Startup Accounting 101: Everything Founders Need to Know
A practical guide to startup accounting fundamentals: from choosing between cash and accrual methods to avoiding mistakes that will hurt your fundraise.
Key Takeaways
- •Switch to accrual accounting before fundraising—investors expect GAAP-compliant financials
- •Close books monthly within 10-15 business days of month end
- •Hire a bookkeeper when you have 50-100+ transactions per month or after raising seed
- •Most common mistake: recognizing prepaid annual revenue upfront instead of ratably
Most founders didn't start their companies because they love accounting. Yet proper accounting is foundational to everything else in your startup's financial life—from understanding your true profitability to raising your next round.
The good news: you don't need to become an accountant. But you do need to understand the basics well enough to make good decisions, ask the right questions, and avoid the mistakes that cause founders real pain during due diligence.
This guide covers the accounting fundamentals every startup founder should know. We'll explain concepts in plain English, show you what matters most at your stage, and help you build the foundation for financial success.
What This Guide Covers
Cash vs accrual accounting, setting up your chart of accounts, revenue recognition basics, the monthly close process, common mistakes to avoid, when to hire help, and choosing the right accounting software.
Why Accounting Matters for Startups
Before diving into the details, let's address why accounting matters beyond tax compliance. For startups, solid accounting serves several critical purposes:
Decision Making
You can't manage what you don't measure. Accurate books tell you what's working, what's not, and where to allocate resources.
Fundraising
Investors will scrutinize your financials during due diligence. Messy books are a red flag that kills deals.
Board Reporting
Your board expects accurate, timely financial reports. You can't produce them without proper accounting.
The startups that treat accounting as an afterthought inevitably hit problems: they discover they're burning more than they thought, they scramble to clean up books before a raise, or they face uncomfortable questions from investors about discrepancies in their financials.
A Common Scenario
A startup raises a Series A and discovers during due diligence that their revenue recognition was wrong, their books don't reconcile, and they can't produce GAAP-compliant financials. The deal gets delayed, terms get re-negotiated, or the round falls apart entirely. We see this happen every year.
Cash vs Accrual Accounting
The most fundamental decision in startup accounting is choosing between cash and accrual accounting methods. This choice affects how you recognize revenue and expenses, and has significant implications for fundraising and reporting. For a detailed comparison, see our guide on Cash vs Accrual Accounting: Which Should Your Startup Use?
Cash Basis
Record revenue when cash is received. Record expenses when cash is paid.
Pros:
- Simple to understand and maintain
- Matches your bank statement
- Good for early-stage simplicity
Cons:
- Doesn't show true profitability
- Not GAAP-compliant
- Won't work for investors or audits
Accrual Basis
Record revenue when earned. Record expenses when incurred (regardless of cash flow).
Pros:
- Shows true economic performance
- Required by GAAP
- What investors expect
Cons:
- More complex to maintain
- Requires more accounting expertise
- Cash flow doesn't match P&L
Which Should You Use?
Our recommendation: start with accrual basis, or plan to switch before your Series A at the latest. While cash basis is simpler, investors and auditors require accrual-basis financials. Converting later is painful and expensive.
| Stage | Recommendation | Why |
|---|---|---|
| Pre-seed | Either (accrual preferred) | Low complexity, but accrual builds good habits |
| Seed | Accrual | Investors expect it; prepare for next round |
| Series A+ | Accrual (required) | GAAP compliance is non-negotiable |
Chart of Accounts Basics
Your chart of accounts (COA) is the organizational structure for your financial data. It's a list of all the accounts where transactions are recorded, grouped by type. Getting this right from the start saves enormous headaches later. For a detailed template, see Chart of Accounts for Startups: A Simple Template.
The Five Account Types
Assets
What you own: cash, accounts receivable, prepaid expenses, equipment, etc.
Liabilities
What you owe: accounts payable, accrued expenses, deferred revenue, loans, etc.
Equity
Owner's stake: common stock, preferred stock, additional paid-in capital, retained earnings.
Revenue
Income from operations: product sales, service revenue, subscription revenue, etc.
Expenses
Costs of operations: salaries, rent, marketing, software, professional services, etc.
Common Startup COA Mistakes
- Too few accounts: Lumping everything into "Expenses" or "Revenue" means you can't analyze your business
- Too many accounts: Creating accounts for every vendor makes reporting unnecessarily complex
- Inconsistent naming: Using different names for the same thing (Marketing vs Advertising vs Ads) causes confusion
- Missing key accounts: Forgetting deferred revenue, accrued expenses, or prepaid expenses means you can't do accrual accounting properly
Revenue Recognition
Revenue recognition is one of the most important—and most often bungled—areas of startup accounting. The core question: when do you actually "earn" revenue? The answer isn't always when cash hits your bank account.
For SaaS and subscription businesses especially, proper revenue recognition is critical. See our detailed guide on Revenue Recognition for SaaS Startups: ASC 606 Explained.
The Basic Principle
Revenue Recognition Rule
Under GAAP (and specifically ASC 606), you recognize revenue when you satisfy a performance obligation—i.e., when you deliver the goods or services you promised. Not when you sign the contract, not when you invoice, and not when you get paid.
Common Scenarios
Monthly SaaS Subscription
Customer pays $100/month. You recognize $100 of revenue each month as you provide the service. Simple and straightforward.
Annual Subscription Paid Upfront
Customer pays $1,200 upfront for a year. You receive $1,200 cash, but you only recognize $100/month in revenue. The remaining balance sits on your balance sheet as "deferred revenue" (a liability).
Implementation + Subscription
Customer pays $10,000 implementation fee plus $1,000/month subscription. The implementation revenue is recognized when the implementation is complete (or ratably over the implementation period). Subscription revenue is recognized monthly.
Usage-Based Pricing
Customer pays based on API calls, seats, or transactions. Revenue is recognized as usage occurs, typically monthly when you calculate the bill.
Why This Matters for Fundraising
Investors will check that your revenue recognition is correct. If you've been recognizing annual subscriptions as revenue upfront, your "real" revenue is lower than you think—and investors will make you restate your financials, killing your growth story.
The Monthly Close Process
The monthly close is when you finalize your books for the prior month, ensuring everything is accurate and complete. A consistent close process is essential for reliable financial reporting. For a detailed walkthrough, see Monthly Close Process: A Checklist for Startups.
Why Close the Books Monthly?
- Timely information: You need current financials to make decisions
- Catch errors early: It's easier to fix a mistake from last month than from last year
- Board and investor expectations: Your board expects monthly financial reports
- Build discipline: Regular closes create operational rigor
A Simple Close Checklist
Close Timeline
Best practice is to close your books within 10-15 business days after month-end. Here's a typical timeline:
| Day | Task |
|---|---|
| 1-3 | Receive and enter final invoices, reconcile bank/credit cards |
| 4-7 | Record accruals, prepaids, revenue recognition entries |
| 8-10 | Review accounts, make adjustments, verify reconciliations |
| 11-15 | Generate financials, prepare reports, lock the period |
Common Accounting Mistakes
We've seen hundreds of startup financial statements. These are the mistakes that come up again and again. For a comprehensive list, see Startup Accounting Mistakes That Will Hurt Your Fundraise.
Wrong Revenue Recognition
Recording annual subscription revenue upfront instead of ratably over the subscription period. This overstates revenue and creates liability problems.
Mixing Personal and Business
Using personal cards for business expenses, or running personal expenses through the business. This creates legal and tax issues.
Not Reconciling Regularly
Waiting months to reconcile bank accounts. By then, tracking down discrepancies is nearly impossible.
Inconsistent Categorization
Categorizing the same vendor differently each month, or using vague categories like "Miscellaneous." This makes analysis impossible.
Ignoring Deferred Revenue
Not setting up deferred revenue accounts for prepaid subscriptions. This causes major issues during due diligence.
No Documentation
Not keeping receipts, contracts, or explanations for transactions. Auditors and investors will ask questions you can't answer.
Capitalization Errors
Either expensing assets that should be capitalized (big equipment purchases) or capitalizing expenses that should be expensed (routine software subscriptions).
The Fix
Most of these mistakes stem from not having proper accounting expertise involved early enough. A good bookkeeper catches transactional issues. A fractional CFO ensures your accounting policies are correct and investor-ready.
When to Hire Accounting Help
Most founders handle their own books initially, then gradually bring in help as complexity grows. Here's a typical progression:
Pre-Seed / Very Early
0-10 transactions/month
DIY is fine. Use QuickBooks or Xero, keep it simple, and categorize transactions yourself. Focus on consistency.
Seed Stage
Raised funding, hiring employees
Outsourced bookkeeper. Services like Pilot, Bench, or a local CPA firm can handle monthly bookkeeping for $500-$2,000/month. Worth it to free up your time and ensure accuracy.
Pre-Series A
Preparing to raise, board reporting needs
Add a fractional CFO. Your bookkeeper handles transactions; your fractional CFO ensures accounting policies are correct, builds your financial model, and prepares you for Series A due diligence.
Post-Series A
Scaling rapidly, increased complexity
Consider more sophisticated solutions. Full-time bookkeeper, fractional controller for complex accounting, upgraded systems. Your fractional CFO can help you determine what you need.
The Right Team for Most Startups
For seed and Series A startups, the typical setup is: outsourced bookkeeper ($500-$2,000/month) + fractional CFO ($3,000-$7,000/month) + CPA for tax ($2,000-$10,000/year). Total: roughly $5,000-$10,000/month for complete financial coverage without hiring anyone full-time.
Accounting Software Options
Choosing the right accounting software sets the foundation for everything else. Here's what most startups use at different stages:
QuickBooks Online
The most popular choice for startups. User-friendly, widely supported by bookkeepers, integrates with almost everything.
Best For:
Pre-seed through Series A
Cost:
$30-$200/month
Xero
A strong alternative to QuickBooks with a cleaner interface. Popular internationally and with certain bookkeeping services.
Best For:
Pre-seed through Series A
Cost:
$15-$70/month
NetSuite
Enterprise-grade ERP system. Much more powerful—and much more expensive and complex. Only consider after Series A when you've outgrown QBO/Xero.
Best For:
Series B+ or complex needs
Cost:
$1,000-$5,000+/month
Our Recommendation
Start with QuickBooks Online. It's the standard for a reason: it works well, every bookkeeper knows it, and it integrates with everything. You won't outgrow it until you're well past Series A. Don't overcomplicate this decision.
Avoid This Mistake
Some founders try to save money by using spreadsheets or free software for too long. This creates technical debt that costs much more to fix later. QuickBooks at $50/month is one of the best investments you can make.
Frequently Asked Questions
What's the difference between cash and accrual accounting?
Cash accounting records transactions when money changes hands. Accrual accounting records revenue when earned and expenses when incurred, regardless of cash timing. Most startups should use accrual accounting once they have any recurring revenue or are preparing to raise—it's required for GAAP compliance.
When should a startup switch from cash to accrual accounting?
Switch to accrual accounting when you have recurring revenue, are preparing to fundraise, or have grown past $1M in revenue. Most investors expect GAAP-compliant (accrual) financials. The transition is easier to do early rather than waiting until you're about to raise.
What accounting software should a startup use?
Most startups start with QuickBooks Online or Xero. QBO is more common in the US with better integrations. Xero is popular internationally. For larger startups ($10M+ revenue), consider NetSuite. Choose software your bookkeeper is familiar with—the person matters more than the platform.
How do I set up a chart of accounts?
Start with standard categories: Assets, Liabilities, Equity, Revenue, COGS, and Operating Expenses. Within Operating Expenses, create subcategories for Personnel, Software, Marketing, and G&A. Keep it simple initially (20-30 accounts) and add granularity as you grow. Most accounting software has templates.
What is ASC 606 and why does it matter?
ASC 606 is the revenue recognition standard that determines when and how you record revenue. For SaaS companies, it typically means recognizing subscription revenue ratably over the contract period, not when cash is received. Getting this wrong is a common due diligence issue.
How often should a startup close the books?
Close books monthly, ideally within 10-15 business days of month end. This includes reconciling all accounts, reviewing transactions, and generating financial statements. Consistent monthly closes make quarterly board reporting and annual audits much easier.
When should a startup hire a bookkeeper?
Hire a bookkeeper when you have more than 50-100 transactions per month or when you're spending more than a few hours per week on bookkeeping. This typically happens after raising a seed round. Start with a part-time bookkeeper or outsourced service ($500-$2,000/month).
What's the most common accounting mistake startups make?
The most common mistake is treating prepaid annual subscriptions as revenue when cash is received instead of recognizing it over the service period. Other frequent errors: not reconciling accounts monthly, mixing personal and business expenses, and not tracking employee equity properly.
Do startups need GAAP-compliant financials?
You need GAAP-compliant financials before raising institutional capital (Series A and beyond). Seed rounds often accept cash-basis or simplified financials, but transitioning to GAAP earlier makes future fundraises easier. GAAP compliance primarily affects revenue recognition and expense timing.
What's the difference between a bookkeeper, controller, and CFO?
A bookkeeper records transactions and maintains books ($15-50/hour). A controller oversees accounting operations, monthly close, and financial reporting ($80K-$150K/year). A CFO provides strategic financial leadership—fundraising, planning, and board-level work ($200K-$400K/year or fractional).
Getting Started
If you're just setting up your startup's accounting, here's a simple action plan:
Your Accounting Setup Checklist
Continue Learning
This guide covered the fundamentals. Dive deeper with these related articles:
Cash vs Accrual Accounting
Detailed comparison for startups
Chart of Accounts Template
A simple template for startups
SaaS Revenue Recognition
ASC 606 explained for startups
Monthly Close Checklist
Step-by-step close process
Accounting Mistakes to Avoid
Common errors that hurt fundraising
CFO vs Controller vs Bookkeeper
Understanding finance roles
Need Help Getting Your Books in Order?
Eagle Rock CFO helps seed and Series A startups build solid financial foundations. From setting up proper accounting to preparing for your next raise, we've got you covered.
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