Burkland - Start Smart, Scale Fast

1.

What is a chart of accounts?

Your startup’s chart of accounts (or general ledger) is a list of all financial accounts in the company’s ledger, usually categorized into assets, liabilities, equity, revenue, and expenses.

2.

What are income statements?

Income statements, also known as profit and loss statements, are financial reports that summarize your company’s expenses, revenues, and net income over a specific period. Tracking income statements helps you understand your startup’s financial performance and identify areas that require improvement.

3.

What are depreciation and amortization?

Depreciation and amortization are the processes for allocating the costs of assets over their useful life. Depreciation is the distribution of the value of tangible assets like cash, real estate, equipment, software, and inventory over their useful life. Amortization is the distribution of the value of intangible assets like patents, trademarks, and R&D expenses over their useful life.

4.

What is deferred revenue?

Deferred revenue refers to payments received by a company for goods or services that have not yet been delivered or performed. The company records these payments as liabilities rather than as income, because it is obligated to deliver the goods or services in the future. This approach to revenue recognition is used in accrual accounting to accurately reflect the company’s financial performance and position.

6.

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is often used as a measure of profitability because it removes key expenses that don’t directly affect your company’s operating performance. EBITDA also helps investors evaluate the value of companies with different capital structures and tax rates.

8.

Should startups use cash or accrual accounting?

With cash-based accounting, revenue is only recorded when payment is received, and expenses are recorded when they are paid. In contrast, accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of whether or not payments have been made or received. Burkland recommends accrual accounting for startups because it generates a more accurate long-term financial picture, is required for GAAP, and is what prospective investors and lenders expect to see.