Accrual vs cash accounting for startups: a worked example and when to switch

Cash counts money when it moves, and accrual counts it when it is earned or owed

The IRS describes the cash method this way: you generally report income in the tax year you receive it and deduct expenses in the year you pay them. Under the accrual method you generally report income in the year you earn it, whatever the payment date, and deduct expenses in the year you incur them, whatever the payment date.

Accrual exists to match revenue with the costs of earning it in the same period. A SaaS company that collects a year of fees in October has earned only three months of it by December. Accrual books show that. Cash books show a great quarter followed by three lean ones.

The same quarter shows $18,000 of profit on cash and $9,500 on accrual

Take a startup's October through December, with five events.

On December 31 the accrual balance sheet also shows what cash hides: $18,000 of deferred revenue (nine months of the subscription that the company owes service for), $10,000 of accounts receivable, $5,000 of prepaid insurance and $5,500 of accrued expenses.

Accrual is lower by $8,500 because it defers $18,000 of revenue, and adds back $10,000 of receivables, $5,000 of prepaid cost and subtracts $5,500 of unpaid costs.

Investors, lenders and auditors expect accrual because GAAP is accrual

US GAAP financial statements are prepared on the accrual basis. FASB's conceptual framework describes accrual accounting as recognizing amounts expected to be received or paid in the future, not only cash that has moved. So a term sheet, a loan covenant or an audit that asks for GAAP financials is asking for accrual books.

Startup accounting firm Kruze says VCs and many lenders expect accrual-basis, GAAP-aligned financials for serious seed, Series A and later rounds. Its rule of thumb is to switch once you have recurring or deferred revenue, are serious about raising institutional capital, or need clear visibility into margins.

The IRS lets most startups file taxes on cash, up to $32 million in receipts

A C corporation generally may not use the cash method for taxes unless it meets the gross receipts test. For taxable years beginning in 2026, it passes if its average annual gross receipts for the three prior years are $32 million or less. The amount for 2025 was $31 million. Every startup in its early years passes.

Inventory is an exception: a business that produces or sells merchandise must generally use an accrual method for purchases and sales, with limited exceptions for small business taxpayers. A software startup does not have inventory.

The tax method and the books method can differ. Many startups keep accrual books for investors and file on cash. Your CPA reconciles the two on the return. Ask yours which method to file with.

Switch to accrual when any of these five things is true

• You have annual or multi-month contracts, so cash arrives long before or after the work.
• You invoice customers and get paid later, so receivables matter.
• You are preparing a seed or Series A raise, or a lender asks for GAAP statements.
• An auditor, a board or an acquirer wants accrual financials.
• You need clean gross margin and unit economics, which cash timing distorts.

The best moment is often the start of a fiscal year, so each year has one method. Switching is easier with accurate cash books as the starting point.

Keep both views: cash for burn, accrual for everything else

Burn and runway are cash measures: how much money leaves and how long what is left lasts. Accrual answers a different question, how profitable the business is. A startup needs both, and neither replaces the other.

Accountable keeps both. Pick the default basis in Settings › Accounting basis, and flip any report between Cash, Accrual or Both. Switching never re-posts anything. Home's cash, burn and runway are always on a cash basis. To build accrual books from a cash history, set a date range under Accrual view and press Build accrual view, then review the result and press Approve and post. A schedule spreads one payment over the months it covers, which handles the prepaid and deferred items in the example above.