Cash vs. accrual: which way should a startup keep its books?

“Cash or accrual?” sounds like an accountant question. It’s really a question about whether your P&L tells you what’s actually happening in your business.

The difference

Cash basis records money when it moves. Revenue counts when a customer pays you, and expenses count when you pay them.

Accrual basis records things when they’re earned or incurred. Revenue counts when you deliver the work, even if the invoice isn’t paid yet, and expenses count when you owe them, even if you haven’t paid yet.

Why it matters for startups

Picture a SaaS company that sells an annual plan and gets $12,000 up front in January.

• On a cash basis, January shows a $12,000 month, and the rest of the year shows nothing from that customer.
• On an accrual basis, you recognize $1,000 a month. The other $11,000 sits on the balance sheet as deferred revenue until you earn it.

The accrual version is the one that tells you whether the business is actually growing.

When cash is fine

If you’re early, with simple revenue and no investors, cash basis is easier and usually fine. Most small businesses can also use the cash method for taxes, even if their books are on accrual.

When to switch to accrual

• You’re raising money. Investors and their diligence teams expect accrual financials.
• You have annual contracts, prepayments, or meaningful unpaid invoices.
• You want metrics like monthly revenue and margins to mean something.

Your books and your taxes can differ

You can keep accrual books for management and investors while filing taxes on the cash method, if you qualify. That’s common and completely normal. It just takes a bit of reconciliation at year-end.

The short version

Cash is simpler. Accrual is truer. Most startups should move to accrual books before they raise money or once they sell annual plans. On our Accounting plan, that’s handled as part of your monthly close.