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Accounting · 7 min read

How to set up the books for a new business

The first decisions that determine whether your books still make sense in two years: the chart of accounts, the financial year, and what gets recorded from day one.

The short answer

Start with four decisions: a chart of accounts simple enough for your trade and no bigger, a fixed financial year, accrual basis so a transaction is recorded when it happens rather than when it is paid, and a document numbering scheme that cannot repeat. Every complication you avoid now saves a month of cleaning up later, and every shortcut you take today is paid for at the first review.

The steps

  1. Build a chart of accounts the size of your trade

    Five groups: assets, liabilities, equity, income and expenses. Under each, only the accounts you actually use. A single shop does not need forty expense accounts; it needs rent, wages, electricity, purchases and a few more. An account nobody uses makes the statements longer and harder to read, while a missing one takes a minute to add.

  2. Pick the financial year and leave it alone

    It does not have to be January to December. Many businesses choose a year ending in their quiet season, because counting stock and closing the books is easier when little is moving. What matters is that it stays fixed: changing it turns a year-on-year comparison into a comparison of two different periods, which tells you nothing.

  3. Record on the accrual basis

    A transaction is recorded on the day it happens, not on the day money moves: a sale on delivery even if the customer pays next month, an expense when the goods arrive even if you pay the supplier later. The cash basis is simpler but it lies to you in any month with credit sales — it shows a wonderful month followed by a terrible one, when in truth both were ordinary.

  4. Separate the business’s money from your own

    One bank account for the business alone, and no personal spending from it. This is what ruins small-business books more than anything: the owner’s drawings get recorded as expenses, and a profitable business appears to be losing money. Drawings are an equity account, not an expense on the income statement.

  5. Number every document from the start

    Invoices, purchase orders, journal entries and receipts, each with its own sequence. Numbering is not bureaucracy: it is what lets a specific invoice be asked for two years later and found, and what makes a missing document from the middle visible. Start it with the first document; adding it later means numbering the past by hand.

  6. Close each month rather than waiting for the year

    Review the balances, reconcile the bank, make sure every supplier bill that arrived has reached the books — then close the month so nothing can be posted into it afterwards. The difference between a business that closes monthly and one that waits for the year is the difference between fixing a one-month-old mistake and fixing an eleven-month-old one that everything since was built on.

Common mistakes

  • Copying another business’s chart of accounts wholesale. A factory’s chart does not fit a consultancy, and unused accounts bury the ones in use.
  • Putting off the small expenses. Their total at year end is not small, and remembering them six months later is impossible.

Common questions

Do I need an accountant from day one?
You need somebody to lay the foundation — the chart of accounts and the policies — even once. The daily recording after that can be done by the owner with software that enforces double-entry rules. An annual audit is a separate question, and may be compulsory depending on your size and your country’s law.
Is a spreadsheet enough at the start?
It is enough for a few months and a few dozen entries. What fails is not the arithmetic but the sequence and the links: nothing stops an old row being edited, and nothing ties an invoice to its entry and to stock. Once transactions are daily, the time spent reconciling exceeds the cost of any software.

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