Post on 03-Feb-2023
© 2020 AJK Consultancy Pte. Ltd.
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The ultimate guide – Accounting for startup
30 June 2020
Did you know lack of financial knowledge and planning has been seen as one of the
top reasons why a lot of businesses failed? As a business owner, familiarizing
yourself with the financial system can help you avoid such failures.
Accounting also known as the language of business, too often business owner is
making decision under uncertainty. To helps making better decision, accounting
plays the most important role. Therefore, it is very important for a business owner
understand the language of business.
Fortunately, you need not to master accounting, but you need to understand the basic
concepts to make sure that your business is running smoothly.
We will cover the fundamentals concepts and how to setup your startup accounting
process in this guide. This includes selecting the correct accounting method,
understand financial statements, hiring the right person, choosing the appropriate
accounting software, and having a solid business plan that outlines monthly and
weekly tasks for bookkeeping.
© 2020 AJK Consultancy Pte. Ltd.
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Table of contents
Chapter
Selecting your accounting method 1
Understand the financial statements 2
Selecting your accounting software 3
Hiring the right person 4
Basic accounting tasks 5
Expert insights 6
Wrapping up 7
© 2020 AJK Consultancy Pte. Ltd.
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Chapter 1 - Selecting your accounting method
Two accounting methods have been adopted, there are accrual method and cash method. These
approaches will impact how you keep company’s accounts as well as the presentation of the
financial statements. However, accrual method is compulsory for some types of business, its
mainly depends on the country and the industry.
In Singapore, companies with financial period from 1 January 2003 must comply with Singapore
Financial Reporting Standards (SFRS). Accrual method is one of the main principals of Singapore
accounting standard.
Accrual method
Business recognise sales or revenue as soon as they raise an invoice for a customer, in other words,
the sales or revenue must be recognise once the sales take place. In the event when receive a bill
or supplier invoice, expenses must be recognise even if the payment would not be made recently.
Two main benefits of accrual method:
- You have a much more accurate data of business performance.
- You have a more reliable data when comes to decision making.
Two main downsides of accrual method:
- The accounting works will be much more complicated, it is because you have to keep track
on invoices not only the bank account.
- Sometimes you have to pay income tax before receiving the payment from customer.
Fortunately, if the debt is not recoverable, IRAS allows you to claim the tax back on your
next return.
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Cash method
Business recognise sales and expenses only when cash in and cash out from bank or hand. They
do not take in the invoices raised as sales, or bills received as expenses. Sales and expenses will
be counted when they have been settled.
Two main benefits of cash method:
- It is very simple and shows the cash on hand and/or bank.
- Cash-flow advantage, as tax is payable when you actually receive the payment from
customer. Please bear in mind, not all businesses are allowed to use cash method
accounting for tax.
Two main downsides of cash method:
- Lack of accuracy, revenue and expenses is not recorded on real-time basis. The financial
statements may show you profit but it is because you have not made any payment to you
bills.
- You are not able to do decision making with cash method, as the data is not reliable.
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Chapter 2 - Understand the financial statements
Business accounting system is built on balance sheet, profit and loss statement and cash-flow
statement. Each statement serves different types of purpose. As a business owner, you do not need
to know every single details. But you should know how to read the financial statements to help
you with decision making.
Balance sheet
Source: CFI
Balance sheet is the foundation for your company’s financial position as it shows the assets and
liabilities.
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Formula:
➢ Assets – These are items owned by your company and able to produce future economic
benefit. For example, inventory and cash in bank and/or bank.
➢ Liabilities – These are items that your company owe and have the obligations to settle in
the coming future.
➢ Equity – Mainly represents the value of the owner’s investment into the company. It is
also known as total assets minus off total liabilities.
➢ Current assets and liabilities – These are items refer to short-term funds and debts that
you company has, short-term also know as less than a year. Level of liquidity differentiate
short term and long term, current assets and liabilities will be more liquid than non-current
assets and liabilities. For example, business can sell or liquidate their inventory faster than
a warehouse or machine.
➢ Non-current assets and liabilities - The items refer to long term assets and liabilities such
as property, machinery, and bank loan.
Business owner use balance sheet to check company level of liquidity, that is the reason makes
balance sheet important. In the event current assets are greater than current liabilities, that shows
your company is doing well and able to settle its short-term debts. It also show your company’s
efficiency in utilises company’s assets, as well as its ability to generate economic benefits.
Assets = Liabilities + Equity
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Profit and loss statement
Source: CFI
Profit and loss statement also known as income statement. Business owner use profit and loss
statement to check their current year profit. It is a key financial snapshot that helps to access and
evaluate your company’s performance.
Formula:
➢ Revenue – The gross amounts of income company earn from services rendered or selling
products. It represents the total amount of income earned before minus off any expenses
incurred.
➢ Gross profit – Revenue minus off cost of goods sold. This is the actual amounts that
company earned from services rendered or selling products.
➢ Expenses – The money used to pay company’s bills such as advertising, wages and
salaries, rental, and so on.
Net Income = Revenue - Expenses
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➢ Cost of Goods sold – Similar to expenses but not the same as expenses. It is also known
as direct costs. The cost arises when generate revenue.
➢ Net Income – The money company earn during the year, also know as profit.
Cash flow statement
Source: CFI
The cash flow statement shows changes in cash in a specific period. Business owner us cash flow
statement as a tool to analyse company’s efficiency in using cash.
➢ Cash-flow from operating activities – Fundamental business activities for daily
operation, such represents the amounts of cash inflow for services rendered or selling
products. These consist of cash from inventory, accounts receivable and net income.
➢ Cash-flow from investing activities – Cash used or generated when the company do
investment, such as buying other businesses or properties. Usually startup will have high
cash flow from investing activities and produce a negative cash outflow, as they
purchase a lot of assets and looking to grow.
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➢ Cash-flow from financing activities – Cash used or generated when the company
undertakes to get investor financing. There are usually broken down between debt and
equity financing.
The cash-flow statement is a powerful tool to analyse a company’s performance and profitability.
Chapter 3 - Selecting your accounting software
Now you have an overview of the balance sheet, profit and loss statement and cash-flow statement.
Let us discuss the accounting software that help you organise your accounts.
It is very true accounting work is super tedious and time-consuming, some more running a small
business is hard enough, so most of the small business owners running the business without
looking at the company accounts, and this is the top reason that most of the companies failed as
we mentioned earlier. So, please do not repeat the same mistake.
Thanks to technology, accounting software makes the accounting tasks so much easier via
automation tools. This help to save time and reduce human error. By using the accounting software,
allowing you to focus on running your business instead of wasting time on paper works.
We recommended Xero accounting software, as the software is cheap and user friendly. AJK
Consultancy is a business partner with Xero, you will get special rate if you subscribe through
AJK Consultancy.
Chapter 4 - Hiring the right person
Accounting software can be helpful, it will perform even better with the experienced chartered
accountant or bookkeeper. When your business is growing and performing extremely well, too
often, you will need a professional accountant to help. It is because Singapore Financial
Reporting Standard (SFRS) have been changing time to time, and your company must stay
compliance to prevent any penalty and fines.
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Chartered accountant
A chartered accountant is a professional who has certain qualification and working experience in
the accounting industry as an accountant. This person has the knowledge of financial statements,
tax planning, and auditing. There are at advisory role.
Bookkeeper
Bookkeepers do not have the same level of expertise as accountant, but they are also helpful for
businesses. Bookkeepers work on basic tasks such as managing income, expenses and bank
reconciliation.
Everybody can be a bookkeeper as it does not require a degree or a license. So, it is very important
to find a bookkeeper that have relevant working experience and education background. You could
consider hiring a bookkeeper through professional accounting firm or a freelancer.
Chapter 5 - Basic accounting tasks
Small business owner should practice a strong bookkeeping habits on weekly, quarterly and yearly
basis.
Weekly task
➢ Bank reconciliation – This is to check your expenses and income have correctly synced
to accounting software.
➢ Categorise expenses – This is to confirm the company only record eligible expenses in
the company’s accounts.
Quarterly task
➢ GST submission – If your company is GST registered, normally the company is required
to file GST quarterly.
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Yearly task
➢ Submit tax return – Company required to file tax computation and Form C/C-s to IRAS
by annual basis.
➢ Submit financial statement – Financial statement can be audited or unaudited, depend on
the qualification criteria given by ACRA.
Chapter 6 - Expert insights
Insights author: Aaron Tee is a Founder and Director at AJK Consultancy Pte Ltd, who offer
chartered accounting services to small medium enterprise (SME) in Singapore and Malaysia. AJK
Consultancy specialising in outsourced accounting, bookkeeping, tax planning, corporate
secretarial and business advisory services.
What are the biggest challenges for small business when setting up
their accounting?
Keeping your company’s account and ensure they are accurate is very important for all the small
businesses, it will not only help the business owner to make a better decision but also understand
profitability. The biggest challenges for small business is finding the most suitable software for
their businesses. We have experts to help our clients through this.
What advise would you give to startups founders for keeping their
accounting?
Always plan ahead and know your limit, it is impossible to be perfect in everything, focus is always
the key to success. Engaging an accountant that provide value adding to your business, will be able
to offer advice on your business development. Having an experienced accountant will not only
save your precious but also allowing you to focus on running your business.
© 2020 AJK Consultancy Pte. Ltd.
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Chapter 7 - Wrapping up
Spending some time to understanding accounting will always benefits your company and prevent
business from failing due to lack of financial knowledge.
As a business owner, you do not need to be an expert in accounting, but you need to know the
important concepts that can apply to your business.
The benefits of accounting:
➢ Budgeting
➢ Understand taxes
➢ Stay organized
➢ Improve your company performance
➢ Better decision making
➢ Reduce stress
➢ Have the overview of your business’s financial health
The best accounting practices you can implement are choosing the right accounting method,
understanding financial statements, engaging with the right accountant, implementing the right
accounting software and making sure your bookkeeping is up to date.