Accounting for Startups: Set Up Your Books the Right Way

Keep business money separate from day one

The single most useful accounting decision a founder makes is to open a separate bank account for the business and run every business receipt and payment through it. Mixing personal and business money is the main reason early books take weeks to untangle.

For a private limited company this is also a legal step. Companies with share capital incorporated since November 2018 must file Form INC-20A within 180 days of incorporation, declaring that subscribers have paid for their shares, and the form asks for the bank account where that money was received. Until it is filed, the company cannot commence business or borrow.

If a founder pays a business expense personally, record it as a reimbursement or a loan from the director, with the bill attached. Do not simply ignore it or treat it as the founder's own cost.

Choose software that meets the rules

A company must keep its books on the accrual basis and under the double entry system, at its registered office. Accrual means you record income when you earn it and expenses when you incur them, not only when cash moves. A spreadsheet can technically do this, but accounting software makes it far easier.

The software itself must meet two further rules. For financial years starting on or after 1 April 2023, companies using accounting software must use one with an audit trail that records every change and cannot be disabled. Where books are kept electronically, a backup must be kept on servers physically located in India, on a daily basis. Most established packages used in India, including Zoho Books and TallyPrime, provide an audit trail. Confirm how your provider handles the backup requirement.

Companies must also preserve books and vouchers for at least eight financial years.

Build a chart of accounts that lasts

A lean, well-structured chart of accounts keeps reports clean as you add products, customers or locations. Start from the default list in your software and change it only where your business really needs more detail. Too many accounts early on makes every report longer and every posting decision harder.

Think about the questions investors and lenders will ask later, such as revenue by stream or spend by function, and structure income and major expense accounts so you can answer them.

• Separate income accounts for each main revenue stream
• Separate ledgers for GST input and output by tax type
• A clear ledger for TDS payable
• Founder or director loan accounts, kept separate from capital
• Group expenses by function: people, marketing, technology, rent, admin
• Use reporting tags, not new accounts, for minor detail

Keep evidence for every transaction

Every entry in the books should have a document behind it: a sales invoice, a supplier bill, a bank statement line or a signed agreement. Auditors, tax officers and investors in due diligence will all ask for these, sometimes years later.

Check that supplier bills carry your correct GSTIN and legal name. Input tax credit depends on the supplier reporting the invoice correctly, so a bill in the wrong name can cost you the credit. Store scanned copies against the entry in your software, not in a separate drive where they get lost.

For payments to contractors, professionals and landlords, check whether TDS applies before you pay. It is much harder to recover tax you should have deducted after the payment has gone out.

Close the books every month

A consistent monthly close keeps numbers reliable and surfaces problems while they are still small. It also lines up with your statutory deadlines. Monthly GST filers must file GSTR-1 by the 11th and GSTR-3B by the 20th of the following month, and TDS deducted in a month is due for deposit by the 7th of the next month (30 April for March deductions).

Keep the close short and repeatable. The same checklist every month is better than a thorough review once a year.

• Reconcile every bank and card account to the statement
• Match purchases with GSTR-2B before filing GSTR-3B
• Record accruals for expenses incurred but not yet billed
• Review receivables and chase overdue invoices
• Check TDS deducted and deposited against the books
• Review the profit and loss against the previous month

Report for investors, not just tax

Tax returns show what the law requires. Founders and investors need more. Track monthly burn (net cash going out), runway (how many months your cash will last at that burn) and a few unit economics that matter for your model, such as gross margin per order or revenue per customer.

Build these from the same reconciled books you use for GST and income tax, not from a separate spreadsheet that drifts over time. When numbers in a board update match the audited accounts, due diligence moves faster and questions are easier to answer.

A simple monthly pack is enough in the early stage: profit and loss, balance sheet, cash flow, burn and runway, with a few lines explaining any large movements.

Where to start

If your company is newly incorporated, one early step is the first auditor. The Board must appoint the first auditor within 30 days of registration, and that auditor holds office until the first annual general meeting. Every company needs a statutory audit by a practising Chartered Accountant, whatever its turnover, so it helps to involve the auditor while you set up the books.

After that, work through the basics in order and review them again after your first full month.

• Open a separate business bank account
• Choose accounting software with an audit trail
• Set up a lean chart of accounts
• Diarise GST, TDS and MCA due dates
• Run a monthly close with the same checklist
• Prepare a short monthly report on burn and runway