lapses.

There is a wealth of literature suggesting best practice for accounting for startups and small businesses. Here are a few tips for entrepreneurs about to launch:

Create a budget

As part of your business plan, create a budget with realistic projections for revenue and expenses. You can compare actual results against your budget to understand where you need to make adjustments such as cost reductions, and it can help you improve the accuracy of future forecasts.

Watch your cash flow

Cash flow is the lifeblood of your startup. Monitor it closely, particularly cash flow from operations. You want to keep it aligned with your revenue and expenses; for example, if customer payments are lagging behind reported revenue, you could face a cash crunch that puts your business’s financial health at risk. It’s important to stay on top of invoices outstanding for customer payments, so that you can pay your business’s bills on time. To boost cash flow, consider giving your customers less time to pay you and ask suppliers for more time to pay.

Know your tax obligations

Research your business’s obligations for employee tax withholdings, sales tax collections, and remittances to appropriate tax authorities. Understand requirements for either business income taxes or personal income taxes for sole proprietors and partners, who report business income on their personal returns. Federal and local tax authorities typically require businesses to keep all financial records—including gross receipts of income, expense receipts, and bank statements—for at least three years.

Automate

Accounting software and bookkeeping software programs—such as QuickBooks, Wave, Xero, and FreshBooks—can save time and effort and help to reduce errors in your financial reports. Some accounting software incorporates functions such as scanning and digitizing paper records, customer invoicing, supplier bills, inventory control, order fulfillment, and reconciling your internal records with your business’s bank account.

Hire an accountant or bookkeeper

Once your business gets rolling, with employees, customers and suppliers, as well as different types of transactions, accounting and bookkeeping software alone may not be sufficient. You could need a bookkeeper or accountant to keep your finances straight. Weigh the need for outside accounting services against the cost of hiring an accountant or bookkeeper.

Accounting for startups FAQ

Do I need an accountant for my startup?

That largely depends on the size and complexity of your startup. If you’re the sole owner-operator with few customers and a handful of financial transactions, you may do fine with your own accounting, perhaps with the aid of bookkeeping and accounting software. If your startup is bigger, with full-time employees, a long customer list, multiple suppliers, and an array of sales and purchase transactions, you may need an accountant.

Should I talk to a CPA before starting a business?

You may find it useful to consult a certified public accountant (CPA) at the outset; they can help you establish your startup properly with a bank and credit account, employer tax ID number, and payroll system, among other things. The CPA’s credentials, knowledge, and experience can help you avoid mistakes that could compromise your startup’s financial health.

How do I create a balance sheet for my business?

You can do it the old-fashioned way, on paper, although these days, most businesses use accounting software to prepare their financial statements. Your startup’s assets—such as cash, equipment, supplies, inventory, prepaid items such as insurance, and the value of any property—are listed on the left side of the balance sheet, while liabilities such as loans, credit card debt, and payments due to suppliers are listed on the right side. Equity—or assets minus liabilities—represents your ownership, or the net value of your business.